Performing a basic consolidation

A parent company must prepare group accounts in accordance with the requirements of CA2006 Schedule 399.

The following companies are exempt from the requirement to prepare consolidated accounts:

Ø Companies subject to the small companies regime

Ø Companies included in the EEA accounts of a larger group

Ø Companies included in the non-EEA accounts of a larger group

Ø Companies with no subsidiaries that need to be included in the consolidation

Group accounts show the financial results of subsidiaries and associates, along with those of the acquiring entity, as though they were all one entity.

Associates are not under the full control of the acquiring entity, but under its significant influence in terms of operating and financial policies. Typically, the acquiring entity will own between 25% and 50% of the share capital and voting rights of an associated company, and have significant influence over operating and financial decisions at board level.

Subsidiaries are entirely under the control of the parent company, with more than 50% of its shares owned by the parent company and control over its operating and financial decisions subordinated to that parent company.

The main features of group accounting are set out below:

Associated Companies

The consolidated balance sheet of the parent company will show the investment in the associate as a separate line item calculated as follows:

Net assets (capital + reserves) of associate x

% holding acquired

Goodwill left at the year end

Investment in associate

The consolidated income statement will show the following amounts as separate line items, but only the % of the company acquired multiplied by the original amount in the acquired company’s own income statement:

A	Operating profit	x
B	Exceptional items	x
C	Interest receivable	x
D	Interest payable	x
E	Tax	x

This has the effect of showing the part of profit and net assets of the associated company under the control of the parent.

Subsidiaries

The consolidated balance sheet of the parent company will show the following assets and liabilities of both the parent company and the subsidiaries added together:

A	The total of all assets line by line	x
B	The total of all liabilities line by line	(x)
C	Reduced by intra-group transactions line by line	(x)/x
D	The share capital of the parent company	x
E	The reserves of the parent company plus the reserves of the reserves of the subsidiary earned after acquisition by the parent company less goodwill amortisation under consolidation	x/(x)
F	Less minority interest in the net assets of the subsidiary	(x)

The effect of this method is to show all the results and net assets under direct control of the parent company.

The consolidated profit and loss account (income statement) will show the following results of the parent company and its subsidiaries added together:

A	The total of all income line by line	x
B	The total of all expenses line by line	(x)
C	A deduction of profit after tax due to the minority shareholders of the subsidiaries.	(x)

Calculating goodwill

Cost of acquiring the subsidiary		x
Fair value of the assets acquired:
Share capital	x
Reserves at acquisition	x
Total	x
X % of holding acquired		(x)
Goodwill
Amortisation/Impairment		(x)
Unamortised/Unimpaired goodwill		x

Reserves (or profits/(losses) accumulated over a number of years) up to the date of acquisition are included in goodwill.

Reserves accumulated after acquisition are included in accumulated reserves of minority interest as appropriate.

Calculating reserves

Reserves of acquiring company	x
Post acquisition reserves	x
Total		x
X % acquired		x
Goodwill impaired/amortised		(x)
Balance sheet reserves		x

Goodwill amortisation for the year is shown in expenses, and accumulated amortisation is deducted from total reserves of the parent company and its subsidiaries.

Calculating investment in associates

% acquired x (share capital + reserves)	X
Unimpaired goodwill	X
Group’s share of net assets at the balance sheet date	X

Profit after tax x % acquired	X
Goodwill amortisation	(X)
Share of profit after tax of associate	X

Goodwill amortisation or impairment during the year is deducted from expenses.

Practical consolidation: the 50% example

Using a spreadsheet, the individual trial balances of the parent company and the subsidiary can be used to calculate the consolidated trial balance before preparing the consolidated accounts. As the consolidated accounts present results as a single entity, all inter-company transactions of companies included in the consolidation are excluded. In this example a 50% holding is first treated as an associate using the equity method of accounting, then it is treated as a subsidiary using the full consolidation.

	Parent	Sub/ Ass	If Ass	If Sub	Interco	Consolidation	Total
		50%	Equity method	Con- solidate		Adjustments
Income	A	O	A	A+O	(sales)
Expenses	(B)	(P)	(B)	(B+P)	Exp’s	(annual goodwill impairment
Operating profit	C	Q	C	C+Q		(annual goodwill impairment
Share of associate Profit			Qx50% - annual goodwill impairment [MSOffice3]
Investment Income	D	R	-	R
PBT	E	S	Subtotal	Subtotal (E+S-D)		(annual goodwill impairment
Tax	(F)	(T)	(F)	(F+T)
PAT	G	U	Subtotal	Subtotal (G+U-D)		(annual goodwill impairment
Attributable to :
Parent	H	V	(H-D) +((Q x50%) – annual goodwill impairment_)	G-D+ (Ux50%)		(annual goodwill impairment
Minority interest In subsidiary			-	50% x V
Balance sheet
Intangible Assets				J-(Z+A2) X50%		(Goodwill impairment since acquisition)
Tangible Assets	I	W	I	I+W
Cost of investment in sub/ass	J	-	(Z+A2+B2) x 50%+ unimpaired goodwill
Debtors	K	X	K	K+X	(Sales)
Creditors	(L)	(Y)	(L)	(L+Y)	(Exp’s)
Capital	(M)	(Z)	(M)	(M)
Reserves: Up to acquisition Since Acquisition	(N1)	(A2) (B2)