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Preparing consolidated financial statementsIAS27 ‘Consolidated and separate financial statements’ defines a subsidiary as an entity that is controlled by another entity. An entity has control if it has the ability to direct the operating and financial policies of another with a view to gaining economic benefit. If an entity owns100% of another entity it will usually have control.
When preparing consolidated financial statements:
Pre-acquisition and post-acquisition reservesWhen preparing consolidated financial statements it is important to distinguish between pre-acquisition reserves and post-acquisition reserves. Pre-acquisition reserves are retained profits and other reserves that exist in a subsidiary’s statement of financial position at the date of acquisition. Pre-acquisition reserves are capitalised at the date of acquisition by including in the goodwill calculation. They must not be included in the consolidated income statement or consolidated statement of financial position.
Profits/losses (including unrealised gains and losses) made after acquisition that are shown in the subsidiary reserves can be included in the consolidated statement of comprehensive income and in reserves in the consolidated statement of financial position.
Intra-group activitiesThe impact of any intra-group activities must be cancelled out in the consolidated financial statements.
Consolidated financial statements use the same underlying format as single entity financial statements, so you do not need to learn new formats for consolidated financial statements.
Consolidated financial statement preparation - checklist
In order to prepare a consolidated balance sheet, the followings aspects are to be given special care to:
- Cancellation Investment and Share Capital
i.e. The Investment in Subsidiary Company by the holding company, appearing on the asset side of the B/S of the holding company, should cancel out the corresponding Share Capital of the subsidiary Company.
- Minority Interest Calculation
- Goodwill on Consolidation
- Capital Reserve on Consolidation
- Cancellation of Inter Company Debts and Acceptance