dipifr-session25 d08 consolidated statement of comprehensive income

7/27/2019 DipIFR-Session25 d08 Consolidated Statement of Comprehensive Income

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SESSION 25 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Accountancy Tuition Centre (International Holdings) Ltd 2008 2501

Overview

Objectives

To explain the accounting treatment of subsidiaries in consolidated statements of

comprehensive income.

TREATMENT OFGOODWILL

INTER-COMPANY

TRANSACTIONS AND

UNREALISED PROFIT

MID-YEAR

ACQUISITIONS

ENTITLEMENT OF

NON-CON TROLLING

INTEREST

Inclusion of subsidiarys

results Dividends from subsidiary

acquired mid-year

Dividends

Inter-company items

CONSOLIDATED

STATEMENT OF

CHANGES IN EQUITY

IAS 1

Income generation

Control and ownershipINTRODUCTION

Basics


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1 Introduction

1.1 Income generation

The statement of comprehensive income shows the income generated by

resources (= net assets in the statement of financial position ):

The parents own statement of comprehensive income includes dividend incomefrom subsidiary.

The consolidated statement of comprehensive income shows theincome generated by the groups resources (= net assets inconsolidated statement of financial position ).

The consolidated statement of comprehensive income is prepared on a basis consistentwith that used in the preparation of the consolidated statement of financial position.

1.2 Control and ownership

Consolidated statement of comprehensive income

$Revenue X[Parent + Subsidiary (100%) intercompany items]

Profit after tax (CONTROL) X

OWNERSHIP

Owners (equity holders) of the parent XNon-controlling interests( % subsidiarys profit after tax) X

Profit for the period X

Commentary

This reflects the profit or loss section of the statement of comprehensive income, any other

gains or losses for the period will be included within other comprehensive income. This

session focuses on the profit or loss component of the statement of comprehensive income.

The profit or loss shows the income generated from net assets under parents control.

On consolidation, dividends from subsidiary are replaced by parents share of subsidiarysincome and expenses (100%) line-by-line, as far as profit after tax.

Reflect ownership by identifying non-controlling interests share of subsidiarys profit aftertax of the group profit after tax in profit or loss, leaving profit attributable to owners of the

parent.

Eliminate effects of transactions between group members (single entity concept).

Commentary

For example, for interest paid by subsidiary to parent, cancel interest payable in subsidiarys

profit or loss against interest receivable in parents profit or loss.


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2 Inter-company transactions and unrealised profit

2.1 Dividends

Dividends from subsidiary to parent are inter-company items:

Cancel parents dividend income from subsidiary against subsidiarysdividends paid and proposed.

This leaves the non-controlling interests share of subsidiarys dividends.

Non-controlling interest in subsidiary in profit or loss is calculated onprofit after tax (before dividends), and therefore includes the non-controlling interests share of subsidiarys dividends andretained profits.

Commentary

In short, simply ignore dividends from subsidiary on consolidation.

Dividend income in profit or loss will be dividends received from non-groupcompanies whilst dividends paid/payable of the parent only will be included inthe statement of changes in equity.

2.2 Inter-company items

2.2.1 Trading

Inter-company trading will be included in the revenue of one group companyand the purchases of another. Such inter-company items must be cancelled outon consolidation (single entity concept) by taking the following steps:

add across parent and subsidiary revenue and cost of sales; deduct value of inter-company sales from revenue and cost of sales.

Commentary

This adjustment has no effect on profit and hence will have no effect on the

non-controlling interests share of profit.

2.2.2 Unrealised profits on trading

If any items sold by one group company to another are included in inventory(i.e. have not been sold on outside the group by the year end), their value must

be adjusted to the lower of cost and net realisable value to group (as for theconsolidated statement of financial position).

The adjustment will be made as a consolidation adjustment either against theprofits of the selling company or the profits of the parent, irrespective of thedirection of sale.

Commentary

Example 1 below looks at the impact of making the adjustment always against the parent

or always against the selling company. The example is provided for comparisonpurposes; after this example all adjustments for unrealised profits will be made against

the selling company unless the question states otherwise.


