GROUP ACCOUNTS (CONSOLIDATED FINANCIAL STATEMENTS)

INTRODUCTION

An entity may expand by acquiring shares in other entities. Where one entity gains control
over another entity, a parent-subsidiary relationship now exists between the two entities.

Each will prepare their own individual financial statements, using the IFRS’s in the normal
way. However, in addition, the parent and subsidiary (collectively referred to as the group)
are obliged by law to prepare a combined set of accounts, known as the consolidated
accounts. These consolidated accounts are prepared and presented as if all the companies in
the group are just one single entity. This means that it is necessary to exclude transactions
between group companies, as failure to do so could result in the assets and profits being
overstated for group purposes.

The accounting rules governing the preparation of consolidated accounts (also known as
group accounts) are set out in a number of standards, namely:

(a) IFRS 3 Business Combinations

(b) IFRS 10 Consolidated Financial Statements
(c) IAS27 Separate Financial Statements
(d) IAS 28 Investments in Associates and Joint Ventures

IFRS 10 covers some of the principles that must be applied in consolidating the accounts of
group companies. It also sets out the circumstances when subsidiary companies must be
excluded from consolidation.

Alexander Okunowo, FCA, MBA, DipIFR 1

DEFINITIONS

Group: A parent and all its subsidiaries.

Parent: An entity that controls one or more subsidiaries

Subsidiary: An entity, including an unincorporated entity such as a partnership that is

controlled by another entity, known as the parent.

Control: The power to govern the financial and operating policies of an entity so as to obtain
benefits from its activities.

Power: Existing rights that give the current ability to direct the relevant activities of the
investee.

Non-Controlling Interest: The equity in a subsidiary not attributable to a parent.

Associate: An entity over which an investor has significant influence and which is neither a
subsidiary nor an interest in a joint venture.

Significant influence: The power to participate in the financial and operating policy decisions
of an investee but not control or joint control over those policies.

We can summarise the different kind of investment and the required accounting for them as
follows:

Investment Criteria Required treatment in the Group

Subsidiary Control Full (or line by line) consolidation (IFRS 10)
(Shareholding > 50%)
Associate Significant Influence Equity Accounting (IAS 28) – Profit Share
(20%+ rule) based on percentage of ownership
Investment Assets held for As for single entity reporting (IFRS 9),
(which is none of accretion of wealth report the value of your financial interest
the above) (financial asset)
Joint Arrangements IFRS 11

Alexander Okunowo, FCA, MBA, DipIFR 2

CONTROL
The extent to which an entity can control another is central to deciding the appropriate
accounting treatment. Control is normally established when one company owns more than
50% of the shares carrying voting rights of another company.

IAS 27 however, outlines four other situations where control exists. Even though the parent
might own half or less of the voting power of another company, control also exists when there
is:

i. Power over more than half of the voting rights by virtue of an agreement with other
investors;
ii. Power to govern the financial and operating policies of the entity under a statute or
an agreement
iii. Power to appoint or remove the majority of the members of the board of directors or
equivalent governing body and control of the entity is by that board or body; or
iv. Power to cast the majority of votes at meetings of the board of directors or equivalent
governing body and control of the entity is by that board or body.

Under IFRS 10, Control is defined as the power to govern the financial and operating policies
of an entity so as to obtain benefits from its activities. Control exists when an investor has all
three of the following elements or the following conditions are met:

1. Power over the investee

2. Exposure or rights to variable returns from its involvement with the investee; and
3. The ability to use its power over the investee to affect the amount of the investor’s
returns.

Examples of rights that, either individually or in combination, can give an investor control
include:
 Right in the form of voting rights (or potential voting rights) of an investee.
 Rights to appoint, reassign, or remove members of an investee’s key management
personnel who have the ability to direct the relevant activities.
 Right to appoint or remove another entity that directs the relevant activities.
 Right to direct the investee to enter into, or veto any changes to, transactions for the
benefit of the investor.
 Other rights (such as decision making rights specified in a management contract) that
give the holder the ability to direct the relevant activities.
 Note that potential voting rights are considered only if the rights are substantive
(meaning that the holder must have the practical ability to exercise the right).

Alexander Okunowo, FCA, MBA, DipIFR 3

CONSOLIDATION
Once Control is established, you must perform line by line consolidation. This is because the
individual financial statements do not provide the parent’s shareholders with complete
information about the parent and so the parent is required to produce an additional set of
financial statements called the group or consolidated financial statements. The consolidated
financial statements:

- Present the results and financial position of the group as if they were a single entity
- Are issued to the shareholders of the parent
- Provide information about all companies controlled by the parent

This is an example of recording the substance of a relationship rather than its strict legal form.
IFRS 10 Consolidated Financial Statements requires a parent to present consolidated financial
statements in which the financial statements of the parent and its subsidiaries are combined
and presented as a single economic entity.

Accounting Dates
IFRS 10 requires that the financial statements of the individual companies in the group be
prepared as of the same reporting date. If the reporting date of the parent and subsidiary
differ, then the subsidiary should prepare additional financial statements as of the same date
as the parent, unless it is impracticable to do so.

Where it is impracticable for the individual financial statements to be prepared to the same
reporting date, the most recent financial statements are used, and:

 The difference must be no greater than three months;

 Adjustments are made for the effects of significant transactions in the intervening
period; and
 The length of the reporting periods and any difference in the reporting dates must be
the same from period to period.

Accounting Policies
All companies in the group should have the same accounting policies, without exception. If a
member of the group uses different policies from those adopted in the financial statements,
appropriate adjustments are made to its financial statements in preparing consolidated
financial statements.

