Balance sheet consolidation adjustments

• Inter-company balances cancellation

• Goods in transit completion and cancellation

• Inter-company dividends paid and proposed

• Unrealised profit cancellation

• Inter-company fixed asset sales and purchases

Dividends paid and proposed

• S Ltd pays a dividend during the financial period.

• No consolidation considerations necessary for group balance sheet as there are no outstanding balances!

• S Ltd proposes a dividend of €5,000 at financial year end

=> S Ltd shows a dividend payable in its financial statements and P Ltd shows a dividend receivable in its financial statements. They cancel out same as other inter-company balances.

Unrealised profits

• P Ltd buys goods for €1,500 and sells them to S Ltd for €2,000. At financial period end, S Ltd still has these goods in stock and values them at cost of €2,000.

• TWO matters for consolidation consideration:

– P Ltd records a profit of €500 but, from a group perspective, no profit is made until S Ltd sells the goods to an outside party

– The cost at which S Ltd has recorded the stock is not the cost to the group

• In a consolidated balance sheet, the only profits recognised should be those earned by the group in providing goods/services to parties outside the group. Similarly, stock should be booked at the cost to the group!

Inter-company fixed asset transactions

• Consolidated balance sheet should show assets at their cost to the group. Group depreciation should be based on group cost.

• Two adjustments may therefore be required for consolidation:

– Remove any element of unrealised profit (same as stock)

• DR Consolidated reserves

• CR Consolidated fixed assets

– Adjust consolidated depreciation charge so it is based on group cost

• DR Consolidated accumulated depreciation

• CR Consolidated reserves

Minority interest details

• Minority Interests

– arise where the parent has not acquired ALL the shares of the subsidiary

– the total assets and liabilities are nevertheless included in the consolidated balance sheet but a proportion of the net assets belong to investors from outside the group

– in the consolidated balance sheet, it is necessary to distinguish this proportion from those attributable to the group

Minority interest details

• Minority Interests

– arise where the parent has not acquired ALL the shares of the subsidiary

– the total assets and liabilities are nevertheless included in the consolidated balance sheet but a proportion of the net assets belong to investors from outside the group

– in the consolidated balance sheet, it is necessary to distinguish this proportion from those attributable to the group

Calculating balance sheet minority interest

• Open up the T-account for each capital and reserve account in the parent and subsidiary company’s balance sheet

• Open up the T-account for the investment in subsidiary account in the parent balance sheet

• Open up a new T-account for consolidated reserves

• Open up a new T-account for minority interests

• Cancel the investment of the parent against the capital of the subsidiary to the extent that shares are held by the parent. Transfer remaining subsidiary share capital to the minority interest account

• Transfer parent reserves and group share of each subsidiary reserve to the consolidated reserves account. Transfer remaining balance on subsidiary reserves to the minority interest account