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Discuss the problem that relate to preparation of a consolidated balance sheet.

Deleted user
by Deleted user

agreed with all ...............................

Deleted user
by Deleted user

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:

  1. We are replacing the cost of the investment in the holding entity’s accounts with the fair value of the assets and liabilities of the subsidiary.
  2. Goodwill is likely to arise on acquisition. Shares purchased at the market price may not reflect the fair value of the assets and liabilities of the subsidiary. Any difference between the amount paid and the value of the assets is goodwill.
  3. There must be no double counting. All items that relate to transfers within the group must be eliminated on consolidation.

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.

  1. Inter-entity trading. Sales and purchases figures need to be adjusted on the income statement to remove double counting of the sales. Any goods in closing inventory at the year end will include unrealised profit in the inventory value, this must be removed.
  2. Current accounts should be reconciled, making adjustments for any items in transit and then cancelled out on consolidation.
  3. Intra/inter-group dividends received are cancelled on consolidation against dividends paid.

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

  1. Calculate group holdings and establish the status of each entity in the question (subsidiary, associate or investment), W1
  2. Establish fair value of assets acquired and calculate net assets of the subsidiary, W2
  3. Calculate goodwill arising on acquisition, W3
  4. Adjust for any intra-group activities, W4
  5. Calculate balance carried forward on consolidated retained earnings, W5
  6. Calculate balance carried forward on consolidated reserves, W6
  7. Prepare consolidated financial statements, statement of financial position and/or consolidated statement of comprehensive income.

Mir Mujtaba Ali
by Mir Mujtaba Ali , Internal Audit Manager , Confidential

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

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