Exemptions from the requirement to prepare consolidated financial statements

IAS 27 requires that, in general, all parent entities must prepare and present consolidated
financial statements that include all of its subsidiaries. However, there are exemptions from
the requirement to prepare consolidated financial statements if, and only if, the following
situations apply:

Alexander Okunowo, FCA, MBA, DipIFR 4

 a) The parent is itself a wholly owned subsidiary, or is a partially owned subsidiary and
its other owners have been informed about, and do not object to, the parent not
presenting consolidated financial statements.
b) The exemption only applies if the parents shares or debt is not traded in a public
market or is about to issue shares in a public market; and
c) The ultimate parent (or intermediate parent) of the parent produces consolidated
financial statements that comply with IFRS’s.
d) The parent did not file nor is it filing its financial statements with a securities
commission or other regulator for the purpose of issuing shares.

All subsidiaries of the parent must be included in the consolidated accounts. There are no
exceptions to the requirement for a subsidiary under the control of the parent to be included
in the group accounts.

However, if on acquisition a subsidiary meets the criteria to be classified as held for sale in
accordance with IFRS 5, it must be accounted for in accordance with that standard. This
requires that it will be shown separately on the face of the consolidated Statement of
Financial Position. There should be evidence that the subsidiary has been acquired with the
intention of disposing it within 12 months and management is actively seeking a buyer.
A subsidiary that has previously been excluded from consolidation and is not disposed of
within the 12 month period must be consolidated from the date of acquisition.

However, if there are severe restrictions on the ability of the parent to manage a subsidiary,
so that its ability to transfer funds to the parent is impaired, then such an entity must be
excluded from the consolidation process, as control has effectively been lost. In this situation,
the investment in the subsidiary will be treated under IAS 39, as a non-current asset
investment.

Loss of Control
If an entity ceases to be a subsidiary, then the investment in the entity will be accounted for
in accordance with IAS 39 Financial Instruments from the date it ceases to be a subsidiary,
provided that it does not become an associate company or a jointly controlled entity.

DISCLOSURES – IFRS 10/IAS 27

IAS 27 requires the following disclosures:

i. The nature of the relationship between the parent and subsidiary when the parent
does not own more than half of the voting power.
ii. The reasons why the ownership of more than half of the voting rights by the investee
does not constitute control.
iii. The reporting date of the subsidiary if different from the parent, and the reason for
the difference.
iv. The nature and extent of any significant restrictions on the ability of the subsidiary to
transfer funds to the parent in the form of dividends or to repay loans or advances.

Alexander Okunowo, FCA, MBA, DipIFR 5

COST OF ACQUISITION
This is the amount of and the fair value of consideration given up to acquire a subsidiary.
The cost of acquiring another entity (cost of investment or consideration transferred) could
be in the form of:
- Cash transfer,
- Share exchange,
- Deferred Consideration, or
- Contingent Consideration
Previously, directly related costs such a professional fees (legal, accounting, valuation, etc.)
could be included as part of the cost of the acquisition. This is now no longer the case and
such costs must now be expensed.

The costs of issuing debt or equity are to be accounted for under the rules of IAS 39 Financial
Instruments: Recognition and Measurement.

Contingent Consideration
Contingent consideration arises when the parent is obligated to pay the former shareholders
of the Subsidiary if the Subsidiary meets certain condition or target. It is normally introduced
by a clause as such “if”, “provided”, “depends on”, etc. It must be reassessed at reporting
date to know whether the target is met.

The reassessed consideration falls in two three circumstances:

 Meet target
 Below target
 Exceed target

The acquirer is required to recognise the fair value of any contingent consideration at the
date of acquisition to be included as part of the consideration for the acquiree. The “fair
value” approach is consistent with the way in which other forms of consideration are valued.
Fair value is defined as “the amount for which an asset could be exchanged, or liability settled
between knowledgeable, willing parties in an arm’s length transaction”.

However, applying this definition to contingent consideration is not easy as the definition is
largely hypothetical. It is most unlikely that the acquisition-date liability for contingent
consideration could be (or would be) settled by “willing parties in an arm’s length
transaction”. It is expected that in an examination context, the fair value of any contingent
consideration at the date of acquisition will be given (or how to calculate it).

Contingent consideration is normally a liability but may be an asset if the acquirer has the
right to a return of some of the consideration transferred, if certain conditions are met.

Alexander Okunowo, FCA, MBA, DipIFR 6

Deferred consideration
When part or full cost of investment is to be paid at a future date, this is referred to as
deferred consideration. Deferred consideration should be measured at fair value at the date
of acquisition. This means that future payment should be shown at its Present Value, by
discounting the future amount at the company’s cost of capital. Each year, the discount will
be then “unwound”. This will increase the deferred liability every year, with the discount
treated as a finance cost in the income statement.

The account entries to make are as follows:

DR Cost of Investment at PV
DR Expense with Finance cost
CR Current or Non-current Liabilities with FV

Formula to calculate the cost of investment: PV= Fv(1+r)-n

Where:
PV = present value
FV = Future value
N = no of years
r = cost of capital

Illustration
ABC Ltd acquires 27 million shares in XYZ Ltd. The consideration is effected by a share for
share exchange of two shares in ABC for every three shares acquired in XYZ and a cash
payment of ₦2 per share acquired, payable 3 years after acquisition. ABC Ltd’s shares have a
nominal value of ₦1 and a market value of ₦2.50 at acquisition. ₦

ABC Ltd.’s cost of capital is 10%.

