- INTRODUCTION
The purpose of the consolidated income statement is to present the results of the parent company and the subsidiary as if it were a combined/single entity.
NON-CONTROLLING INTEREST
If there is a Non-Controlling Interest in a subsidiary, give them their share of the profit after tax of the subsidiary. The Non-Controlling Interest is shown below the consolidated income statement, alongside the share of profit attributable to the parent
Note the full profit before tax and tax of the subsidiary are consolidated.
Furthermore, if the Fair Value method is being used, then the NCI share of any goodwill impairment must be deducted in arriving at the NCI amount in the consolidated Income Statement.
PROFIT AND LOSS – BALANCE FORWARD IN SUBSIDIARY
In examination questions it is normal for students to be given the income statement of the parent company and subsidiary several years after acquisition. In practice a consolidated income statement will be prepared each year and the balance forward of profits will be known. For examinations it is necessary to work out the balance brought forward. It comprises the parent company’s balance forward plus group’s share of the post acquisition profits of the subsidiary.
INTER COMPANY PROFITS
Inter company profits arise on:-
Inventory and Non Current Assets
The principle is to eliminate inter company profits and show assets at their cost to the group. The elimination of profits or losses relating to intragroup transactions should be dealt with in the income statement of the company in which the profit/loss arose.
DIVIDENDS
Introduction
Dividends received/receivable from the subsidiary which have been credited to the parent company’s income statement should be eliminated in preparing the consolidated accounts. The profits of the subsidiary, out of which the dividends have been appropriated, are being consolidated; if the dividends were not eliminated a duplication would arise in the consolidated accounts.
TRANSFERS TO RESERVES
Group Share of transfers to reserves made by the subsidiary should be aggregated with the parent company’s transfers to reserves.
DEBIT BALANCE ON INCOME STATEMENT AT ACQUISITION
The accounting treatment of a debit balance on the subsidiary’s income statement at the date of acquisition is the opposite to that of a credit balance.
SALES AND COST OF SALES
Company law requires the disclosure of group sales and group cost of sales, a problem arises though where there is inter company trading.
DEBENTURE INTEREST
The amount of debenture interest charged in the consolidated income statement is that which has been paid to non-group debenture holders. Any inter company debenture interest should cancel out.
ACQUISITION OF SUBSIDIARY DURING THE YEAR
If a subsidiary is acquired during the year, only the post acquisition results of the subsidiary are consolidated.
ASSOCIATE COMPANIES IN THE INCOME STATEMENT
A reporting entity that prepares consolidated financial statements should include its associates in those statements using the equity method of accounting.
Under this method, the associate company’s revenue, cost of sales and expenses are not consolidated with those of the investing group. Instead, the investor’s share of the profit after tax of the associate is brought into the consolidated income statement. The share of the associates profit is shown in the consolidated income statement before profit before tax.
The share of profit after tax will include any accounting adjustments that arise in the question in relation to the associate, as well as any goodwill impairment that must be accounted for.
GOODWILL ON ACQUISITION OF AN ASSOCIATE
When an entity acquires an associate, fair values should be attributed to the investor’s underlying assets and liabilities, identified using the investor’s accounting policies.
The investor’s assets used in calculating the goodwill arising should not include any goodwill carried in the balance sheet of the investee.
