CONSOLIDATION – SOCI WITH ONE SUBSIDIARY (1)

CONSOLIDATION – SOCI WITH ONE SUBSIDIARY

Consolidated statement of comprehensive income (or Group statement of comprehensive income) is line by line addition
of all values from “Sales” to “Total comprehensive income” of “P” and “S”, subject to certain adjustments.

BASIC PRESENTATION

After line by line addition till Total comprehensive income, “Profit after tax” and “Total comprehensive income”
is attributed to:
- Shareholders of “P”
- NCI
We have already studied consolidation adjustments in sufficient detail in “Consolidation of SOFP”. In this chapter will discuss
the effect of those adjustments in Consolidated SOCI for the year as follows:

Note – If P has recorded investment in S as per IFRS 9, then do not forget to reverse any fair value gain/loss recorded.

1. IMPAIRMENT OF GOODWILL FOR THE YEAR

In questions, impairment loss for the year of goodwill may be:

- Given OR
- Determined by deducting “recoverable amount of current year” from “recoverable amount of previous
year” of goodwill

Consolidation adjustment:

(a) NCI valued at proportionate share (b) NCI valued at Fair value

Total impairment loss is ADDED to “Admin Total impairment loss is:

expenses” (i) ADDED to “Admin expenses”
(ii) DEDUCTED from S PAT in “NCI working”

2. ACQUISITION RELATED COSTS

In case of first year of acquisition, acquisition related costs which were capitalized by P in its cost of investment,
shall be adjusted as follows:

Consolidation adjustment:

Acquisition related transactions costs shall ADDED to “Finance cost” OR “Admin expenses”

3. INTER COMPANY SALES

Either sales are from “P to S” or “S to P”, these transactions are adjusted in the same manner

Consolidation adjustment:

“Sales value” is DEDUCTED from:

(i) Sales
(ii) Cost of sales (or Purchases, if breakup of Cost of sales is given)

4. INTER COMPANY MANAGENT FEES

P may provide management services to S and charge certain fees. This fee is an inter-company transaction and
must be eliminated.

Nasir Abbas FCA

 CONSOLIDATION – SOCI WITH ONE SUBSIDIARY (2)

Consolidation adjustment:

“Management fees” is DEDUCTED from:

(i) Other income of “P”
(ii) Admin expenses of “S”

5. UNREALIZED PROFIT IN INVENTORY [URP]

Inventory value may be given in question or mentioned as a proportion of intercompany sale.

Calculation of URP:
URP = Inventory x GP margin %
OR
Inventory x GP markup / (100 + GP markup)
OR
URP = Total profit in the inter company sale x % goods held in stock

Consolidation adjustment:

P to S sale S to P sale

URP in closing stock is ADDED to “Cost of sales” URP in closing stock is:
(i) ADDED to “cost of sales”
(ii) DEDUCTED from S’s PAT in “NCI working”

In case of URP in opening stock, above adjustments will be inverse.

6. EXTRA DEPRECIATION FOR FAIR VALUE ADJUSTMENT OF DEPRECIABLE ASSETS

If related asset is still held in books, then extra depreciation on fair value adjustment is calculated using same
depreciation basis as of S in its books

Calculation of Extra depreciation for the year:

= FV adjustment x depreciation %

Consolidation adjustment:

Extra depreciation for the year is:

(i) ADDED to “cost of sales” or “admin expenses”
(ii) DEDUCTED from S’s PAT in “NCI working”

In case of negative adjustment to S’s net assets, above adjustments will be reversed

Note – If subsequently S has accounted for any such fair value adjustment in its books, then its effect in
current year SOCI must be reversed.

7. INTER COMPANY SALE OF NON-CURRENT ASSET DURING THE YEAR

Calculation of Profit:
Profit = Sale value of asset x margin %
OR
Sale value of asset x markup / (100 + markup)

Nasir Abbas FCA

 CONSOLIDATION – SOCI WITH ONE SUBSIDIARY (3)

Consolidation adjustment:

In the year of disposal:

(1) If seller recorded this sale of asset as “Sales”

- DEDUCT sale price from “Sales”
- DEDUCT cost from “Cost of sales”

In case of S to P sale, also DEDUCT the profit on sale from S’s PAT in NCI working

(2) If seller recorded profit on sale of asset as “Other income”

P to S sale S to P sale

Profit is DEDUCTED from “Other income” Profit is DEDUCTED from:

(i) “Other income”
(ii) S's PAT in “NCI working”

8. EXCESS DEPRECIATION FOR INTER COMPANY SALE OF DEPRECIABLE ASSET

When asset is depreciated, seller’s profit is realized, therefore, this adjustment is made in seller’s profits. It is
calculated using same depreciation basis as of buyer company in its books

Calculation of Excess depreciation during the year:

= Profit x depreciation %

Consolidation adjustment:

P to S sale S to P sale

Excess depreciation is DEDUCTED from Excess depreciation is:

“cost of sales” or “admin expenses” (i) DEDUCTED from “cost of sales” or “admin
expenses”
(ii) ADDED to S’s PAT in “NCI working”

9. INTEREST ON DEBENTURES / DIVIDEND ON PREFERENCE SHARES

First ensure whether both entities have recorded the interest / dividend as per accrual concept. If not properly
recorded, then accordingly account for it.

Consolidation adjustment (After proper recording):

P’s share in the interest / dividend is DEDUCTED from:

(i) Other income
(ii) Finance cost

10. ORDINARY DIVIDEND BY “S”

First ensure whether both entities have recorded the dividend as per relevant IAS. If not properly recorded,
then accordingly account for it.

Consolidation adjustment (After proper recording):

P’s share in post-acquisition dividend is DEDUCTED from “other income”

Nasir Abbas FCA

 CONSOLIDATION – SOCI WITH ONE SUBSIDIARY (4)

11. NEGATIVE GOODWILL

Consolidation adjustment:

It is recognized as income and generally shown as a separate line item of income on Group statement of
comprehensive income ONLY in the year of acquisition.

12. S’s INTANGIBLE ASSET RECOGNIZED AT ACQUISITION

Consolidation adjustment:

Amortization for the year, if any, is ADDED to “admin expenses” and DEDUCTED from S’s PAT in NCI
working.

13. S’s CONTINGENT LIABILITY RECOGNIZED AT ACQUISITION

Consolidation adjustment:

Case 1 – If obligation still exists at year end but S has subsequently not recognized any liability:

No adjustment required.

Case 2 – If S has now recognized a liability at an amount LOWER than acquisition date fair value:

Any expense recognized by S during the year is reversed i.e.:

(i) DEDUCTED from “Admin expenses” in Group SOCI
(ii) ADDED to S’ PAT in “NCI working”

Case 3 – If S has now recognized a liability at an amount HIGHER than or EQUAL to acquisition date fair
value / If obligation is settled during the year:

“Acquisition date fair value – carrying amount of liability in S books at end of last year” (if positive) is:
(i) DEDUCTED from “Admin expenses” in Group SOCI
(ii) ADDED to S’ PAT in “NCI working”

14. DEFERRED CONSIDERATION

Calculation for finance cost for the year:

= Present value of deferred consideration at year end – present value of deferred consideration at year start

OR

= Present value of deferred consideration at year start x discount rate

Consolidation adjustment (if still unrecorded):

Finance cost on deferred consideration for the year will be ADDED to the finance cost for the year in Group
SOCI.

15. CONTINGENT CONSIDERATION

Calculation for adjustment for the year:

= Fair value of contingent consideration at year end – fair value of contingent consideration at year start

Nasir Abbas FCA

 CONSOLIDATION – SOCI WITH ONE SUBSIDIARY (5)

Consolidation adjustment (if still unrecorded):

Fair value change on contingent consideration for the year will be RECOGNIZED to the Admin expenses for
the year in Group SOCI.

16. TRANSFER OF NON-CASH ASSET AS PURCHASE CONSIDERATION

Consolidation adjustment (if still unrecorded):

In first year of acquisition, profit/loss on transfer of non-cash asset shall be recognized in Group SOCI. If the
asset was depreciable then reverse any depreciation, for the period after acquisition, charged in P books.

