FINANCIAL REPORTING
LECTURE NOTE
ON
CONSOLIDATED FINANCIAL
STATEMENT
FOR
ICAN-SKILL LEVEL
Taiwo Ewedairo FCA, FCTI, CFIP, ACCA-IFRdip, MSc
08069201515, 09010640068
2022
1
,FINANCIAL REPORTING
GROUP ACCOUNTS
Outline:
Introduction to group accounts
Purpose of group accounts
Relevant IFRS for preparing group accounts
Exemptions from preparing group accounts
Group accounting year end
Group accounting policies
Tutorial notes
Introducing group statement of financial position
Procedures involved in preparing group statement of financial position
Treatment of goodwill in group accounts
Treatment of post-acquisition profit in group accounts
Treatment of pre-acquisition in group accounts
Determining the date of acquisition in group accounts
Treatment of cost of investment in group accounts
Treatment of professional on acquisition of subsidiary by parent
Treatment of fair value adjustment of subsidiary’s net assets
Treatment of inter-company transactions
Treatment of provision for unrealized profit (PURP) on inventory in group statement
of financial position
Explaining mark-up and margin
Treatment of provision for unrealized profit (PURP) on inter-company transfer of
property, plant and equipment in group accounts
Introducing mid-year acquisitions in group accounts
Treatment of dividends paid by subsidiary
Introducing group statement of profit or loss and other comprehensive income
Treatment of intra-group purchases and sales in group accounts
Treatment of intra-group interest received and interest paid in group accounts
Treatment of intra-group dividend in the group profit or loss statement
Treatment of unrealised profit in the group statement of profit or loss
Treatment of fair value adjustment and extra depreciation in group profit or loss
Treatment of goodwill and impairment in the group profit or loss
Treatment of non-controlling interest in the group statement of profit or loss
Introducing mid-year acquisition to group statement of profit or loss
Introducing group other comprehensive income
Introducing group statement of changes in equity
Introducing Associates
Explaining equity accounting principles
Tutorial notes
Questions
2
,FINANCIAL REPORTING
INTRODUCTION TO GROUP ACCOUNTS
The ordinary shareholders of an entity are generally referred to as risk bearers and
owners of the entity. Both individual and corporate entities invest in equity instruments of
business entities to obtain benefit (e.g. dividends) from them. For instance, if an entity
has 10,000,000 N1 ordinary shares and SOROSOKE PLC invested in it as follows:
i. 3,000,000 ordinary shares. This is 30% investment (3,000,000/10,000,000 X 100%];
or
ii. 6,500,000 ordinary shares. This is 65% investment (6,500,000/ 10,000,000 X 100%];
or
iii. 1,850,000 ordinary shares. This is 15% investment (1,500,000/10,000,000 X 100%]
The point I am making out of the above scenario is that purchasing or investing in
ordinary shares of an entity by another entity can be categorised into three:
a. Between 0 – 20% - This is a case of Ordinary investment
b. Between 20 – 50% - This is a case of Associate
c. Above 50% - This is a case of Subsidiary
Now, where an entity invests in more than 50% of another entity, the implications are:
i. It gives the first company (investor) control of the second company (investee).
ii. It gives the first company (i.e. parent company, P) enough voting power to
appoint all the directors of the second company (The subsidiary company, S),
Why? Because of control
iii. The parent entity is in effect, now able to manage the Subsidiary as if it is merely a
department of the Parent company, rather than a separate entity
iv. Legally, Parent (P) is an entity and Subsidiary (S) is an entity, meaning P and S
remain distinct, but in accounting and in economic substance, both (P and S)
can be regarded as a single unit (i.e. a group).
Thus, the word control is important to establish parent-subsidiary relationship. The IFRS
recognises this state of undertakings and requires that a parent company should
produce consolidated financial statements to show the position and results of the whole
group as if they are one entity.
The key principle underlying group accounts is the need to reflect the economic
substance of the parent-subsidiary relationship.
P P is an individual legal entity.
S is an individual legal entity.
Controls Group But, because P control S,
they form a single entity – group
S
3
, FINANCIAL REPORTING
PURPSOE OF GROUP ACCOUNTS
i. To present financial information about a parent undertaking and its subsidiary
undertakings as if they are a single economic unit.
ii. To show the economic resources controlled by the group i.e. both parent and its
subsidiaries.
iii. To show the obligations of the group i.e. both parent and its subsidiaries.
iv. To show the results the group achieves with its resources
v. To comply with IFRSs requirements
vi. To comply with the statutory framework of the country.
By now you may be thinking that, consolidating the results (i.e. profit or loss) and net
assets of group members so as to display the group’s affair as those of a single
economic entity conflicts the strict legal view, where legally, each company is an
artificial person, distinct from its owner. But applying the single economic unit concept is
a good example of the accounting convention of showing economic substance over
legal form [substance over form]. Please remember this when you are asked to give
examples of substance over form application in examination.
The best way to prepare the financial statement of group is to imagine that all
transactions of the group had been carried out by a single equivalent company and to
prepare:
• Group statement of financial position (P + S)
• Group statement of profit or loss and other comprehensive income (P + S)
• Group statement of changes in equity (P + S)
• Group statement of cash flows (P + S)
• Group accounting policies and explanatory notes to accounts.