The cost of the investment is recorded as:

Shares: (27/3) x 2 = 18 million shares issued, valued at ₦2.50 each.

Consideration: ₦45 million

Cash: 27 million shares x ₦2 = ₦54 million

Present Value = ₦54m x 0.751 = ₦40.55m

Total consideration: ₦45m + ₦40.55m = ₦85.55m

The Present Value of the cash consideration is then unwound in years 1 to 3, for example

Year 1 40.55 x 10% = ₦4.055m

Debit Income Statement (Finance Cost) 4.055m

Credit Deferred Consideration (liability in SFP) 4.055m

Alexander Okunowo, FCA, MBA, DipIFR 7

CONSOLIDATION APPROACH
For the preparation of a consolidated statement of financial position, the following six steps
should be followed:

1. Establish Group Structure.

Determine the % holding in the subsidiary and when the control was established

2. Carry out consolidation adjustments.

For example, inter company (intra-group) debts must be eliminated, revaluations of assets
at acquisition must be accounted for, inter company profits must be adjusted for.

3. Calculate Goodwill arising on the acquisition of the subsidiary.

Depending on the method of measuring Non-Controlling Interest, Goodwill can be measured
in one of two ways: Proportion of Fair Value of Net Assets Method and Fair Value Method

Goodwill on acquisition is usually positive:

• It is capitalised as an intangible asset in Non-Current Assets,

• It should not be amortised, and
• It should be tested for impairment on an annual basis

If impairment arises, the accounting entries for the treatment of the impairment loss depends
on the method used to value NCI:

Parent’s proportionate share of the fair value of Subsidiary’s Net Assets:

Debit Group Retained Earnings
Credit Goodwill

Full (or Fair) Value Method:

Debit Group Retained Earnings (group %)
Debit NCI (group %)
Credit Goodwill

Negative Goodwill
Negative goodwill is also referred to as “discount on acquisition” or “gain on bargain
purchase”. It arises when the fair value of the consideration given to acquire the subsidiary is
less than the fair value of the net assets purchased.

It is an unusual situation to arise, and the standard advises that should negative goodwill be
calculated, the calculation should be reviewed, to ensure that the fair value of assets and
liabilities are not inadvertently misstated.

Alexander Okunowo, FCA, MBA, DipIFR 8

Following the review, any negative goodwill remaining is credited to the income statement
immediately.

4. Calculate Non-Controlling Interest

The value at which NCI is shown in the Statement of Financial Position depends on the method
used to value it:

At its proportionate share of the fair value of the subsidiary's net assets;
NCI % of net assets of subsidiary at the reporting date X

OR At its Full (or fair) value (usually based on the market value of the shares held by the non-
controlling interest).
NCI % of net assets of subsidiary at the reporting date X
NCI share of goodwill X
NCI share of goodwill impairment (X)
X

5. Calculate Consolidated Reserves

The Retained Earnings to be included in the consolidated statement of financial position are
calculated as follows:
Retained Earnings of parent (subject to adjustments in step 2) X
ADD: Group share of post-acquisition earnings of subsidiary
(subject to adjustments in step 2) X
LESS: Total Goodwill Impairments to date (X)
X

It is important to make a distinction between pre-acquisition and post-acquisition reserves.

Pre-Acquisition reserves are the reserves existing at the date the subsidiary company is
acquired. They are included in the goodwill calculation.

Post-Acquisition reserves are reserves generated after the date of acquisition. They are
included in group reserves.

6. Prepare Consolidated Statement of Financial Position

The assets and liabilities of the subsidiary and parent are combined in the final statement of
financial position. The assets and liabilities will include any adjustments arising in Step 2.

In addition, the Goodwill, NCI and Consolidated reserves as calculated in Steps 3, 4 and 5 are
included.

Note that the Share Capital and Share Premium to be included will be those of the parent
company only.

Alexander Okunowo, FCA, MBA, DipIFR 9

Consolidated Financial Statements – [IFRS Compliant Template]

Alexander Okunowo, FCA, MBA, DipIFR 10

Alexander Okunowo, FCA, MBA, DipIFR 11
Alexander Okunowo, FCA, MBA, DipIFR 12
Illustration 1: The basics
P acquired 100% of the equity shares of S on incorporation of S (i.e., when S was first
established as a company). The date of this transaction was 31 December 2021 (this known
as the date of acquisition). The cost of this investment was ₦120,000

S had net assets (total assets minus total liabilities) when it was first set up of ₦120,000

The statements of financial position P and S as at 31 December 2021 (the date of

acquisition) were as follows.

P S
₦ ₦
Non-current assets:
Property, plant and equipment 640,000 125,000
Investment in S 120,000 -
Current assets 140,000 20,000
900,000 145,000
Equity
Share capital 200,000 80,000
Share premium 250,000 40,000
Retained earnings 350,000 –
800,000 120,000
Current liabilities 100,000 25,000
900,000 145,000

Prepare the consolidated statement of financial position as at 31 December 2021.

Illustration 2: Consolidated statement of financial position with share of post- acquisition

profits of subsidiary
P acquired 100% of the share capital of Son1January 2021 for ₦200,000. The
balance on the retained earnings account of S was N80,000 at this date.

The statements of financial position P and S as at 31 December 2021 were as follows.