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Steps to set up an allowance for unrealised profit:

Calculate the amount of inventory remaining at the year end. Calculate the inter-company profit included in it. Make an allowance against the inventory to reduce it to cost to the

group (or net realisable value if lower).

Worked example 1

Whales owns 75% of Porpoise. The trading account for each companyfor the year ended 31 March 2008 is as follows:

Whales Porpoise

$ $Revenue 120,000 70,000Cost of sales (80,000) (50,000)

Gross profit 40,000 20,000

During the year Porpoise made sales to Whales amounting to $30,000.$15,000 of these sales were in inventory at the year end. Profit madeon the year end inventory items amounted to $2,000.

Required:

Calculate group revenue, cost of sales and gross profit.

Worked solution 1

Parent adjustment

Whales Porpoise Adjustment Consolidated

$ $ $ $Revenue 120,000 70,000 (30,000) 160,000Cost of sales per question (80,000) (50,000) 30,000

Unrealised profit (2,000) (102,000)

Gross profit 40,000 20,000 (2,000) 58,000

Non-controlling interests (25% 20,000) (5,000)

Seller adjustment

Whales Porpoise Adjustment Consolidated

$ $ $ $Revenue 120,000 70,000 (30,000) 160,000Cost of sales per question (80,000) (50,000) 30,000

unrealised profit (2,000) (102,000)

Gross profit 40,000 18,000 58,000

Non-controlling interests (25% 18,000) (4,500)


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Commentary

This example considers the different impact that the adjustment could have on the

calculation of non-controlling interests. From this point on all adjustments should be

made against the selling entitys profits unless the question states otherwise.

Any unrealised profit in opening inventory will be deducted from cost of sales of theoriginal selling company, thereby reversing the originating adjustment made againstthe previous years closing inventory.

Commentary

The adjustment for unrealised profit is merely a timing adjustment. The period of recognition

of profit by the group is moved to a later period than that recognised by the single entity.

2.2.3 Non-current asset transfers

The consolidated statement of comprehensive income should include depreciation ofnon-current assets based on cost to group and should exclude profit/loss on non-current asset transfers between group members. This is consistent with treatment inthe consolidated statement of financial position .

Eliminate profit or loss on transfer and adjust depreciation in full (control). These adjustments are made in full against the consolidated figures.

Worked example 2

Parent owns 80% of subsidiary. Parent transferred a non-current asset to subsidiary

on 1 January 2007 at a value of $15,000. The asset originally cost Parent $20,000and depreciation to the date of transfer was $8,000. The asset had a useful life of 5years when originally acquired, with a residual value of zero. The useful life at thedate of transfer remains at 3 years. A full years depreciation charge is made in theyear of acquisition and none in the year of disposal. Total depreciation for 2007 was$700,000 for parent and $500,000 for subsidiary.

Required:

Show the adjustments required for the above transaction in the consolidated

statement of comprehensive income for the year ended 31 December 2007.

Worked solution 2 As a selling company adjustment

Parent Subsidiary Adjustment Consolidated

$ $ $Per question 700,000 500,000 1,200,000Asset unrealised profit

[15,000 (20,000 8,000)] 3,000 3,000Depreciation adjustment

(15,000/3 years) 4,000 (1,000) (1,000)

1,202,000

This would be part of the profit after tax of subsidiary and

would therefore be shared with the non-controlling interests


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3 Entitlement of non-controlling interests

3.1 Basics

The non-controlling interests share of subsidiarys profit after tax must be

shown, leaving group profit remaining.

Activity 1

Pathfinder owns 75% of Sultan . Statements of comprehensive income for the twocompanies for the year ending 30 September 2007 are as follows:

Pathfinder Sultan

$ $Revenue 100,000 50,000Cost of sales (60,000) (30,000)

Gross profit 40,000 20,000Expenses (20,000) (10,000)

Profit for the period 20,000 10,000

During the year, Pathfinder sold goods to Sultan for $20,000, at a gross profit marginof 40%. Half of the goods remained in inventory at the year end.

Required:

Prepare the consolidated statement of comprehensive income of Pathfinder for

the year ended 30 September 2007.

