Other accounting considerations and practical examples
Table of Contents
- Requirements of IFRS 10 consolidated financial statements and ASC 810 consolidation
- Combine like items
- Offset (eliminate) the carrying amount of parent’s invetment and parent’s portion of equity of subsidiary
- Eliminate all intragroup transactions and balances
- Non-controlling interest (NCI)
- Using the same accounting periods
When an investor has assessed that it has control over an investee, the investor is required to prepare consolidated financial statements. These are financial statements of a group in which assets, liabilities, equity, income, expenses and cash flows of the investor (parent) and investee (subsidiary) are presented as those of a single economic entity.
Requirements of IFRS 10 consolidated financial statements and ASC 810 consolidation
In order to present financial information of a group as that of a single entity, investor must:
- Combine like items of assets, liabilities, equity, income, expenses, and cash flows of the parent with those of its subsidiaries,
- Offset (eliminate) the carrying amount of the parent’s investment in each subsidiary as recognised in the statement of financial position and the parent’s portion of equity of each subsidiary,
- Eliminate all intragroup assets and liabilities, equity, income, expenses and cash flows and any unrealised gains/losses arising from transactions between group entities,
- Attribute net income or loss and other comprehensive income or loss to any non-controlling interests, presenting it separately from the equity of the owners of the parent,
- Use the same accounting periods for parent and subsidiary
- Use uniform accounting principles for parent and subsidiary,
- Under the IFRS use uniform accounting policies for parent and subsidiary, whereas under the US GAAP policies can differ,
- In the case of foreign subsidiaries with different functional currencies of that of the presentation currency of the group, the results and financial position of each such subsidiary is translated into the presentation currency of the consolidated financial statements.
Combine like items
An entity includes the income and expenses of a subsidiary in the consolidated financial statements from the date it obtains control over the subsidiary until the date when the entity ceases to control the subsidiary. Income and expenses of the subsidiary are based on the amounts of the assets and liabilities recognised in the consolidated financial statements at the acquisition date.
For example, depreciation expense recognised in the consolidated statement of comprehensive income after the acquisition date is based on the fair values of the related depreciable assets recognised in the consolidated financial statements at the acquisition date and not based on the pre-acquisition carrying amounts recognised in the financial statements of the subsidiary.
Offset (eliminate) the carrying amount of parent’s invetment and parent’s portion of equity of subsidiary
This point refers to the elimination of the parent’s investment and the parent’s share of equity. The equity in a subsidiary that is not directly or indirectly attributable to the parent, represents a non-controlling interest.
Illustrative example - Combine like items and offset parent’s investment with its share in subsidiary’s equity
Parent Co A acquired 100% of the shares of Subsidiary Co B on 31 December 2022 for 250 000 EUR. Fair value of net assets of Subsidiary Co B as at date of acquisition was 200 000 EUR. Tax effects are ignored. At acquisition date the following elimination entry is recorded to offset the investment made into Subsidiary Co B, as recognised in the statement of financial position of Parent Co A, with Parent Co A's holding in the equity of Subsidiary Co B:
|31.12.2022||Parent Co A||Subsidiary Co B||Corrections||Eliminations||Consolidated|
|Cash||35 000||5 000||40 000|
|Investment in subsidiary B||250 000||0||-250 000||0|
|Non-Current Assets 1||0||145 000||50 000||195 000|
|Goodwill 2||0||0||50 000|
|Total Assets||285 000||150 000||285 000|
|Equity||285 000||150 000||-150 000||285 000|
|Total Equity and Liabilities||285 000||150 000||285 000|
Eliminate all intragroup transactions and balances
All intragroup assets and liabilities, equity, income, expenses, and cash flows relating to transactions between entities of the group shall be eliminated upon preparing consolidated financial statements. Profits or losses resulting from intragroup transactions that are recognised in assets, e.g. as inventory or fixed assets, must also be eliminated.
Non-controlling interest (NCI)
If the subsidiary is not wholly owned by the parent, then upon consolidation the profit or loss and each component of other comprehensive income of the subsidiary, and the equity of the subsidiary, are attributed to the parent and the non-controlling interest, usually solely based on the existing ownership interest of both. This means that any effect from potential voting rights which are currently exercisable, would not be taken into account when determining the parent’s and non-controlling interest’s share in preparing the consolidated financial statements.
NCI-s in subsidiaries are presented, in aggregate, within equity, separately from the equity of the owners of the parent.
Illustrative example - Eliminate intragroup transactions and balances and account for NCI
Parent Co A acquired 80% of the shares of Subsidiary Co B on 1 January 2022. Please refer to the Purchase price allocation (PPA) below. Any tax effects are ignored in this example.
|PPA 1 January 2022|
|EUR||Carrying amount||Adjustments||Fair value|
|Cash||2 000||2 000|
|Trade receivables||3 000||3 000|
|Inventory||4 000||1 000||5 000|
|Property, plant and equipment 3||20 000||5 000||25 000|
|Total Assets (A)||29 000||6 000||35 000|
|Trade payables||3 000||3 000|
|Non-current liabilities||15 000||15 000|
|Total Liabilities (B)||18 000||18 000|
|Net Assets (C=A+B)||11 000||17 000|
|Non-controlling interest (C*20%)||-3 400|
|Goodwill (20 000 - C*80%)||6 400|
|Purchase price||20 000|
During the year:
- All the inventories revalued at acquisition date were sold.
