Introduction to Consolidated Financial Statements

When a parent company controls one or more subsidiaries, the group is presented as a single economic entity in consolidated financial statements. Although the parent and each subsidiary are separate legal entities, the consolidated statements combine their assets, liabilities, income, and expenses, eliminating the effects of transactions between them.

This provides users with information about the economic resources controlled by the group as a whole, rather than just the parent's individual position (which would show only its investment in subsidiaries rather than the underlying assets and liabilities).

IFRS 10 Consolidated Financial Statements requires a parent to present consolidated financial statements unless specific exemptions apply (e.g., the parent is itself a wholly-owned subsidiary whose ultimate parent produces IFRS-compliant consolidated statements).

Control exists when an investor has all three of the following:

1. Power over the investee — the investor has existing rights that give it the current ability to direct the relevant activities of the investee (the activities that significantly affect the investee's returns). Power typically arises from holding a majority (>50%) of voting rights, but can also come from:
   • Contractual arrangements giving the right to direct relevant activities
   • Holding less than 50% of voting rights where remaining shareholders are widely dispersed and passive (de facto control)
   • Potential voting rights that are currently exercisable (e.g., convertible instruments, options)
2. Exposure, or rights, to variable returns from involvement with the investee — returns may be positive (dividends, cost savings, synergies, capital appreciation) or negative (losses, exposure to credit risk)
3. The ability to use power to affect the amount of those returns — the link between power and returns. The investor must be able to use its power to influence the investee's returns for the investor's own benefit.

All three elements must be present simultaneously. Control is reassessed whenever facts and circumstances indicate a change.

Subsidiary: An entity that is controlled by another entity (the parent).

Parent: An entity that controls one or more subsidiaries.

Group: A parent and all its subsidiaries.

Goodwill represents the excess of the consideration paid (plus the value of NCI) over the fair value of the subsidiary's identifiable net assets at the acquisition date. It is recognised as an intangible asset on the consolidated SoFP.

There are two methods for measuring NCI, which affect the goodwill calculation:

Method 1 — Proportionate share method (partial goodwill):

NCI at acquisition is measured at NCI's proportionate share of the subsidiary's fair value of net assets (FVNA). Goodwill reflects only the parent's share.

Goodwill = Consideration paid − Parent's % × FVNA at acquisition

Method 2 — Full (fair value) goodwill method:

NCI at acquisition is measured at its fair value (e.g., based on the market price of the NCI's shares). Goodwill includes both the parent's and the NCI's share.

Goodwill = Consideration paid + Fair value of NCI − 100% × FVNA at acquisition

IFRS 3 Business Combinations allows a choice between these two methods on a transaction-by-transaction basis.

Key points about goodwill:

• Goodwill is not amortised — it is tested for impairment annually under IAS 36 (or more frequently if there are indicators of impairment)
• Impairment of goodwill is charged to profit or loss and is never reversed
• If FVNA exceeds consideration + NCI, a bargain purchase (negative goodwill) arises — recognised immediately as a gain in profit or loss (after reassessing all fair values to confirm they are correct)

The Net Assets Working (Standard Consolidation Working)

When the parent owns less than 100% of a subsidiary, the remaining ownership belongs to outside shareholders — the non-controlling interest. NCI represents the equity in the subsidiary not attributable to the parent.

NCI at the acquisition date:

• Proportionate share method: NCI = NCI% × FVNA at acquisition
• Full goodwill method: NCI = fair value of NCI at acquisition (e.g., NCI% × fair value per share if shares are traded)

NCI at the reporting date:

NCI at reporting date = NCI at acquisition + NCI% × Post-acquisition retained earnings (adjusted) − NCI% × Goodwill impairment (full method only) − NCI% × Unrealised profit on upstream sales

Presentation:

• Consolidated SoFP: NCI is shown as a separate component within equity, distinct from equity attributable to the parent
• Consolidated SoPL: Profit for the year is allocated between: profit attributable to owners of the parent and profit attributable to NCI. Total profit is not affected — it is simply split.

Because the group is presented as a single entity, all transactions between group companies must be eliminated. You cannot sell to yourself or owe yourself money.

Intra-Group Balances

Intra-Group Trading (Revenue and Cost of Sales)

Unrealised Profit in Inventory (PURP)

Intra-Group Dividends

At the acquisition date, the subsidiary's identifiable assets and liabilities are measured at their fair values for consolidation purposes under IFRS 3, even if they are carried at different amounts in the subsidiary's own books.

Common fair value adjustments:

• Property: Market value often exceeds book value. The uplift increases FVNA (reducing goodwill). The uplift must be depreciated over its remaining useful life in post-acquisition periods, which reduces post-acquisition retained earnings.
• Inventory: Fair value at acquisition may exceed cost. If this inventory is subsequently sold (usually within the first year), the fair value adjustment reverses through cost of sales, reducing post-acquisition profit.
• Intangible assets: Items such as customer lists, order backlogs, or brand names may need to be recognised at fair value at acquisition (even if not in the subsidiary's books), provided they meet IAS 38 recognition criteria under IFRS 3. These are then amortised post-acquisition.
• Contingent liabilities: Under IFRS 3, contingent liabilities of the acquiree are recognised at fair value at acquisition even if they would not qualify for recognition under IAS 37 in the subsidiary's own statements (i.e., even if the outflow is merely possible, not probable).

Effect on calculations:

• Fair value adjustments increase FVNA at acquisition, which reduces goodwill
• Post-acquisition depreciation/amortisation of the fair value uplift reduces post-acquisition profits, which affects both group retained earnings and NCI at the reporting date

Group retained earnings represent the parent's own retained earnings plus the group's share of the subsidiary's post-acquisition retained earnings, adjusted for consolidation items.

Group retained earnings = Parent's own retained earnings + Parent's % × Subsidiary's post-acquisition retained earnings (adjusted) − URP on downstream sales − Goodwill impairment to date − Parent's % × URP on upstream sales

The subsidiary's "post-acquisition retained earnings (adjusted)" is the movement in the net assets working column, which includes the subsidiary's own retained earnings growth less any post-acquisition depreciation of fair value adjustments.

The consolidated SoPL combines the parent's and subsidiary's income and expenses line by line for the reporting period. Key adjustments:

1. Add parent's and subsidiary's figures line by line (revenue + revenue, COS + COS, etc.)
2. Eliminate intra-group revenue and cost of sales (Dr Revenue / Cr COS for the intra-group trading amount)
3. Eliminate unrealised profit in inventory: Dr COS (increase) for the URP amount
4. Include additional depreciation/amortisation on fair value adjustments (allocated to the appropriate expense line)
5. Include goodwill impairment (if any) — charged as a separate line or within admin expenses
6. Eliminate intra-group items: management charges, interest on intra-group loans, dividends from subsidiary
7. Allocate profit for the year between: profit attributable to owners of the parent, and profit attributable to NCI

NCI share of profit = NCI% × Subsidiary's adjusted profit for the year (after additional FV depreciation, after URP adjustments on upstream sales, after goodwill impairment allocated to NCI under full method).

Mid-year acquisitions: If the subsidiary was acquired part-way through the year, only include the subsidiary's results from the date of acquisition (time-apportion revenue, COS, expenses). Pre-acquisition profits belong to the previous owners and are already reflected in the goodwill calculation.