P S
N N
Non-current assets:
Property, plant and equipment 680,000 245,000
Investment in S 200,000 -
Current assets 175,000 90,000
1,055,000 335,000
Equity

Alexander Okunowo, FCA, MBA, DipIFR 13

 Share capital 150,000 30,000
Share premium 280,000 90,000
Retained earnings 470,000 140,000
900,000 260,000
Current liabilities 155,000 75,000
1,055,000 335,000

Prepare the consolidated statement of financial position as at 31 December 2021.

Illustration 3: Consolidated statement of financial position with share of post- acquisition

profits and goodwill

P acquired 100% of S on 1 January 2021 for 230,000. The retained earnings of S were
100,000 at that date.

The statements of financial position for P and S as at 31 December 2021 were as

follows:

P S
N N
Assets:
Investment in S, at cost 230,000 -
Other assets 570,000 240,000
800,000 240,000
Equity
Share capital 200,000 50,000
Share premium 100,000 20,000
Retained earnings 440,000 125,000
740,000 195,000
Current liabilities 60,000 45,000
800,000 240,000

Prepare the consolidated statement of financial position as at 31 December 2021

Practice questions
Calculate the goodwill arising on acquisition in each of the following cases on the assumption
that it is the parent company’s policy to measure non- controlling interest at acquisition as a
proportionate share of net assets.

a) A Ltd bought 60% of B Limited on 1 January 2005 for N766,000. At this date B limited
had net assets of N800,000.
b) C Ltd bought 55% of D Limited several years ago for 1,000,000. At this date D limited
had share capital of N500,000 and retained earnings of N 750,000.

Alexander Okunowo, FCA, MBA, DipIFR 14

 c) E Ltd bought 90% of F Limited several years ago for N1,750,000. At this date F limited
had share capital of N100,000, share premium of N48,000, are valuation reserve of
N120,000 and retained earnings of N250,000.
d) G Ltd bought 40% of H Limited several years ago for N1,000,000. Circumstances are
such that this holding gives G Ltd defacto control of H Limited. At this date H limited
had share capital of N500,000 and retained earnings of N750,000.

Illustration 4: Consolidated statement of financial position with share of post-acquisition

profits, goodwill and NCI

P acquired 80% of S on 1 January 2021 for 230,000. The retained earnings of S were 100,000
at that date. It is P’s policy to recognize non-controlling interest at the date of acquisition as
a proportionate share of net assets.

The statements of financial position P and S as at 31 December 20X1 were as follows:

P S
N N
Assets:
Investment in S, at cost 230,000 -
Other assets 570,000 240,000
800,000 240,000
Equity
Share capital 200,000 50,000
Share premium 100,000 20,000
Retained earnings 440,000 125,000
740,000 195,000
Current liabilities 60,000 45,000
800,000 240,000

Prepare the consolidated statement of financial position as at 31 December 2021.

Illustration 5: NCI at date of acquisition measured at fair value

Continuing the last illustration, the fair value of the NCI at the date of acquisition was given
as 40,000.

Alexander Okunowo, FCA, MBA, DipIFR 15

Practice questions
Calculate the goodwill arising on acquisition in each of the following cases on the assumption
that it is the parent company’s policy to measure non-controlling interest at acquisition at its
fair value.
a) A Ltd bought 60% of B Limited on 1 January 2005 for ₦766,000. At this date B Limited had
net assets of ₦800,000 and the fair value of its non-controlling interest was ₦350,000.

b) C Ltd bought 55% of D Limited several years ago for ₦1,000,000. At this date D limited
had share capital of ₦500,000 and retained earnings of ₦750,000 and the fair value of its
non-controlling interest was ₦600,000.

c) E Ltd bought 90% of F Limited several years ago for ₦1,750,000. At this date F limited had
share capital of ₦100,000, share premium of ₦48,000, are valuation reserve of ₦120,000
and retained earnings of ₦250,000 and the fair value of its non-controlling interest was
₦60,000.

d) P acquired 70% of S on 1 January 2021 for ₦450,000. The retained earnings of S were
₦50,000 at that date. It is P’s policy to recognise non-controlling interest at the date of
acquisition as a proportionate share of net assets.
The statements of financial position of P and S as at 31 December 2021 were as follows:
Statements of Financial Position as at 31 December 2021
Assets: P (₦) S (₦)
Investment in S, at cost 450,000 -
Other assets 500,000 350,000
Total Assets 950,000 350,000

Equity & Liabilities:

Share capital 100,000 100,000
Retained earnings 650,000 100,000
Total Equity 750,000 200,000
Current liabilities 200,000 150,000
Total Equity & Liabilities 950,000 350,000

Required: Prepare a consolidated statement of financial position as at 31 December

2021.

Alexander Okunowo, FCA, MBA, DipIFR 16

Illustration 6: Fair Value Adjustment (Non-Depreciable Asset)
P bought 80% of S 2 years ago. At the date of acquisition, S’s retained earnings stood at
₦600,000. The fair value of its net assets was not materially different from the book value,
except for the fact that it had a brand which was not recognized in S’s accounts. This had a
fair value of ₦100,000 at this date and an estimated useful life of 20 years.
The statements of financial position for P and S as at 31 December 2021 were as follows:
P (₦) S (₦)
PP and E 1,800,000 1,000,000
Investment in S 1,000,000 -
Other assets 400,000 300,000
Total Assets 3,200,000 1,300,000

Share Capital 100,000 100,000

Retained Earnings 2,900,000 1,000,000
Liabilities 200,000 200,000
Total Equity & Liabilities 3,200,000 1,300,000

Prepare the consolidated statement of financial position as at 31 December 2021.

