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From the register of Uzair Aziz Abro| Senior Audit Incharge| Nasir Mahmood & Co.

Page 1

Guidelines to Consolidation

1. General Awareness:

Tip 1: Care should be taken in respect of:
o Share holding % acquired in subsidiary and/ or associate for sharing between parent and
Non-controlling interest (NCI)
o Unrealized profit: Whether % of profit applies on sales or cost of sales? (Margin or markup?)
o Acquisition date and consolidation date for:
Profit & Loss (P&L) consolidation
Depreciation / amortization calculations
Associate share of profit/ loss calculations

Goodwill (Full goodwill method):

Consideration paid by parent xxx
FV of NCI xxx
Less: Net assets of subsidiary at acquisition
Share capital xxx
Share premium xxx
Fair value adjustment (FVA) xxx
Defer tax liability on FVA (xxx) (xxx)
Full goodwill at acquisition xxx

Tip 2: Impairment in goodwill if any shall be charged to consolidated retained earnings (CRE) and NCI
proportionately only in case of full goodwill method.

Tip 3: Decrease in defer tax liability on FVA shall be proportionately credited to CRE and NCI at period
end.

Goodwill (Proportionate goodwill method):

Consideration paid by parent xxx
Less: Net assets of subsidiary at acquisition
(Computed as above x Parents share holding in subsidiary) (xxx)
Proportionate goodwill at acquisition xxx

Tip 4: Impairment in goodwill if any shall only be charged to CRE in proportionate goodwill method.

Computing full goodwill If NCIs share of goodwill is already given in the question instead of its FV:

Method 1: Compute proportionate goodwill and add to it NCIs goodwill to make it full goodwill.
Method 2: Compute NCIs % of net assets of subsidiary at acquisition and add NCIs portion of
goodwill to get FV of NCI. Now, compute full goodwill in normal manner.





From the register of Uzair Aziz Abro| Senior Audit Incharge| Nasir Mahmood & Co. Page 2

Unrealized Profit (URP)

Seller Affectee of URP Parents % of URP NCIs % of URP
Parent Parent 100% NA
Subsidiary Parent & NCI % of share holding Remaining %
Associate parent % of shareholding NA
Indirect subsidiary Parent & NCI % of effective shareholding Remaining %

TIP 5: In case of URPs, it does not matter who the buyer is. Focus should be on who the seller is.

Tip 6: Intra-group sale involving associate:
o If buyer is associate, reduce URP from investment because inventory lies with associate and
we do not consolidate associate accounts.
o If buyer is parent, reduce URP from inventory because now inventory lies with parent.

Balance Sheet Approach Consolidation:

Steps
1. Compute consideration paid
2. FV of NCI (if full goodwill method to be applied)
3. Goodwill
4. CRE & NCI
5. Consolidated balance sheet

CRE and NCI in balance sheet approach

Computing CRE and NCI involves line by line consolidation adjustments starting with closing balance
of parents retained earnings in case of CRE and initial FV of NCI in case of NCI.

Intra-group balances to be eliminated from consolidated balance sheet such as:

o Payables and receivables
o Loan notes directly issued by parent to subsidiary or by subsidiary to parent and interest
receivable and payable therein.
Entry by issuer in its separate accounts:
Debit: Cash/ bank
Credit: Loan notes payable.
Entry by issuee in its separate accounts:
Debit: Investment
Credit: Cash/ bank

P&L Approach Consolidation:

Steps
1. Step 1 to 3 same as balance sheet approach
2. Consolidated profit and loss
3. Profit attributable to parent and NCI
4. CRE and NCI
5. Consolidated balance sheet


From the register of Uzair Aziz Abro| Senior Audit Incharge| Nasir Mahmood & Co. Page 3

Intra-group balances to be eliminated from consolidated P&L such as:
o Intra-group inventory sale and purchase to be eliminated from sales and cost of sales (C.O.S.)
o URPs (relating to intra-group transfer of inventory or PPE that still exists at the consolidation
date) to be added in C.O.S
o Dividends received and paid between parent - subsidiary and parent associate to be
eliminated
Tip 7: When computing NCI in P&L approach, subtract from NCI the dividends paid to NCI. No
such treatment in computing CRE

Tip 8: Do not get confused regarding dividend in balance sheet approach. Assume there are no
rules for dividend

o Interest on loan notes issued between parent and subsidiary (not between parent and
shareholders of subsidiary).