- Subsidiary Co B sold goods at the cost of 2 500 EUR to the Parent Co A for 3 000 EUR. Half of these goods were unsold by the Parent Co A as at 31 December 2022.
- As at 31 December 2022, Parent Co A still owed 2 000 EUR to the Subsidiary Co B for the goods sold.
Below are the Group’s Consolidated Statement of Financial Position as at 31 December 2022 and Consolidated Statement of Comprehensive Income for the year then ended:
|SOFP/BS||As at 31 December 2022|
|EUR||Parent Co A||Subsidiary Co B||Eliminations||Consolidated|
|1. Investment made||2. Additional depreciation from FV adjustment||3. Inventories revalued are sold||4. Inter-group sale of goods||5. Elimination of unrealized gains||6. NCI of 2022 result|
|Cash||4 500||2 000||6 500|
|Trade receivables||7 500||3 500||11 000|
|Trade receivables from parent entity||0||2 000||-2 000||0|
|Inventory||8 000||4 500||1 000||-1 000||-250||12 250|
|Investment in subsidiary||20 000||0||-20 000||0|
|Property, plant and equipment 3||25 000||18 000||5 000||-500||47 500|
|Goodwill||6 400||6 400|
|Total Assets||65 000||30 000||-7 600||-500||-1 000||-2 000||-250||0||83 650|
|Trade payables||7 500||3 000||10 500|
|Trade payables to subsidiary||2 000||0||-2 000||0|
|Non-current liabilities||25 000||10 000||35 000|
|Total Liabilities||34 500||13 000||0||0||0||-2 000||0||0||45 500|
|Share capital||6 000||2 000||-2 000||6 000|
|Retained earnings||14 400||8 800||-8 800||14 400|
|Profit/-loss for the year||9 500||6 000||0||-400||-800||0||-200||-1 200||12 900|
|Equity attributable to equity holders of the parent||30 500||17 000||-11 000||-400||-800||0||-200||-1 200||33 900|
|Non-controlling interest||3 400||-100||-200||0||-50||1 200||4 250|
|Total Equity||30 500||17 000||-7 600||-500||-1 000||0||-250||0||38 150|
|Total Liabilities and Equity||65 000||30 000||-7 600||-500||-1 000||-2 000||-250||0||83 650|
|SOCI/PL||For the year ended 31 December 2022||Consolidated|
|Revenue||300 000||150 000||-3 000||447 000|
|Cost of goods sold||-240 000||-120 000||-500||-1 000||3 000||-250||-358 750|
|Administrative expenses||-43 000||-20 000||-63 000|
|Other operating expenses||-6 000||-3 000||-9 000|
|Operating profit / -loss||11 000||7 000||0||-500||-1 000||0||-250||0||16 250|
|Finance cost||-1 500||-1 000||-2 500|
|Profit / -loss for the year||9 500||6 000||0||-500||-1 000||0||-250||0||13 750|
|Equity holders of the parent||9 500||6 000||-400||-800||0||-200||-1 200||12 900|
|Non-controlling interests||-100||-200||0||-50||1 200||850|
Using the same accounting periods
The financial statements of the parent and the subsidiary that are used in the preparation of the consolidated financial statements of the group shall have the same reporting date. When the end of the reporting period of the parent is different from that of a subsidiary, the subsidiary should prepare for consolidation purposes, additional financial information as of the same date as the financial statements of the parent to enable the parent to consolidate the financial information of the subsidiary, unless it is impracticable to do so.
If it is impracticable for the subsidiary to prepare such additional financial information, then the parent consolidates the financial information of the subsidiary using the most recent financial statements of the subsidiary but makes adjustments for the effect of significant transactions or events that took place between the date of the subsidiary’s most recent financial statements and the date of the consolidated financial statements. The difference between these two dates must not be more than three months.
Rephop simplifies the process of preparing consolidated financial statements under both IFRS 10 and ASC 810. With our guidance, you can easily combine like items, offset the carrying amount of the parent’s investment and the parent’s portion of the subsidiary’s equity, eliminate all intragroup transactions and balances, and account for non-controlling interest. Rephop ensures that you use the same accounting periods for all entities included in the consolidation, helping you achieve consistency and comparability in your consolidated financial statements. Say goodbye to manual procedures and potential errors, and simplify your consolidation process with our software solution.
As given in the fact pattern above, the fair value of net assets at the date of acquisition was 200 000 EUR. Thus, a difference of 50 000 EUR arises between the fair value and carrying amounts of net assets of the subsidiary (fair value of 200 000 EUR less carrying amount of 150 000 EUR, as shown on the statement of financial position of Subsidiary Co B). In this example, that difference is, upon consolidation, allocated to the non-current assets. ↩
Goodwill is calculated as:↩