Group accountsWhen preparing group statements of financial position, the basic rule with the assets and liabilities of the subsidiary is that they will cross cast. In exam questions often the majority of the marks are allocated for the consolidation adjustments around goodwill, NCI, post-acquisition profits and fair value adjustments. Let’s have a look at an exercise where these issues all feature.

Question

Two years ago, Weller paid $90,000 for a controlling interest of 80% in the equity of Foxton when the retained earnings of Foxton were $25,000. An extract of the statement of financial positions at the reporting date shows;

Weller Foxton
$ $
Ordinary sharews ($1) 25,000 15,000
Retained earnings 100,000 40,000
125,000 55,000
  • The fair value of the NCI of Foxton at the date of acquisition was $20,000.
  • It is group policy to measure the NCI at acquisition at fair value.
  • For consolidation purposes an upwards fair value adjustment of $25,000 was made on certain items of Foxton’s property plant and equipment which at the date of acquisition had a remaining life of five years.
  • By the reporting date goodwill has been impaired by $1,000.

Required

  • a) Calculate the goodwill at the reporting date.
  • b) Prepare the equity section of the Weller group statement of financial position.

Now in approaching such a question there are five regular workings that have to be processed. It is first necessary to prepare a group structure to ensure that we have noted the parent’s and the NCI’s interest in the subsidiary’s profits and noted how long the subsidiary has been a member of the group.

W1 Group structure

Weller (parent)
Two years ago 80% / 20% NCI
Foxton (subsidiary)

Our next working is to establish the fair value of the net assets of the subsidiary both at the date of acquisition and at the reporting date. The net assets of the subsidiary are represented by its equity. Note that the subsidiary’s net assets at the date of acquisition need a fair value adjustment on its property plant and equipment. This adjustment is still necessary at the reporting date as the asset is still held, in fact, at the reporting date it also creates the additional adjustment of more depreciation.

W2 Net assets

At acquisition At reporting date
$ $
Ordinary shares 15,000 15,000
Retained earnings 25,000 40,000
Fair value adjustments on PPE 25,000 25,000
Less depreciation(1/5 x 25,000 X 2 years) (10,000)
Total 65,000 70,000

From the net asset working we can see that the rise in the net assets since the subsidiary was acquired is $5,000. This is known as the post-acquisition profits of the subsidiary and is allocated 80% to the parent w5 and 20% to the NCI w4. Further we can note that the net assets of the subsidiary at acquisition is $65,000, a key figure for the calculation of goodwill which is our next working. The goodwill arising on consolidation is subject to an annual impairment review. Where the NCI at acquisition has been measured at fair value then the goodwill is said to be the full goodwill of the group and as such any impairment loss has be allocated between the parent w5 and the NCI w4 in the normal proportions that they share profits and losses.

W3 Goodwill

$
FV of Parent’s investment 90,000
FV of NCI 20,000
FV of Net assets (65,000)
Goodwill at acquisition – full 45,000
Less impairment loss (80% / 20%) (1,000)
Goodwill at the reporting date 44,000

Next we determine the NCI at the reporting date. NCI is part of equity (the ownership) and so the balance at the date of acquisition will increase with its share of any profits and decrease with any share of losses that we have seen above.

W4 NCI

$
Opening balance 20,000
Plus NCI% of post -acquisition profit 1,000
Plus NCI% of post -acquisition profit (20% x 5000) 1,000
Less NCI% impairment loss on full goodwill (20% x 1,000) (200)
20,800

Our final working is the retained earnings of the group.

W5 Retained earnings

$
Parent 100,000
Plus parent’s % of post acquisition profit (80% x 5,000) 4,000
Less parent’s % of impairment loss on full goodwill (80% x 1,000) (800)
103,200

To recap, in answer to the requirements

  • a) Goodwill at the reporting date; per w3 above , $44,000
  • b) Equity section of the group statement of financial position
$
Ordinary shares (parent only) 25,000
Retained earnings w5 103,200
NCI w4 20,800
149,000

The second edition of Tom’s book – A Student’s Guide to Group Accounts is now available from Kaplan Publishing. Use the discount code kmb9dv8-s for £5 off and free delivery!

Main image courtesy of Images_of_Money via Flickr.

Written by Tom Clendon

Tom teaches Financial Accounting at Kaplan London. He won PQ magazine’s Tutor of the Year award in 2009. Tom is a published author, most recently writing a Student’s Guide to Group Accounts, now in its second edition, which he describes as a ‘creative and satisfying’ experience.