Illustration 7: Fair Value Adjustment (Non-Depreciable Asset)

P bought 80% of S 2 years ago. At the date of acquisition, S’s retained earnings stood at
₦600,000, and the fair value of its net assets was ₦1,000,000. This was ₦300,000 above the
book value of the net assets at this date.
The revaluation was due to an asset that had a remaining useful economic life of 10 years as
at the date of acquisition.
The statements of financial position for P and S as at 31 December 2021 were as follows:
P (₦) S (₦)
PP and E 1,800,000 1,000,000
Investment in S 1,000,000 -
Other assets 400,000 300,000
Total Assets 3,200,000 1,300,000

Share Capital 100,000 100,000

Retained Earnings 2,900,000 1,000,000
Liabilities 200,000 200,000
Total Equity & Liabilities 3,200,000 1,300,000

Prepare the consolidated statement of financial position as at 31 December 2021.

Alexander Okunowo, FCA, MBA, DipIFR 17

Practice Question:

P acquired 70% of S on 1 January 20X1 for ₦1,000,000. The retained earnings of S were
₦50,000 at that date.
Also, at the date of acquisition, S held an item of plant with a carrying amount of ₦250,000
less than its fair value. This asset had a remaining useful life of 10 years as from that date.
It is P’s policy to recognize non-controlling interest at the date of acquisition as a
proportionate share of net assets.
The statements of financial position of P and S as at 31 December 2021 were as follows:
P (₦) S (₦)
Investment in S, at cost 1,000,000 -
Other non-current assets 400,000 200,000
Current assets 500,000 350,000
Total Assets 1,900,000 550,000

Share Capital 100,000 100,000

Retained Earnings 1,600,000 300,000
Total Equity 1,700,000 400,000
Current Liabilities 200,000 150,000
Total Equity & Liabilities 1,900,000 550,000

Required: Prepare a Consolidated Statement of Financial Position as at 31 December 2021.

Illustration 8: Mid-year acquisition

P bought 70% of S on 31st March this year. S’s profit for the year was ₦12,000.
The statements of financial position of P and S as at 31 December 20X1 were as follows:
Assets P (₦) S (₦)
PP and E 100,000 20,000
Investment in S 50,000 -
Other assets 30,000 12,000
Total Assets 180,000 32,000

Share Capital 10,000 1,000

Retained Earnings 160,000 30,000
Total Equity 170,000 31,000
Liabilities 10,000 1,000
Total Equity & Liabilities 180,000 32,000

Required: Prepare a Consolidated Statement of Financial Position as at 31 December 2021.

Alexander Okunowo, FCA, MBA, DipIFR 18

Illustration 9: Unrealised Profit

P bought 80% of S, 2 years ago. At the date of acquisition, S’s retained earnings stood at
₦16,000.

During the year, S sold goods to H for ₦20,000, which gave S a profit of ₦8,000. H still held
40% of these goods at the year-end.

The statements of financial position of P and S as at 31 December 2021 were as follows:

Assets P (₦) S (₦)

PP and E 100,000 41,000
Investment in S 50,000 -
Other assets 110,000 50,000
Total Assets 260,000 91,000

Share Capital 50,000 30,000

Retained Earnings 200,000 56,000
Total Equity 250,000 86,000
Liabilities 10,000 5,000
Total Equity & Liabilities 260,000 91,000

Required: Prepare a Consolidated Statement of Financial Position as at 31 December 2021.

Practice Question:

P acquired 60% of S on 1 January 20X1 for ₦2,000,000. The retained earnings of S were
₦785,000 at that date, and S held land which had a fair value of ₦500,000 more than its
carrying value.

It is P’s policy to recognize non-controlling interest at the date of acquisition as a

proportionate share of net assets.

During the period, P sold goods to S for ₦50,000 at a mark-up of 25% on cost. S had sold
some of this inventory to third parties but still held inventory bought from P for ₦12,500 at
31 December 20X1.

The statements of financial position of P and S as at 31 December 20X1 were as follows:

Assets P (₦) S (₦)

Investment in S, at cost 2,000,000 -
Other non-current assets 650,000 826,000
Current assets
- Inventory 100,000 80,000
- Amount owed by S 6,000 -
- Other current assets 374,000 320,000
Total Assets 3,130,000 1,226,000

Alexander Okunowo, FCA, MBA, DipIFR 19

 Equity & Liabilities
Share Capital 100,000 50,000
Retained Earnings 2,590,000 1,050,000
Total Equity 2,690,000 1,100,000
Current Liabilities
- Amount owed to P - 6,000
- Other current liabilities 240,000 120,000
Total Liabilities 440,000 126,000
Total Equity & Liabilities 3,130,000 1,226,000

Illustration 10: Unrealised profit on transfer of non-current assets

H owns 80% of S. There was a transfer of an asset within the group for ₦15,000 on1 January
2023. The original cost to H was ₦20,000 and the accumulated depreciation at the date of
transfer was ₦8,000.

Both companies depreciate such assets at 20% per year on cost to the company, recognising
a full year’s depreciation in the year of purchase and none in the year of sale.

Illustration 11: Goodwill Impairment

P acquired 80% of S when the retained earnings of S were ₦20,000. The values for assets
and liabilities in the statement of financial position for S represent fair values.

A review of goodwill at 31 December 20X1 found that goodwill had been impaired, and was
now valued at ₦55,000.

