Chapter 7: Preparing Standalone vs Consolidated Statements

7.1 Standalone Financial Statements: Structure & Disclosures

• Statement of Financial Position (vertical or horizontal format):
  • Separate classification of current vs non-current assets and liabilities (IAS 1).
  • Equity section: share capital, reserves, retained earnings.
• Statement of Profit or Loss:
  • Revenue, cost of sales, gross profit.
  • Operating expenses, finance costs, tax, profit for the year.
• Statement of Changes in Equity: movements in share capital, reserves, retained earnings.
• Statement of Cash Flows: operating, investing, financing activities (IAS 7).
• Notes:
  • Accounting policies.
  • Breakdowns of balances (e.g. PPE schedule, inventory analysis).
  • Contingencies, commitments, related-party disclosures.

7.2 Consolidated Financial Statements: Combining Schedules

Under IFRS 10, a parent must present consolidated statements if it controls one or more subsidiaries. Key steps:

1. Prepare standalone schedules for each subsidiary (income, balance sheet).
2. Aggregate line by line: sum like items (e.g. cash + cash, payables + payables).
3. Eliminate intra-group: intercompany balances, sales, expenses, dividends, unrealized profits.
4. Adjust for fair-value uplifts and goodwill at acquisition date.
5. Include non-controlling interest in equity and profit allocation.

7.3 Eliminations, Non-controlling Interests & Disclosure Schedules

• Intra-group eliminations: Dr Intercompany payables XXX Cr Intercompany receivables XXX Dr Intercompany revenue XXX Cr Intercompany cost of sales XXX
• Unrealized profit in closing inventory: Dr Intercompany profit (P&L) XXX Cr Inventory XXX
• Dividends from subsidiary to parent: Dr Retained earnings (subsidiary) XXX Cr Dividend income (parent P&L) XXX
• Non-controlling interest:
  • Measured at acquisition (fair value or proportionate share).
  • Show NCI share of net assets in equity.
  • Allocate post-acquisition profit to NCI.
• Disclosure schedules:
  • Schedule of eliminations (revenue, COGS, payables/receivables).
  • Schedule of fair-value adjustments and goodwill.
  • NCI reconciliation (opening, share of profit, dividends, closing).

7.4 Worked Example: Two-Entity Group Consolidation

Scenario: Parent P acquires 75% of Sub S on 1 Jan 20X1 for \$1 500 000. S’s identifiable net assets at FV = \$1 200 000. During 20X1:

• P’s standalone revenue \$5 000 000, COGS \$3 000 000.
• S’s standalone revenue \$2 000 000, COGS \$1 200 000.
• Intercompany sales: P → S of \$200 000 at 20% markup; 10% remains unsold at year-end.

1. Goodwill: 1 500 000 – (1 200 000×75%) = 1 500 000 – 900 000 = \$600 000.
2. Eliminate investment and recognize goodwill & NCI: Dr Net assets (FV) 1 200 000 Dr Goodwill 600 000 Cr Investment in S 1 500 000 Cr Non-controlling interest 300 000
3. Eliminate intercompany sales & unrealized profit: Dr Interco revenue 200 000 Cr Interco COGS 166 667 Cr Interco profit (P&L) 33 333 Dr Interco profit (inventory) 3 333 Cr Inventory 3 333 (200 000÷1.20=166 667 cost; profit=33 333; 10% of 200 000 remains → 20 000 sales value → unreal profit=20 000÷1.20×0.20=3 333)
4. Aggregate P & S standalone figures, then apply eliminations to produce consolidated P&L and BS.

7.5 Practice Problems

1. Z Ltd. buys 60% of Y Ltd. for \$2 400 000. Y’s FV net assets = \$3 000 000. Compute goodwill and NCI.
2. Entity A sells inventory to B for \$500 000 at 25% markup. If 30% remains unsold, calculate elimination entries.
3. Prepare a consolidated BS extract showing PPE, goodwill, NCI, eliminations and net worth.

7.6 Strategic Approach: Preparing Standalone vs Consolidated Statements

Use this clear, step-by-step method to prepare both standalone and consolidated financial statements under IFRS:

1. Gather Trial-Balance Information
   Collect complete trial balances for the parent and each subsidiary at the reporting date.
2. Prepare Standalone Statements
   For each entity, draft:
   • Statement of Profit or Loss (P&L)
   • Statement of Financial Position (Balance Sheet)
   • Statement of Changes in Equity
   • Statement of Cash Flows
3. Set Up Consolidation Worksheet
   Create a worksheet with columns for:
   • Parent standalone balances
   • Each subsidiary’s standalone balances
   • Elimination and adjustment entries
   • Consolidated totals
4. Aggregate Like Items
   Sum each line item across parent and subsidiaries: Consolidated Item = Parent Item + Σ Subsidiary Items
5. Post Acquisition Adjustments
   Include:
   • Fair-value uplifts & goodwill (IFRS 3)
   • Deferred tax on uplifts (IAS 12)
   • IFRS 9 ECL provisions
6. Eliminate Intra-group Transactions
   See Chapter 6 for:
   • Intercompany payables/receivables
   • Sales/COGS and unrealized profit
   • Intra-group dividends
7. Account for Non-controlling Interests
   Measure NCI at acquisition (fair-value or proportionate share) and:
   • Include NCI in equity section
   • Allocate share of post-acquisition profit
8. Compute Consolidated Totals
   After all eliminations and adjustments, calculate:
   • Consolidated P&L: external revenue & expenses only
   • Consolidated BS: assets, liabilities, equity (incl. goodwill & NCI)
9. Prepare Final Financial Statements
   Draft consolidated:
   • Statement of Financial Position
   • Statement of Profit or Loss
   • Statement of Changes in Equity
   • Statement of Cash Flows
10. Disclose Significant Judgments & Policies
    In the notes, explain:
    • How control was assessed
    • Fair-value measurement methods
    • Contingent consideration and discount rates
    • Basis for NCI measurement
11. Review & Reconcile
    Ensure:
    • Consolidated equity ties to statement of changes in equity
    • Total assets = total equity + total liabilities
    • No remaining intercompany balances