17. ACQUISITION DURING THE YEAR

If sufficient data is available to prepare separate SOCI of S for post-acquisition period then use this specific
period SOCI for consolidation purposes. However generally in questions such data is not available, therefore,
all incomes and expenses of S are assumed to occur evenly throughout the year unless any specific expense
or income is mentioned to be exceptional and specifically relates to a particular period. In which case following
adjustments are made:

Consolidation adjustment:

Acquisition during the year has following effects on consolidated figures:

Effect on: Adjustment:

All items of S’s SOCI Figures are time apportioned as per months since acquisition,
except specific period related items (see note below)
Intercompany eliminations Intercompany transactions in post-acquisition period are
eliminated.
Extra depreciation on FV adjustment Calculated for post-acquisition period in the year
For NCI working, S’s PAT is adjusted as: [S’PAT +/- specific period related item (see note below)] x n/12
–/+ specific period related item

Note:
Generally all expenses and incomes of S are assumed to occur evenly throughout the year therefore all these items are time
apportioned according to post acquisition months. However there may be certain expenses and incomes which are
mentioned to be exceptional and they specifically relate to pre or post acquisition period.

Example:
P acquired controlling interest in S on August 1, 2013. S’s PAT for the year is Rs. 74,000. Its other income for the year includes
Rs. 2,000 which specifically relates to December 2013. Now S’s PAT in NCI working will be as [(74,000 - 2,000) x 5/12 + 2,000
= 32,000]

Nasir Abbas FCA

 CONSOLIDATION – SOCI WITH ONE SUBSIDIARY (6)

FORMATS AND WORKINGS

P Group
Consolidated Statement of Comprehensive income
For the year ended …………………..
Rs.

Sale XXX
(P’s + S’s x n/12 – Inter-company transaction)
Cost of sales (XXX)
(P’s + S’s x n/12 – Inter-company transaction + URP on goods [P or S] + Extra depreciation
on Fair value adjustment – Excess depreciation on asset sale)
Gross profit (Cast down) XXX
Distribution cost (XXX)
(P’s + S’s x n/12)
Administrative expenses (XXX)
(P’s + S’s x n/12 + unrecorded expense – Inter-company transaction – Excess depreciation
on asset sale + Extra depreciation on fair value adjustment + Amortization on asset
recognized at acquisition + total impairment loss of goodwill for the year + value increase
of contingent liability of S + fair value change in contingent consideration)
Finance cost (XXX)
(P’s + S’s x n/12 – Intercompany finance cost + finance cost on deferred consideration)
Other income XXX
(P’s + S’s x n/12 – Intercompany interest / dividend – Profit [P or S] on asset sale during
the year + unrecorded income)
Profit before tax (Cast down) XXX
Tax (XXX)
(P’s + S’s x n/12)
Profit after tax (Cast down) XXX
Other comprehensive income:
Revaluation gain / (loss) XXX
(P’s + S’s post acquisition gain/loss)
Fair value gain / (loss) XXX
(P’s + S’s post acquisition gain/loss)
Total comprehensive income for the year XXX
Profit for the year attributable to:
Shareholders of Parent XXX
Non-controlling interest (W – 1) XXX
XXX
Total comprehensive income attributable to:
Shareholders of Parent XXX
Non-controlling interest XXX
(“Answer of W – 1” + NCI % x S’s other comprehensive income)
XXX

Nasir Abbas FCA

 CONSOLIDATION – SOCI WITH ONE SUBSIDIARY (7)

Consolidated Statement of changes in retained earnings:

Rs.

Group retained earnings b/f (W – 2) XXX

Add: Profit attributable to shareholders of Parent XXX

Less: Dividend for the year (Parent’s only) (XXX)

Group retained earnings c/f (Cast down) XXX

WORKINGS

(W – 1) Non controlling interest

Rs. Rs.

S’s profit after taxation (Notes) XXX

Less: URP on goods [ S to P ] (sale during the year) (XXX)
Less: Profit on assets [ S to P ] (sale during the year) (XXX)
Less: Extra depreciation for the period on FV adjustment (XXX)
Less: Amortization for the period on asset recognized (XXX)
Less: value change in contingent liability of S (XXX)
Less: unrecorded expense (XXX)
Less: Impairment loss for the year [If NCI is at fair value] (XXX)
Add / Less: correction of error XXX
Add: unrecorded income XXX
Add: Excess dep. for the period on asset sale [S to P] XXX
XXX
NCI share @ (% share in ordinary shares) XXX

Notes:
1. Intercompany eliminations have nothing to do with NCI working
2. Also see note on page 5

“n” means number of months from acquisition date to year end, in case of acquisition during the year.

(W – 2) Group retained earnings b/f

It will be the group retained earnings as would be calculated for previous year consolidated statement of financial position.
Now it can be calculated using “retained earnings b/f”, of both parent and subsidiary, given in question.

Nasir Abbas FCA