CONSOLIDATED ACCOUNTS: STATEMENTS OF FINANCIAL

POSITION: COMPLICATIONS AND OTHER ISSUES.

1. Acquisition related costs: These are the costs that the acquirer incurs to effect a
business combination. Such costs include advisory, legal, accounting, valuation and other
professional or consulting fees. The cost is not capitalized as part of the cost of
acquisition but expensed in the periods in which they are incurred. If in the exams you
see an incorrectly capitalized cost, you would have to collect this before consolidating.

2. Acquired intangible assets:

A question might provide information about an unrecognized asset of the subsidiary. Such an
asset should be added to the asset in the subsidiary’s financial statements before consolidation.
Goodwill is recognized by the acquirer as an asset from the acquisition date. It is initially
measured as the difference between: (1) the cost of acquisition plus non-controlling interest
and (2) the net asset of the acquisition date amounts to identifiable assets acquired and
liabilities assumed.
When a company acquires a subsidiary, it may identify intangible assets of the acquired
subsidiary, which are not included in the subsidiary’s statement of financial position. If the
assets are separately identifiable and can be measured reliably, they should be included in the
consolidated statement of financial position as intangible assets, and accounted for as such.

FAIR VALUE ADJUSTMENT: Fair value is the price would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement
date.
ILLUSTRATION ON FAIR VALUE ADJUSTMENT
If a company bought 100% of Mobil Corporation Unlimited they will be buying a lots of assets
but part of the purchase consideration would be to buy the Mobil brand. Naturally, Mobil will
not recognize its own brand in its own financial statements because internally generated brands
are not allowed to be recognized. However, as far as the company buying the Mobil
Corporation is concerned the brand is a purchased asset. It would be recognized in the
consolidated financial statements and would be taken into account in the goodwill calculation.

EXAMPLE: Fair Value Adjustment (non-depreciable asset)

Imabong bought 80% of Fehintola 2 years ago.
At the date of acquisition Fehintola’s retained earnings stood at N600,000. The fair value of its
net assets was not materially different from the book value except for the fact that it had a
brand which was not recognized in Fehintola’s accounts. This had a fair value of 100,000 at this
date and an estimated useful life of 20 years.
The statement of financial position of Imabong and Fehintola as at December 31, 2022 was as
follows:
Imabong Fehintola
=N= =N=
PPE 1,800,000 1,000,000
Investment in Fehintola 1,000,000
Other assets 400,000 300,000
3,200,000 1,300,000
Share capital 100,000 100,000
Retained earnings 2,900,000 1,000,000
Liabilities 200,000 200,000
3,200,000 1,300,000
Required: Prepare the consolidated statement of financial position as at December 31, 2022
 2. IRREDEEMABLE PREFERENCE SHARES OF SUBSIDIARY.
The irredeemable preference share of subsidiary is expected to be owned by both the parent
company and NCI. For example, where you are informed that the parent companyhas 30% of
the preference shares of the subsidiary, it implies that the remaining 70% is attributed to
NCI and therefore should be considered for the purpose of calculating of NCI as at
acquisition date. It should be noted that preference shares does not give control and as a
result the parent company may not acquire any interest in the preference shares of the
subsidiary. If no information is given in respect of the percentage of the subsidiary’s
preference shares acquired by the parent company, then assume that the parent company
has no interest in the preference shares of subsidiary and as a result all preference shares
will be assumed to be owned by NCI.
If NCI is measured using proportionate identifiable net assets and the subsidiary has both
equity shares and preference shares, NCI value at DOA will be calculated as NCI portion
in subsidiary’s equity fund (ordinary shares + reserves) at DOA plus NCI portion in
subsidiary’s preference shares.
Illustration 1
Indubitable Professionals plc acquired 75% of the equity shares and 30% of the
preference shares of Eunice plc on October 1, 2013 when the retained earnings of Eunice
were N150, 000 debits. It is the policy of the group to value NCI at their proportionate
share of identifiable net assets. The following is the statement of financial position of both
companies as at December 31,2014.
Indubitable Eunice
N’000 N’000
Non-current assets 800 600
Investment in govt bond - 300
Investment in Eunice plc: Ord shares 500 -
Preference shares 200 -
Current assets 750 550
Total assets 2,250 1,450
Equity & liabilities
 Equity shares of 50k each 600 500
10% irredeemable preference shares 250 200
Share premium 450 350
Retained earnings 300 250
1,600 1,300
Payables 2,250 1,450
Prepare consolidated statement of financial position of Beta at December 31, 2014
(Adapted from Teach yourself group account)
SOLUTION
Workings
1. Capital and reserves (net assets) of subsidiary:
DOA DOC Post Acq.
A B C=B-A
Equity share 500 500 -
Share premium 350 350 -
Retained earnings (150) 250 400
Equity fund 700 1,100 400
Pref. shares 200 - -
Net assets 900 1,300 400
Note: post acq. Retained earnings =250,000-(150,000) = 400,000
2. Calculation of goodwill
Cost of investment in subsidiary (500+200) 700
Add NCI value at DOA:
EQUITY 25% X 700 = 175
Pref. shares 70% X 200 = 140 315
Purchase consideration 1,015
Less: subsidiary net assets at DOA (900)
Positive goodwill 115
3. Calculation of NCI
NCI value at DOA 315
Add NCI’s share of post – acq. net asset of subsidiary (25% X 400) 100
415
4. Calculation o consolidated retained earnings
Parent company retained earnings 300
Add: share of post acq. Retained earnings of sub. (75%X400) 300
600

