Financial Reporting

Consolidated Statement of Comprehensive Income

Steve Collings considers the Consolidated Statement of Comprehensive Income (previously known as the Consolidated Income Statement) and considers the approach to answering such a question in an exam. (This follows on from Steve’s last article ‘Consolidating your knowledge about Consolidated Accounts’).

First let us consider the ‘technique’ when preparing a consolidated statement of comprehensive income. Please note you might have your own technique which may be as effective – if this is the case then please do continue to use this.

The adjustments required for consolidation of a subsidiary are as follows:

• Eliminate intra-group sales and purchases
• Eliminate any unrealised profits on intra-group purchases still in stock at the year end
• Eliminate any intra-group dividends received and paid (remember only to show the parent company dividends)
• Combine all H and S results from revenue to profit after tax (where the acquisition is a mid-year acquisition, this will require time-apportionment)
• Exclude any investment income that is intra-group
• Calculate non-controlling interest (previously known as minority interests)
• Where there are pre-acquisition dividends then apportion the dividend on a time basis between the pre- and post-acquisition periods so that only post-acquisition dividends are taken to H’s reserves.

Group Structure
Take care to understand the composition of the group in the question. It could be that the question does not just feature a parent and a subsidiary. A question could well feature parent, subsidiary and an associate, or even a parent, subsidiary and a joint venture. It is important to understand how the group in the question is structured so as to then apply IAS 27, 28, 31 or 39 correctly.

Unrealised Profits in Inventory
This often causes confusion with students and it is best to illustrate this by way of an example. Let us consider the ‘provision for unrealised profit’ calculation. These are often referred to as PURP adjustments.

Illustration – Holding, Subsidiary and Associate
Holding Inc sells goods which are used by Subsidiary and Associate. Details of the amounts in inventory at the year end are as follows:

All sales by Holding Inc are made at a mark up of 25% on cost. Holding Inc owns a 30% share in Associate.

Solution
The unrealised profit held in Subsidiary is ($5,000 - $2,700) x 25/125 = $460

The unrealised profit held in Associate is ($3,000 x 25/125) x 30% = $180

Be careful when dealing with PURP adjustments relating to an Associate. IAS 28 states that profits can only be included to the extent that they relate to the non-group share i.e. the profit included is only attributable to the non-controlling interests, not the group. You could adopt an alternative approach than adjusting cost of sales or gross profit and reduce the consolidated revenue by the group share of the revenue that is unsold by the Associate at the year end. Either way you must ensure that you eliminate the unrealised profit on the transactions between associates and their group entities. Keep in mind the fundamental reason why we are preparing consolidated financial statements – to show group results as a single reporting entity.

Non-controlling interests (revised definition)
Following the amendments to IFRS 3, non-controlling interests were previously known as minority interests. The non-controlling interests are the interests held by outside investors i.e. the balance of holdings not owned by the Parent company.

Illustration – Foot and Ball
Foot owns 90% of the equity shares of Ball. The year end financial statements of Ball show profit after tax of $90,000. Show the split of this profit between Foot and the non-controlling interests:

Solution
Foot = $90,000 x 90% = $81,000
Non-controlling interests = $90,000 x 10% = $9,000

It is worth mentioning that the consolidated statement of comprehensive income is more straight forward than the consolidated statement of financial position – but still has its tricky areas. Let us now look at a typical consolidated statement of comprehensive income.

Purpose of the Consolidated Statement of Comprehensive Income
In my last article Consolidating your Knowledge about Consolidated Accounts we discussed the purpose of consolidated financial statements. To recap, the purpose of consolidated financial statements is to show the results of a group of companies as one, single reporting entity. This is the reason why all intra-group transactions such as sales, purchases, dividends, interest received, paid and income tax liabilities are eliminated.

Illustration – Alex, Alicia and Lucas
Alex has owned 80% of the equity shares of Alicia since its incorporation. On 1 June 2008 Alex purchased 35% of the equity shares of Lucas. The statements of comprehensive income and summarised statements of changes in equity of the three entities for the year ended 30 September 2008 are as follows:

Notes to the financial statements

Note 1 - Intra-Group Sales
Alex sells products to Alicia making a profit of 25% on the cost of the products sold. Details of the purchases of the products by Alicia together with the amounts included in opening and closing inventories are as follows (all amounts are $,000):

Purchased in the year: $18,000
Included in opening inventory: $2,500
Included in closing inventory: $3,500

There were no other intra-group sales between Alex, Alicia or Lucas during the period.

Note 2 – Investment Income
Alex’s investment income includes dividends received from Alicia and Lucas and interest receivable from Alicia. The dividend received from Lucas has been credited to the statement of comprehensive income of Alex without time apportionment. The interest receivable is in respect of a loan of $25 million to Alicia at a fixed rate of 8% per annum. The loan has been outstanding for the whole of the year ended 30 September 2008.

Note 3 – Acquisitions
Details of Alex’s acquisitions are as follows:

Alicia
Acquisition date: 1 October 1996
Goodwill on acquisition: $nil
Fair value adjustment at acquisition date: $nil

Lucas
Acquisition date: 1 June 2008
Goodwill on acquisition: $5,000
Fair value adjustment at acquisition date: $7,000

The goodwill figure for Lucas is after taking account of the fair value adjustment. This goodwill has not suffered any impairment since 1 June 2008.

The fair value adjustment has the effect of increasing the fair value of property, plant and equipment above the carrying value in the individual financial statements of Lucas. Group policy is to depreciate property, plant and equipment on a monthly basis over its estimated useful economic life (UEL). The UEL of the property, plant and equipment of Lucas that was subject to the fair value adjustment is five years. Depreciation is charged against cost of sales.

The investment in Lucas was as a result of a contractual arrangement with two other investors to obtain joint control over Lucas from 1 June 2008. The contract requires that all three investors approve the financial and operating policies of Lucas.

Required

We are required to prepare the consolidated statement of comprehensive income for the Alex Group Inc for the year ended 30 September 2008 and the consolidated statement of changes in equity.

Solution

Workings

The above consolidated statement of comprehensive income and consolidated statement of changes in equity features most of the consolidation adjustments which you can expect to see when being asked to do such a question. The investment in Lucas gives rise to a ‘joint venture’. This is because a contractual arrangement exists between Alex and outside investors to obtain joint control whereby all three investors must approve the key policy decisions. Therefore, under IAS 31, we can proportionally consolidate Lucas which is reflected in the above solution, though the allowed alternative treatment for investments in associates under IAS 31 is ‘equity accounting’.

Conclusion

Practising lots of examination style questions in the area of consolidated statement of comprehensive income is the only way to get your consolidation techniques up to standard. Keep in mind opening URP adjustments included in inventory by a subsidiary – this needs adjustment when you work out the opening consolidated reserves of the parent.

As mentioned above, the consolidated statement of comprehensive income is relatively more straight forward than the consolidated statement of financial position. However, there are issues which may be forgotten about, such as PURP adjustments in opening inventory, or forgetting to eliminate dividends paid to the parent company when preparing the consolidated statement of changes in equity. All these ‘tricky’ areas will become more easily identifiable through lots of question practise in consolidation questions.

Steve Collings FMAAT ACCA DipIFRS is Audit Manager at Leavitt Walmsley Associates Limited and a partner in AccountancyStudents.co.uk