AC506 lecture 7

• Pre-acquisition reserves

• Consolidated profit and loss account

Pre- and post-acquisition reserves

• When a parent acquires a subsidiary during the financial period or at a date subsequent to the date of incorporation of the subsidiary (when the subsidiary has accumulated reserves), for consolidation purposes it is necessary to distinguish between pre-acquisition and post-acquisition reserves

Example

• P Ltd purchased 80% of the equity share capital of S Ltd at a cost of €9,600 on 1 January 2000. At that date, the revenue reserves of S Ltd amounted to €2,000

• Prepare the consolidated balance sheet as at 31 December 2000

Consolidated Profit and Loss

• Previously dealt with profit and loss implications of associates and JVs

• Consolidation of profit and loss account of parent and subsidiaries follow same logic as balance sheet - parent plus group share of subsidiaries. Eliminate intra-group items.

Standard P&L adjustments

• Intra-group turnover• Intra-group stock• Intra-group charges• Minority interest• Dividend shuffle and holding company dividend• Retained profit brought forward

Example

• Apple Limited acquired the following in 1987:– 90,000 of 100,000 issued €1 ordinary shares in Pear Limited– 180,000 of 200,000 issued €1 ordinary shares in Plum Limited– 20,000 of 100,000 issued 1% €1 preference shares in Plum

Limited

• Apple controls all the operating and policy decisions in both Pear and Plum

• The reserves balances of Pear Limited and Plum Limited at the date of acquisition were €1,600 dr and €5,800 cr respectively

• Prepare consolidated profit and loss account for the Apple Group

Intra-group turnover

• During the financial year, Apple sold goods to Plum for €48,000.

=> Intragroup sales and purchases amounts to be eliminated

• Of these, Plum holds stock costing Plum €2,700 at year-end. Unrealised profit to be eliminated from cost of sales and stock asset

• Apple makes a 20% gross profit based on cost on all intra group sales.

=> Amount to be eliminated = 2,700/6 = €450

Intra-group charges

• Included in Pear’s administrative expenses is a holding company management charge of €2,000. This has been recognised in the books of Apple as management fee income.

• Eliminate all management charges, interest on loans, debenture interest charged by one group company to another.

Minority interest

• Although Apple has control over the activities of the companies in the group, it does not have legal title to 100% of the shares and consequently to 100% of the profits.

• We must calculate and show the amount attributable to the minority interest

=>Minority interest of Pear is 10% of the ordinary shares; and

=>Minority interest of Plum is 10% of the ordinary shares and 80% of the preference shares

Intragroup dividends

• Once minority interest has been deducted from total profit, all amounts in the consolidated profit and loss account are group share only => net of minority interest

• Apple has included dividend income in its sundry income

• Eliminate from Apple income and corresponding dividend payments in Pear and Plum. Note there is no change to the profit retained by the group as a result of the intragroup elimination

Reserves brought forward

• Pear €1,600 dr

• Plum €5,800 cr

• Exclude pre-acquisition reserves (Adjust 1)

• Include group share of post-acquisition reserves only (Adjust 2)