The statements of financial position of the parent company P and its subsidiary S at 31
December 2021 are as follows:

P(₦) S(₦)
Non-current assets:
Property, plant and equipment 408,000 100,000
Investment in S 142,000 -
Current assets 120,000 40,000
Total assets 670,000 140,000

Equity
Share capital 100,000 20,000
Share premium 100,000 50,000
Retained earnings 400,000 60,000
Total equity 600,000 130,000

Alexander Okunowo, FCA, MBA, DipIFR 20

 Bank loan 70,000 10,000
Total liabilities 70,000 10,000
Total equity & liabilities 670,000 140,000

Prepare a consolidated statement of financial position as at 31 December 2021.

PAST EXAMINATION QUESTION (#2 – ICAN SKILLS LEVEL EXAMINATION – MAY 2024)

The following are the statements of financial position of Sokoto Nig. PLC and Niger Nig. LTD for the
year ended October 31, 2023.

Sokoto Nig. PLC Niger Nig. LTD

(₦'000) (₦'000)
Non-current assets:
Plant and machinery 2,600 560
Furniture and fittings 1,600 400
Total non-current assets 4,200 960
Investment:
Shares in Niger Nig. LTD at cost 1,600 -
Current assets:
Inventories at cost 1,760 560
Trade receivables 1,160 840
Cash and cash equivalents 800 -
Total current assets 3,720 1,400
Total assets 9,520 2,360
Equity and liabilities:
Equity:
₦1 ordinary shares 5,600 1,360
Retained earnings 1,720 400
Total equity 7,320 1,760
Current liabilities:
Trade payables 2,200 440
Bank overdraft - 160
Total current liabilities 2,200 600
Total equity and liabilities 9,520 2,360

Additional Information:

i. Sokoto Nig. PLC purchased 70% of the issued ordinary share capital of Niger Nig. LTD four
years ago, when the retained earnings of Niger Nig. LTD were ₦160,000. There had been no
impairment of goodwill.

Alexander Okunowo, FCA, MBA, DipIFR 21

 ii. For the purpose of the acquisition, plant and machinery in Niger Nig. LTD with a carrying
amount of ₦400,000 was revalued to its fair value of ₦480,000. The revaluation was not
recorded in the accounts of Niger Nig. LTD. Depreciation is charged at 20% using the
straight-line method.

iii. Sokoto Nig. PLC sells goods to Niger Nig. LTD at a mark-up of 25%. At October 31, 2023, the
inventories of Niger Nig. LTD included ₦360,000 of the goods purchased from Sokoto Nig. PLC.

iv. Niger Nig. LTD owes Sokoto Nig. PLC ₦280,000 for goods purchased and Sokoto Nig. PLC
owes Niger Nig. LTD ₦120,000.

v. It is the group policy to value non-controlling interests at fair value.

vi. The market price of the shares of the non-controlling shareholders just before the acquisition
was ₦1.50 per share.

Required:

a. Prepare a consolidated statement of financial position of Sokoto group as at October 31, 2023.
(17 Marks)

b. Explain how investment in a subsidiary should be accounted for in the separate financial
statements of the parent. (3 Marks)

(20 Marks)

Alexander Okunowo, FCA, MBA, DipIFR 22

Consolidated Statement of Profit of Loss

All items of income and expense in the consolidated statement of profit or loss are a straight cross
cast of equivalent items in the individual financial statements of the members of the group.

Attribution of profit: Consolidated Statement of Profit or Loss must disclose the profit or loss for the
period and the total comprehensive income for the period attributable to:

 Owners of the parent company; and

 Non-controlling interests.

This is shown as a small table immediately below the consolidated statement of profit or loss and
other comprehensive income.

Pre and post-acquisition profits: When a parent acquires a subsidiary during a financial year, the
profits of the subsidiary have to be divided into pre-acquisition and post-acquisition profits by
consolidating only income and expenses from the date of acquisition.

Intercompany trading: In preparing the Consolidated Statement of Profit or Loss, it is necessary to

make adjustments to eliminate the results of inter- company trading. This includes adjustments to
cancel out inter-company trading balances and unrealised profit.

To eliminate inter-company trading:

DR Revenue X
CR Cost of Sales X
with the amount of sales between both Parent and Subsidiary

To cancel out Unrealised Profits:

DR Closing Inventory (Statement of Profit or Loss) X
CR Closing Inventory (Statement of Financial Position) X
with the amount of profit on goods remaining in Inventory of the buyer at the end of the period.

Other inter-company amounts must also be cancelled. For instance, where a group company charges
another group company, management fees/interest, there is no external group income or external
group expense, so they are cancelled one against the other like inter-company sales and cost of sales.

Inter-company dividends: The parent may have accounted for dividend income from a subsidiary. This
is cancelled on consolidation. Dividends received from a subsidiary are ignored in the consolidation of
the statement of profit or loss because the profit out of which they are paid has already been
consolidated.

Fair value adjustments: Depreciation is charged on the carrying amount of assets. If a depreciable
asset is revalued on consolidation the depreciation stream that relates to that asset will also need to
be revalued. This adjustment is carried out in the financial statements of the subsidiary. It will affect
the subsidiary’s profit after tax figure and therefore will affect the NCI.

Impairment of goodwill: Impairment does not affect the individual financial statements of the parent
company or the subsidiary. The effect applies exclusively to the consolidated statement of financial
position and the consolidated income statement. If goodwill is impaired:

 It is written down in value in the consolidated statement of financial position, and

Alexander Okunowo, FCA, MBA, DipIFR 23

  The amount of the write-down is charged as an expense in the consolidated income statement
(normally in administrative expenses).