Proforma solution

Consolidated statement of comprehensive income for the year ended 30 September 2007

$Revenue

Cost of sales

Gross profit

Expenses

Profit

Attributable to:

Owners of the parent

Non-controlling interests (W3)


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WORKINGS

(1) Group structure

(2) Consolidation schedule

Pathfinder Sultan Adjustment Consolidated

$ $ $ $Revenue

Cost of sales

Expenses

Profit

(3) Non-controlling interests

$

(4) Unrealised profit

% $Selling price

Cost

$

Gross profit

4 Mid-year acquisitions4.1 Inclusion of subsidiarys results

Group accounts only include subsidiary from date of acquisition, i.e.when control is gained. If subsidiary is acquired mid-year:

Consolidate subsidiary from date of acquisition;

Identify net assets at date of acquisition for goodwill (as forconsolidated statement of financial position );

Assume revenue and expenses accrue evenly over the year (unlesscontrary is indicated). Therefore time-apportion totals for revenueand costs, then deduct inter-company items.


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Worked example 3

Parent acquired 75% of subsidiary on 1 April 2007. Extracts from the companiesstatements of comprehensive income for the year ended 31 December 2007 are:

Parent Subsidiary$ $Revenue 100,000 75,000Cost of sales (70,000) (60,000)

Gross profit 30,000 15,000

Since acquisition, parent has made sales to subsidiary of $15,000. None of thesegoods remain in inventory at the year end.

Required:

Calculate revenue, cost of sales and gross profit for the group for the yearending 31 December 2007.

Worked solution 3

Consolidated statement of comprehensive income9/12

Parent Subsidiary Adjustment Consolidated

$ $ $ $

Revenue 100,000 56,250 (15,000) 141,250

Cost of sales (70,000) (45,000) 15,000 (100,000)

Gross profit 30,000 11,250 41,250

4.2 Dividends from subsidiary acquired mid-year

In calculating net assets at acquisition, assume profit after tax (i.e.before dividends) accrues evenly over year, unless contrary is indicated.

Two ways to look at the dividend:

Treat subsidiarys dividends paid post-acquisition as being paid out of postacquisition profits first. Only treat dividends as pre-acquisition once post-acquisition profits have been fully exhausted by dividends.

Treat the dividend as arising evenly throughout the year.

5 Treatment of goodwill

IFRS 3 rules that goodwill arising on acquisition must be capitalised andtested annually for impairment. Any fall in value is recognised as an expenseand charged to profit or loss in the period.

Any excess of the fair value of the assets and liabilities acquired over the costof the acquisition is credited to profit or loss immediately.


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6 Consolidated statement of changes in equity

6.1 IAS 1

IAS 1 requires a statement of changes in equity to be included in a set of financial

statements, whether they are from a single entity perspective or that of a group.

The statement will reconcile how the equity position has changed during the period.The consolidated statement will look at the movements from the point of the group,

but will include a reconciliation in respect the movement of non-controllinginterests share of group equity. The statement may include some of the following:

Opening balances

Cumulative effect of changes in accounting policy and prior period errors

Profit for the year

Ordinary dividends (parent plus non-controlling interests share of subsidiary)

Issue of shares

Equity component of convertible bond

Deferred tax implications (if any) to above items.

Illustration 1

NOVARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED INCOME STATEMENTSfor the years ended December 31, 2006 and 2005

Notes2006

USD millions2005

USD millionsNet sales from continuing operations 3/4 36 031 31 005Other revenues 718 314

Cost of goods sold -10 299 -8 259Gross profit from continuing operations 26 450 23 060Marketing & sales -10 454 -9 397Research & development -5 349 -4 825General & administration -1 957 -1 681Other income & expense -741 -355

Operating income from continuing operations 3 7 949 6 802Income from associated companies 10 264 193Financial income 5 354 461

Interest expense -266 -294

Income before taxes from continuing operations 8 301 7 162

Taxes 6 -1 282 -1 090

Net income from continuing operations 7 019 6 072

Net income from discontinuing operations 3 183 69

Group net income 7 202 6 141

Attributable to

Shareholders of Novartis AG 7 175 6 130

Minority interests 27 11

The accompanying notes form an integral part of the consolidated financial statements.


