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CONSOLIDATED STATEMENT OF FINANCIAL POSITION

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

LEANRING OBJECTIVE

1. What is group?
2. Requirement to prepare consolidated financial statement
3. The basic method of preparing a consolidated statement of financial position
4. The mechanics of consolidation
5. Goodwill
6. How to include fair value in consolidation workings
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I. What is a group?

A group exists where on entity, the parent, has control over another entity, the subsidiary.
In accordance with IFRS 10 consolidated Financial Statements control consists of three components:
(1) Power over the investee, which is normally exercised through the majority of voting rights (i.e. owning more than 50% of the equity shares).
(2) Exposure or rights to variable returns from involvement (e.g. a dividend).
(3) The ability to use power over the investee to affect the amount of investor returns. This is regarded as a crucial determinant in deciding whether or not control is exercised.
An investor is an entity which owns a shareholding in another entity.
An investee is an entity in which another entity has a shareholding.
2. Requirement to prepare consolidated financial statements
If one company controls another then IFRS 10 requires that a single set of consolidated financial statements be prepared to reflect the financial performance and position of the group as one combined entity. This reflects the fact that the investment of the parents’ shareholders is now tied up in more than one entity. Their returns and the stability of their investment now reflect the performance and position of both entities.
In order to make informed decisions about their investment, shareholders would need to read and interpret the financial statements of both companies. If there were more than one subsidiary company this could become quite complex for shareholders. To this end one set of financial statements is prepared where the revenues, expenses, assets and liabilities of the parent and subsidiary are combined for ease of understanding and analysis.
3. The basic method of preparing a consolidated statement of financial position
(1) The assets and liabilities of the parent and the subsidiary are added together on a line-by-line basis.
(2) The investment in the subsidiary included in the parent’s SoFP is replaced by a goodwill asset in the consolidated SoFP.
(3) The share capital and share premium balances of the parent and subsidiary are not added together, only the parent entity balances for share capital and share premium are included in the consolidated SoFP. This reflects the fact that the consolidated SoFP includes all of the assets and liabilities under the control of the parent entity.
(4) The amount attributable to non-controlling interests is calculated and shown separately on the face of the consolidated SoFP.
(5) The group share of the subsidiary’s post-acquisition retained earnings is calculated and included as part of group retained earnings.

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Download lessons:

CHAPTER 8 CONSOLIDATED STATEMENT OF FINANCIAL POSITION part 1

Chapter 8 – part 2 Consolidated BS

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