Illustration 12: Consolidated Statement of Profit or Loss

Entity P bought 80% of S several years ago. The income statements for the year to 31 December
2023 are as follows:

P (₦) S (₦)
Revenue 500,000 250,000
Cost of sales - 200,000 - 80,000
Gross profit 300,000 170,000
Other income 25,000 -
Distribution costs - 70,000 - 60,000
Administrative expenses - 90,000 - 50,000
Other expenses - 30,000 - 18,000
Finance costs - 15,000 - 8,000
Profit before tax 120,000 40,000
Income tax expense - 45,000 - 16,000
Profit for the period 75,000 24,000

Prepare the Consolidated statement of profit or loss.

Illustration 13: CSPL - Pre-and post-acquisition profits

Entity P acquired 80% of S on 1 October 2023. The income statements for the year to 31 December
2023 are as follows:

P (₦) S (₦)
Revenue 400,000 260,000
Cost of sales - 200,000 - 60,000
Gross profit 200,000 200,000
Other income 20,000 -
Distribution costs - 50,000 - 30,000
Administrative expenses - 90,000 - 95,000
Profit before tax 80,000 75,000
Income tax expense - 30,000 - 15,000
Profit for the period 50,000 60,000

Prepare the Consolidated statement of profit or loss.

Alexander Okunowo, FCA, MBA, DipIFR 24

Illustration 14: CSPL - Inter-company trading

P acquired 80% of S 3 years ago. During the year P sold goods to S for ₦50,000 at a mark-up of 25%
on cost. At the year-end S still had 30% of the goods in inventory.

Extracts of the income statements for the year to 31 December 20X1 are as follows:

P (₦) S (₦)
Revenue 800,000 420,000
Cost of sales - 300,000 - 220,000
Gross profit 500,000 200,000

Show the adjustments in respect of inter-company trading and unrealised profit.

Illustration 15: CSPL - Inter-company trading (sale by Subsidiary)

Assume that the sale in Illustration 14 was made by the Subsidiary to the Parent. Show the necessary
adjustments under this circumstance.

Illustration 16: Inter-company management fees and interest

P acquired 80% of S 3 years ago. Other income in P’s statement of profit or loss includes an inter-
company management charge of ₦5,000 to S. S has recognized this in administrative expenses.

Extracts of the income statements for the year to 31 December 2023 are as follows:

P (₦) S (₦)
Revenue 800,000 420,000
Cost of sales - 300,000 - 220,000
Gross profit 500,000 200,000
Administrative expenses - 100,000 - 90,000
Distribution costs - 85,000 - 75,000
Other income 12,000 2,000
Profit before tax 327,000 37,000

Required: Prepare the Consolidated Statement of Profit or Loss while showing necessary
adjustments.

Illustration 17: Fair Value Adjustments

P acquired 80% of S 3 years ago. At the date of acquisition, S had a depreciable asset with a fair value
of ₦120,000 in excess of its book value. This asset had a useful life of 10 years at the date of
acquisition.

Alexander Okunowo, FCA, MBA, DipIFR 25

Extracts of the income statements for the year to 31 December 2023 are as follows:

P (₦) S (₦)
Revenue 800,000 420,000
Cost of sales - 300,000 - 220,000
Gross profit 500,000 200,000
Expenses - 173,000 - 163,000
Profit before tax 327,000 37,000

Illustration 18: Goodwill Impairment

P acquired 80% of S 3 years ago. Goodwill on acquisition was ₦200,000. The annual impairment test
on goodwill has shown it to have a recoverable amount of only ₦175,000.

Extracts of the income statements for the year to 31 December 2023 are as follows:

P (₦) S (₦)
Revenue 800,000 420,000
Cost of sales - 300,000 - 220,000
Gross profit 500,000 200,000
Expenses - 173,000 - 163,000
Profit before tax 327,000 37,000

PAST EXAMINATION QUESTION (#3 – ICAN SKILLS LEVEL EXAMINATION – MAY 2023)

Olu Nigeria PLC has a subsidiary, Oba Limited, which it acquired on January 1, 2022.

The financial statements of the companies are detailed below:

Statement of profit or loss for the year ended September 30, 2022

Olu PLC Oba LTD

₦’000 ₦’000
Revenue 446,250 233,100
Cost of sales - 330,750 - 174,600
Gross profit 115,500 58,500
Other income 40,250 -
Distribution costs - 10,250 - 11,100
Administrative expenses - 31,650 - 14,760
Finance costs - 8,575 - 7,200
Profit before taxation 105,275 25,440
Income tax expense - 28,670 - 5,790
Profit for the year 76,605 19,650

Alexander Okunowo, FCA, MBA, DipIFR 26

 Other comprehensive income:
Gain on revaluation of property 26,600 5,000
Total comprehensive income 103,205 24,650

Statement of financial position as at September 30, 2022

Olu PLC Oba LTD

₦’000 ₦’000
Non-current assets:
Property, plant and equipment 253,750 82,530
Intangibles 31,420 -
Current assets
Inventories 72,200 30,440
Trade receivables 65,250 25,560
Cash and bank balances 12,550 6,450
Total Assets 435,170 144,980
Equity and liabilities
Ordinary shares of ₦1 each 100,000 40,000
Retained earnings 235,600 50,550
Non-current liabilities
10% Loan notes 30,000 32,600
Deferred tax 6,400 4,180
Current liabilities
Trade payables 34,500 11,860
Income tax payable 28,670 5,790
Total Equity & Liabilities 435,170 144,980

Additional Information:

i. Olu PLC acquired its 70% interest in Oba Limited through a share exchange of three shares in
Olu PLC for five shares in Oba Limited. At the acquisition date, the shares of Olu PLC were
sold at ₦8.10 each at the Nigerian Exchange (NGX). The parent company is yet to record this
share issue in its books.

ii. At the acquisition date, the fair value of Oba Limited’s assets was equal to their carrying
amounts except for an item of plant which had a fair value of ₦30,000,000 in excess of its
carrying amount. This fair value increase has not been adjusted in the books of Oba Limited.
The said plant has a remaining life of five years at the acquisition date.

iii. During the year, Oba Limited transferred goods worth ₦40,000,000 to Olu PLC. These goods
were invoiced at cost plus 25%, and only a quarter of the goods had been sold by Olu PLC at
the year-end.

iv. Included in the other income was ₦6,550,000 received from Oba Limited as interest paid on
a loan granted by Olu PLC. The loan was fully repaid before September 30, 2022.