Indubitable Professionals Plc

Consolidated statement of financial position as at December 31, 2013
=N=’000
NCA 800+600 1,400
Goodwill (see working above) 115
Investment in Govt bond 300
Current assets 1,300
Total assets 3,115
Equity and liabilities
Equity share (Parent only) 600
10% Preference share (Parent) 250
Share premium (Parent) 450
Retained earnings 600
1,900
NCI see working above 415
2,315

Payables 650+150 800

3,115
 3 CALCULATION OF PERCENTAGE HOLDING
Where the number of shares acquired by the parent company or dividend receivable from
subsidiary is given rather than the percentage holding, the percentage holding of the
parent company will be calculated as follows:
3. Number of shares acquired by parent company X 100
Total numbers of shares of subsidiary
Alternatively it can also be calculated this order way:
4. Number of shares acquired by parent company X 100
Share value of subsidiary divided by nominal price per share
5. Equity dividend receivable by parent from subsidiary X 100
Total equity dividend payables by subsidiary
ILLUSTRATION 2
Assuming Aba plc purchased N1, 440,000 shares of Abua plc on March1, 2015 when the
retained earnings of Abua plc were N235, 000 debits. The equity shares of 25k each of
Aba were N13, OOO and that of Abua N600. Determine the percentage of the
shareholding.
Solution:
Percentage holding = No of shares acquired X 100
Share value of sub. divided by nominal price
=1,440,000/ (600,000/0.25) X 100 =60%
TYPES OF INTRA GROUP TRANSACTION:
In many groups, business and financial transactions take place between entities within the
group. These intra group transactions might be:
 The sale of goods or services between the parent and a subsidiary, or between
two subsidiaries in the group.
 Transfers of non-current assets between the parent and subsidiary to the parent
and a subsidiary, or between subsidiaries in the group
 The payment of dividends by a subsidiary to the parent or by one of the subsidiary
to another subsidiary
 Loans by one entity in the group to another, and the payment of interest on intra
group loans.
 ELIMINATING INTRA- GROUP TRANSACTIONS DURING CONSOLIDATION

