Consolidated Financial Statements
Groups
Consolidated Financial Statements
Syllabus tag: KASNEB CPA | Intermediate Level | CA23 Financial Reporting and Analysis | Topic 9 Consolidated Financial Statements
Lesson objectives
By the end of this topic, you will be able to:
- Identify control and say when consolidation is required
- Compute goodwill under the full and proportionate methods
- Compute non-controlling interest at the reporting date
- Compute group retained earnings
- Eliminate intra-group balances and unrealised profit
Why this matters
A group is not a legal entity. It exists only in the consolidated accounts, which present a parent and its subsidiaries as though they were one business — because that is how the parent's shareholders experience it.
Control
IFRS 10 requires consolidation where the parent has control: power over the investee, exposure to variable returns, and the ability to use its power to affect those returns.
More than 50% of the voting rights usually gives control, but not always. A parent can control with less through an agreement with other shareholders, and can hold more than half without control if the shares carry no votes.
| Holding | Normal treatment |
|---|---|
| Control (usually above 50%) | Consolidate line by line |
| Significant influence (20–50%) | Equity method — associate |
| Below 20% | Investment at fair value |
One group throughout
Parent P acquired 80% of Subsidiary S for KES 26,000,000.
At acquisition S had share capital KES 12,000,000 and retained earnings KES 9,000,000. Land was undervalued by KES 3,000,000. S's retained earnings are now KES 15,000,000. P's own retained earnings are KES 40,000,000. The fair value of the non-controlling interest at acquisition was KES 6,200,000.
Net assets at acquisition
| KES | |
|---|---|
| Share capital | 12,000,000 |
| Retained earnings at acquisition | 9,000,000 |
| Fair value adjustment — land | 3,000,000 |
| Net assets at acquisition | 24,000,000 |
The fair value adjustment matters. Consolidation records what the parent actually bought, which is the fair value of the net assets, not their book value in the subsidiary's own accounts.
Goodwill: two permitted methods
Full (fair value) method — NCI measured at its fair value:
| KES | |
|---|---|
| Consideration transferred | 26,000,000 |
| Non-controlling interest at fair value | 6,200,000 |
| Less net assets at acquisition | (24,000,000) |
| Goodwill | 8,200,000 |
Proportionate method — NCI measured at its share of net assets:
NCI = 20% × 24,000,000 = 4,800,000
| KES | |
|---|---|
| Consideration transferred | 26,000,000 |
| Non-controlling interest | 4,800,000 |
| Less net assets at acquisition | (24,000,000) |
| Goodwill | 6,800,000 |
The two differ by 1,400,000, which is precisely the NCI's share of goodwill. The full method recognises the goodwill attributable to the whole subsidiary; the proportionate method recognises only the parent's share.
The choice is made for each acquisition separately, and it changes both goodwill and NCI by the same amount.
Post-acquisition reserves
Only profits earned since acquisition belong to the group. Profits earned before were bought and are already reflected in goodwill.
Post-acquisition retained earnings = 15,000,000 − 9,000,000 = KES 6,000,000
- Group share (80%) = 4,800,000
- NCI share (20%) = 1,200,000
Non-controlling interest at the reporting date
NCI = NCI at acquisition + NCI share of post-acquisition reserves
- Full method: 6,200,000 + 1,200,000 = KES 7,400,000
- Proportionate: 4,800,000 + 1,200,000 = KES 6,000,000
Group retained earnings
Group retained earnings = Parent's own + Group share of post-acquisition
= 40,000,000 + 4,800,000 = KES 44,800,000
The parent's figure is taken in full because the parent's shareholders own all of it. Only the group share of the subsidiary's post-acquisition profit is added.
:::checkpoint Explain why S's pre-acquisition retained earnings of KES 9,000,000 appear nowhere in group retained earnings, and say where their effect can be found instead. :::
Intra-group adjustments
A group cannot trade with itself, so anything internal must be removed.
Balances. A receivable in P matching a payable in S is cancelled in full. Both figures are otherwise overstated.
Trading. Intra-group sales and purchases are eliminated from revenue and cost of sales. The group's revenue must show only sales to outsiders.
Unrealised profit. Where goods sold within the group remain in inventory at the year end, the profit on them has not been earned from anyone outside.
S sold goods to P for KES 5,000,000 at a margin of 25%, and 40% remain unsold:
Unrealised profit = 5,000,000 × 25% × 40% = KES 500,000
Deduct it from inventory and from the profit of the selling company. Where the seller is the subsidiary, the adjustment reduces S's post-acquisition profit, so the NCI bears its 20% share of it.
Watch the wording. A margin is a percentage of selling price; a mark-up is a percentage of cost. A 25% mark-up on the same sale would give unrealised profit of 5,000,000 × 25/125 × 40% = 400,000.
:::checkpoint P sells goods to S at a mark-up of one third, and half remain in inventory. The sale was KES 6,000,000. Compute the unrealised profit and say whose profit is reduced and whether the NCI is affected. :::