Alexander Okunowo, FCA, MBA, DipIFR 27

 v. An impairment test carried out revealed a loss in value of goodwill at the acquisition date of
₦28,000,000.

vi. It is the group’s policy to value non-controlling interest at fair value. The prevailing market
price per ordinary share of Oba Limited at January 1, 2022, was ₦5.05.

vii. The gain on revaluation of property arose from an independent valuation of the group’s
property in September 2022.

viii. The administration expenses of Oba Limited included ₦10,000,000 paid as management fees
to Olu PLC, and the income has been duly accounted for in the books.

ix. Except where indicated, income and expenses accrue evenly over the period.

Required:

a. Prepare the consolidated statement of profit or loss and other comprehensive income for
Olu Group for the year ended September 30, 2022. (12 Marks)
b. Calculate the goodwill on acquisition and the non-controlling interest at the reporting date.
(4 Marks)
c. IFRS 10 - Consolidated Financial Statements states that a parent must present consolidated
financial statements in which it consolidates its investments in subsidiaries.
Required: State FOUR exceptions to the above pronouncement of IFRS 10. (4 Marks)

(Total 20 Marks)

Alexander Okunowo, FCA, MBA, DipIFR 28

ASSOCIATES

An entity over which the investor has significant influence. Significant influence is the power to
participate in the financial and operating policy decisions of the investee but is not control or joint
control over those policies. This could be shown by:

a) Representation on the board of directors

b) Participation in policy-making processes
c) Material transactions between the entity and investee
d) Interchange of managerial personnel
e) Provision of essential technical information

If an investor holds 20% or more of the voting power of the investee, it can be presumed that the
investor has significant influence over the investee.

An investment in an associate is accounted for in consolidated financial statements using the equity
method.

The equity method is defined as a method of accounting whereby the investment is initially
recognised at cost and adjusted thereafter for the post- acquisition change in the investor’s share of
the investee’s net assets.

The associate’s revenue, cost of sales and so on are not consolidated with those of the group. Instead,
only the group share of the associate’s profit and other comprehensive income for the year is included
in the relevant sections of the statement of profit or loss and other comprehensive income.

The consolidated statement of financial position should show a non-current asset, investments in
associates, which is calculated as:

₦
Cost of investment X
Plus/(Minus): Parent’s share of profits (losses) of the associate (or JV) since acquisition X
Plus/(Minus): Parent’s share of OCI of the associate (or JV) since acquisition X
Minus any impairment of the investment (X)
Investment in Associate X

Intragroup transactions and balances are not eliminated. However, the investor’s share of unrealised
profits or losses on transfer of assets that do not constitute a ‘business’ is eliminated.

a. Sales by parent (P) to the associate (A), where A still holds the inventories, where A% is the
parent’s holding in the associate and PUP is the unrealised profit

DR. Cost of sales/Retained earnings of P PUP × A%

CR. Investment in associate PUP × A%

b. Sales by associate (A) to the parent (P), where P still holds the inventories, where A% is the
parent’s holding in the associate and PUP is the unrealised profit

DR. Shares of associate’s profit/Retained earnings of P PUP × A%

CR. Group inventories PUP × A%

Alexander Okunowo, FCA, MBA, DipIFR 29

Illustration 19:

Entity P acquired 40% of the equity shares in Entity A during Year 1 at a cost of ₦128,000, when the
fair value of the net assets of Entity A was ₦250,000. Since that time, the investment in the associate
has been impaired by ₦8,000.

Since acquisition of the investment, there has been no change in the issued share capital of Entity A,
nor in its share premium reserve or revaluation reserve. On 31 December Year 5, the net assets of
Entity A were ₦400,000.

In the year to 31 December Year 5, the profits of Entity A after tax were ₦50,000.

Required: What figures would be included for the associate in the financial statements of Entity P for
the year to 31 December Year 5?

Illustration 20:

Entity P acquired 30% of the equity shares of Entity A several years ago at a cost of ₦275,000. As at 31
December Year 6, Entity A had made profits of ₦380,000 since the date of acquisition.

In the year to 31 December Year 6, the reported profits after tax of Entity A were ₦100,000.

In the year to 31 December Year 6, Entity P sold goods to Entity A for ₦180,000 at a mark-up of 20%
on cost. Goods which had cost Entity A ₦60,000 were still held as inventory by Entity A at the year-
end.

Required:

a) Calculate the unrealized profit adjustment and state the double entry.

b) Calculate the investment in associate balance that would be included in Entity P’s statement
of financial position as at 31 December Year 6.

c) Calculate the amount that would appear as a share of profit of the associate in Entity P’s
statement of profit or loss for the year ending 31 December Year 6.

Alexander Okunowo, FCA, MBA, DipIFR 30