Intra group transactions should be eliminated on consolidation. Or put it another way, the
effects of intra group transactions must be removed from the consolidated financial
statements on consolidation. Note that the essence of consolidating accounts is to show
the financial position and the financial performance of the group as a whole as if it is the
financial statement of a single entity.
IFRS 10 requires that:
 Intra group balances and transactions, including income, expenses and dividend
must be eliminated in full
 Profits or losses resulting from intra group transactions that are recognized in
inventory or non-current assets must be eliminated in full.
ITEMS IN TRANSIT
At the year-end current accounts may not agree, owing to the existence of in transit items
such as goods or cash. The usual convention to follow is to follow the item through to its
ultimate destination and adjust the books of the ultimate recipient.
TREATMENT OF UNREALIZED PROFIT ON INVENTORY (URP)
Unrealized profit is profit earned from individual company’s perspective but unearned and
unrealized from the group perspective because the group considers both the selling
company and the buying company as one.
During the post-acquisition periods, there may be transaction involving transfer of goods
from one group member to another group member. If the transferring company, transfers
the goods at cost (no profit), there is no need for calculating unrealized profit.
But where the goods are transferred with a profit element or margin, then URP will be
calculated provided the buying company still has some proportion or all the goods as
inventory as at the reporting date. URP is the amount of profit attributable to the unsold
goods meaning that there will be no URP if there is no element of unsold goods.
URP on inventory = margin X value of unsold inventory.
Note that margin must be applied on unsold inventory in order to calculate unrealized
profit. Where the markup must be converted to margin before unrealized profit on
inventory is calculated.
The calculated value of URP on inventory should be subtracted from both the consolidated
inventory and retained earnings of the seller. The accounting entries for URP on inventory:
DR. Income statement of the seller,
CR. Consolidated inventory.
CONVERSION OF MARK-UP TO MARGIN
 Where markup is given in percentage, then; Margin = Mark-up/100+mark-up.
E.g. if markup is given as 25%, margin will be 25/100+25 = 25/125 = 20%
 If mark -up is given in fraction, like X/Y, margin will be X/Y+X.
E.g. if mark -up is given as 3/8 then margin = 3/8+3 = 3/11.
ILLUSTRATION. 3
The inventory of the subsidiary company includes N2, 500,000 being goods
purchased from the parent company. It is the policy of the parent company to
invoice goods to all customers at cost plus 25%.
Required. Calculate the unrealized profit on inventory and state the consolidation
adjustments.
SOLUTION
URP= Margin X Value of unsold gods = 25/125X 2,500,000 = 500,000
CONSOLIDATION ADJUSTMENT
The calculated URP of N500, 000 will be subtracted from consolidated inventory
and also subtracted from the profit of (retained earnings) the parent company (the
seller) when calculating consolidated retained earnings.
ILLUSTRATION 4 Charles Plc
The following is the statement of financial position of Charles plc and Charity plc
as at June 30, 2019
Charles Plc Charity Plc
N’000 N’000
NCA
PPE 900 6OO
Investment in Charity plc 650 -
Other investment 300 250
Current Assets
Inventory 500 300
Receivables 400 300
Bank 250 150
Total assets 3,000 1,600
Equity & Liabilities
Equity shares of 25k each 800 400
 10% irredeemable pref. shares 250 200
Share premium 300 150
Retained earnings 650 350
2,000 1,100
Non-current liabilities
5%m loan stock 200 50
Deferred tax 100 80
Current liabilities
Trade payables 150 70
Bank overdraft 300 250
Income tax payable 250 50
Total equity & liabilities 3,000 1,600
Notes:
1. Charles pc acquired 1,200,000 equity shares and 80,000 preference shares of
Charity plc for N500,000 and N150,000 respectively on October 1, 2014 when
the retained earnings of Charity was N250,000 debit.
2. The inventory of Charity includes N120, 000 being amount of goods purchased
from Charles plc. It is the police of Charles to invoice goods to all customers at
cost plus 25%
3. The group policy is to measure the NCI of the subsidiary using the proportion
of net assets method.
Required: Prepare consolidated statement of financial position of Charles Plc as at
June 30, 2019. (Adapted from Teach yourself group account)
DETERMINATION OF OTHER INVESTMENTS:
Whenever the purchase consideration or cost of investments in subsidiary is given in the
notes or additional information and it’s not the same with the amount of investment shown
in the statement of financial position of the parent company, then the difference represent
cost of investment in other entities and it should be shown in the consolidated statement
of financial position.
IMPAIRMENT OF ASSETS
Impairment or impairment loss simply means reduction in the carrying amount (net book
value) of an asset. Recoverable value is the amount or value that can be recovered from
the continuing use of assets or from the immediate sale of an asset. According to IAS 36,
 defines recoverable value as the higher of value in use and fair value less costs to sale.
Note that impairment will only occur when carrying amount or net book vale of the asset
is higher than the recoverable amount.
Treatment of impairment loss in a consolidated statement of financial position.
The value of impairment loss should be subtracted from the positive goodwill and retained
earnings. Remember that impairment loss should be subtracted from the retained
earnings of subsidiary if NCI is valued at fair value on acquisition date. But in the parent
company, impairment loss should be subtracted from the retained earnings if NCI is valued
at proportionate or of net asset at DOA.
TREATMENT OF URP ON NON-CURRENT ASSETS
Where there is a transfer or sale of NCA (PPE) between group members during the post-
acquisition period, an adjustment will be required if the NCA was transferred or sold with
profit element. If the NCA is transferred at cost, adjustment is not necessary. To
consolidate, note the followings:
 Adjustment for unrealized profit. URP = Transfer value or selling price – carrying
amount (NBV) OR URP = Margin X Transfer value
Accounting entries:
DR. Income statement (retained earnings) of the seller
CR Consolidated N.C.A (PPE)
 Adjustment for over/excess depreciation charges (no land)
Over/excess depreciation = URP /remaining useful life X no of years from date of
transfer to date of consolidation.
Accounting entries.
DR. Consolidated NCA
CR. Income statement (retained earnings of buyer) of the seller.
MID YEAR ACQUISTION
When a company acquires another company mid -year, it is necessary to calculate the net
assets at the date of acquisition in order to calculate goodwill, NCI and consolidated
retained earnings. This will be done by calculating the subsidiary’s retained earnings at
the date of acquisition. The profits of the subsidiary are assumed to accrue evenly over
time unless there is informsssation to the contrary.