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Worked example 4

The draft accounts of two companies at 31 March 2008 were as follows:

Statements of financial position

Hamble Group Jemima$ $

Investment in Jemima at cost 3,440 Sundry assets 36,450 6,500

39,890 6,500

Share capital ($1 ordinary shares) 20,000 3,000Retained earnings 19,890 3,500

39,890 6,500

Statements of comprehensive income

Hamble Group Jemima

$ $Profit before tax 12,950 3,800Tax (5,400) (2,150)

Profit after tax 7,550 1,650Retained earnings b/d 12,340 1,850

Retained earnings c/f 19,890 3,500

Hamble and Jemima are both incorporated entities.

Hamble had acquired 90% of Jemima, on 1 April 2006, when the reserves of Jemimawere $700. Goodwill of $110 arose on the acquisition. This had been impaired by $22in each year since the acquisition occurred.

Required:

Prepare extracts from the Hamble Group statement of financial position ,

statement of comprehensive income , and statement of changes in equity.


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Worked solution 4

(1) Consolidated retained earnings 1 April 2007

$

Hamble Group 12,340Jemima 90% (1,850 700) 1,035Less Goodwill (22)

13,353

(2) Consolidated retained earnings 31 March 2008

$

Hamble Group 19,890Jemima 90% (3,500 700) 2,520

Less Goodwill (22 2) (44)22,366

Consolidated statement of financial position as at 31 March 2008

$

Goodwill (110 44) 66Sundry assets (36,450 + 6,500) 42,950

43,016

Share capital 20,000Retained earnings 22,366

Non-controlling interests (6,500 10%) 65043,016

Consolidated statement of comprehensive income for the year ended 31

March 2008

Hamble Jemima Consolidated

$ $ $Profit before taxation 12,950 3,800 16,750Goodwill (22)Taxation (5,400) (2,150) (7,550)

Profit after taxation 7,550 1,650 9,178

Attributable to:

Non-controlling interests (1,650 10%) 165

Owners of the parent 9,013

9,178


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Consolidated statement of changes in equity for year ended 31 March 2008

Share Retained Total Non-controlling Total

capital earnings interest Equity

$ $ $ $ $At 1 April 2007 20,000 13,353 33,353 485 33,838Profit for year 9,013 9,013 165 9,178

At 31 March 2008 20,000 22,366 42,366 650 43,016

Commentary

Opening non-controlling interests is calculated as 10% of the share capital and the

retained earnings at 1 April 2007 (3,000 + 1,850).

Focus

You should be able to:

prepare a consolidated statement of comprehensive income for a simple group,including an example where an acquisition occurs during the year and there is anon-controlling interests;

report the effects of intra-group trading and other transactions including:

unrealised profits in inventory and non-current assets; intra-group loans and interest and other intra-group charges; and intra-group dividends, including those paid out of pre acquisition

profits; and

prepare a consolidated statement of changes in equity.


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Activity solution

Solution 1

Consolidated statement of comprehensive income for the year ended 30 September 2007

$Revenue 130,000Cost of sales (74,000)

Gross profit 56,000Expenses (30,000)

Profit 26,000

Attributable to:Owners of the parent (balance) 23,500

Non-controlling interests (W3) (2,500)26,000

WORKINGS

(a) (1) Group structure

Pathfinder

75%

Sultan

(2) Consolidation schedule

Pathfinder Sultan Adjustment Consolidated

$ $ $ $Revenue 100,000 50,000 (20,000) 130,000

Cost of sales per question (60,000) (30,000) 20,000 unrealised profit (W4) (4,000) (74,000)

Expenses (20,000) (10,000) (30,000)

Profit 26,000

(3) Non-controlling interests

$Sultan 10,000 (W2) 25% = 2,500

(4) Unrealised profit

% $Selling price 100 20,000Cost (60) (12,000)

$Gross profit 40 8,000 = 4,000


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(5) Revenue

$Pathfinder 100,000Sultan 50,000Inter company sales (20,000)

130,000

(6) Gross profit

$Pathfinder 40,000Sultan 20,000Unrealised profit (4,000)

Profit 56,000

Therefore cost of sales could be taken as a balancing figure of 74,000.

dipifr-session25 d08 consolidated statement of comprehensive income

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