THE RELEVANT IFRSs FOR GROUP ACCOUNTS
IAS 27 Separate Financial statement
IAS 28 Investment in associates and Joint ventures
IFRS 3 Business combination
IFRS 10 Consolidated Financial Statements
IFRS 11 Joint arrangements
IFRS 12 Disclosure of Interest in other entities
4
LECTURE NOTE
ON
CONSOLIDATED FINANCIAL
STATEMENT
FOR
ICAN-SKILL LEVEL
Taiwo Ewedairo FCA, FCTI, CFIP, ACCA-IFRdip, MSc
08069201515, 09010640068
2022
1
,FINANCIAL REPORTING
GROUP ACCOUNTS
Outline:
Introduction to group accounts
Purpose of group accounts
Relevant IFRS for preparing group accounts
Exemptions from preparing group accounts
Group accounting year end
Group accounting policies
Tutorial notes
Introducing group statement of financial position
Procedures involved in preparing group statement of financial position
Treatment of goodwill in group accounts
Treatment of post-acquisition profit in group accounts
Treatment of pre-acquisition in group accounts
Determining the date of acquisition in group accounts
Treatment of cost of investment in group accounts
Treatment of professional on acquisition of subsidiary by parent
Treatment of fair value adjustment of subsidiary’s net assets
Treatment of inter-company transactions
Treatment of provision for unrealized profit (PURP) on inventory in group statement
of financial position
Explaining mark-up and margin
Treatment of provision for unrealized profit (PURP) on inter-company transfer of
property, plant and equipment in group accounts
Introducing mid-year acquisitions in group accounts
Treatment of dividends paid by subsidiary
Introducing group statement of profit or loss and other comprehensive income
Treatment of intra-group purchases and sales in group accounts
Treatment of intra-group interest received and interest paid in group accounts
Treatment of intra-group dividend in the group profit or loss statement
Treatment of unrealised profit in the group statement of profit or loss
Treatment of fair value adjustment and extra depreciation in group profit or loss
Treatment of goodwill and impairment in the group profit or loss
Treatment of non-controlling interest in the group statement of profit or loss
Introducing mid-year acquisition to group statement of profit or loss
Introducing group other comprehensive income
Introducing group statement of changes in equity
Introducing Associates
Explaining equity accounting principles
Tutorial notes
Questions
2
,FINANCIAL REPORTING
INTRODUCTION TO GROUP ACCOUNTS
The ordinary shareholders of an entity are generally referred to as risk bearers and
owners of the entity. Both individual and corporate entities invest in equity instruments of
business entities to obtain benefit (e.g. dividends) from them. For instance, if an entity
has 10,000,000 N1 ordinary shares and SOROSOKE PLC invested in it as follows:
i. 3,000,000 ordinary shares. This is 30% investment (3,000,000/10,000,000 X 100%];
or
ii. 6,500,000 ordinary shares. This is 65% investment (6,500,000/ 10,000,000 X 100%];
or
iii. 1,850,000 ordinary shares. This is 15% investment (1,500,000/10,000,000 X 100%]
The point I am making out of the above scenario is that purchasing or investing in
ordinary shares of an entity by another entity can be categorised into three:
a. Between 0 – 20% - This is a case of Ordinary investment
b. Between 20 – 50% - This is a case of Associate
c. Above 50% - This is a case of Subsidiary
Now, where an entity invests in more than 50% of another entity, the implications are:
i. It gives the first company (investor) control of the second company (investee).
ii. It gives the first company (i.e. parent company, P) enough voting power to
appoint all the directors of the second company (The subsidiary company, S),
Why? Because of control
iii. The parent entity is in effect, now able to manage the Subsidiary as if it is merely a
department of the Parent company, rather than a separate entity
iv. Legally, Parent (P) is an entity and Subsidiary (S) is an entity, meaning P and S
remain distinct, but in accounting and in economic substance, both (P and S)
can be regarded as a single unit (i.e. a group).
Thus, the word control is important to establish parent-subsidiary relationship. The IFRS
recognises this state of undertakings and requires that a parent company should
produce consolidated financial statements to show the position and results of the whole
group as if they are one entity.
The key principle underlying group accounts is the need to reflect the economic
substance of the parent-subsidiary relationship.
P P is an individual legal entity.
S is an individual legal entity.
Controls Group But, because P control S,
they form a single entity – group
S
3
, FINANCIAL REPORTING
PURPSOE OF GROUP ACCOUNTS
i. To present financial information about a parent undertaking and its subsidiary
undertakings as if they are a single economic unit.
ii. To show the economic resources controlled by the group i.e. both parent and its
subsidiaries.
iii. To show the obligations of the group i.e. both parent and its subsidiaries.
iv. To show the results the group achieves with its resources
v. To comply with IFRSs requirements
vi. To comply with the statutory framework of the country.
By now you may be thinking that, consolidating the results (i.e. profit or loss) and net
assets of group members so as to display the group’s affair as those of a single
economic entity conflicts the strict legal view, where legally, each company is an
artificial person, distinct from its owner. But applying the single economic unit concept is
a good example of the accounting convention of showing economic substance over
legal form [substance over form]. Please remember this when you are asked to give
examples of substance over form application in examination.
The best way to prepare the financial statement of group is to imagine that all
transactions of the group had been carried out by a single equivalent company and to
prepare:
• Group statement of financial position (P + S)
• Group statement of profit or loss and other comprehensive income (P + S)
• Group statement of changes in equity (P + S)
• Group statement of cash flows (P + S)
• Group accounting policies and explanatory notes to accounts.
THE RELEVANT IFRSs FOR GROUP ACCOUNTS
IAS 27 Separate Financial statement
IAS 28 Investment in associates and Joint ventures
IFRS 3 Business combination
IFRS 10 Consolidated Financial Statements
IFRS 11 Joint arrangements
IFRS 12 Disclosure of Interest in other entities
4