Other matters to be considered in preparing consolidated P&L:
o Depreciation/ amortization on FVA
o Goodwill impairment
o Add/ less associate share of profit/ loss
o Impairment in Investment in associate
o Gain/ loss on disposal of investment

CRE in P&L approach

CRE (Closing) CRE (Opening)
CRE (opening) xxx Parents opening retained earning xxx
Profit attributable to parent xxx Adjustments till last year regarding: xxx
Less: dividends paid by parent xxx -associate share of profit xxx
CRE (Closing) xxx -subsidiarys post acquisition profit xxx
-Depreciation on FVAs xxx
-Goodwill impairments xxx
xxx

NCI in P&L approach
NCI (Closing) NCI (Opening)
NCI (opening) xxx Initial FV of NCI xxx
Profit attributable to parent xxx Adjustments till last year regarding: xxx
Less: dividends paid by parent xxx -subsidiarys post acquisition profit xxx
CRE (Closing) xxx -Depreciation on FVAs xxx
-Goodwill impairments xxx
NCI (Opening) xxx

Tip 9: If current year is the 1
st
year of consolidation then CRE opening and NCI opening as above shall be
replaced by Parents RE and initial FV of NCI respectively. Column 2 above shall not be considered.





From the register of Uzair Aziz Abro| Senior Audit Incharge| Nasir Mahmood & Co. Page 4

2. Disposal of Subsidiary

Control Lost:
FV of consideration received xxx
FV of remaining investment (if any) xxx
Less: Goodwill (net of impairment) xxx
Net assets at disposal (see below) xxx
Less: NCI at disposal (xxx) xxx
Gain / (Loss) xxx/ ( xxx)

Net assets at disposal
Share capital xxx
Share premium xxx
Retained earnings xxx
FVA xxx
Depreciation on FVA (xxx)
Net assets at disposal xxx

Tax on above gain
Consideration received xxx
Cost of investment sold (do not include cost of remaining investment) (xxx)
Tax on above gain xxx

Tip 10: Tax on gain on re-measurement of remaining investment does not apply as it is not a realized
gain.
Tip 11: When control lost from subsidiary to associate, consider adding post disposal associate share of
profit in P&L and showing remaining investment at FV in balance sheet.

Control NOT Lost:

TIP 12: Goodwill or gain/ loss shall not be treated as typical goodwill or gain/ loss. It shall be transferred
directly to equity.

Further Purchase of share holding

Consideration paid xxx
Less: Decrease in NCI
NCI at the time of transaction x Further % acquired .
NCIs % before further acquisition

(xxx)
Difference directly to equity (CRE debit if answer is positive & vice-versa) xxx

Disposal of share holding to the extent that subsidiary remains subsidiary

Consideration received xxx
Less: Increase in NCI
Net assets + goodwill at the time of transaction x % disposed

(xxx)
Difference directly to equity (CRE debit if answer is negative & vice-versa) xxx

TIP 13: Do not forget to subtract decrease in NCI and add increase in NCI while computing NCI for balance sheet.

From the register of Uzair Aziz Abro| Senior Audit Incharge| Nasir Mahmood & Co. Page 5

3. Peace-meal Acquisition

Tip 14: In peace-meal acquisition, % of share holding increases such that the acquisition changes
investment relationship (e.g. from associate to subsidiary). Whereas in further purchase of share holding
in case of control not lost (as above), status of investment relationship remains same, i.e. subsidiary
remains subsidiary.

Goodwill
Consideration paid xxx
FV of existing investment xxx
Less: net assets at acquisition x parents % of share holding (xxx)
Proportionate goodwill xxx

Tip 15: Do not forget to add/ less gain/ loss on re-measurement of existing investment to FV in P&L.

4. Complex Group Structure

A ------- 80% holding in -----------> B ---------- 70% holding in ------------> C
(Subsidiary of A) (Subsidiary of B)

A ------ 80 % of 70 % i.e. 80% x 70% = 56% effective holding in --------> C
(Indirect subsidiary of A)

Tip 16: If effective share holding is 50% or below, relationship is that of indirect associate.

Goodwill of Indirect Subsidiary:

Goodwill
Consideration paid (Consideration x % of shareholding in subsidiary) xxx
Less: net assets at acquisition x parents % of effective shareholding in indirect
subsidiary
(xxx)
Proportionate goodwill xxx

Tip 17: All intra group trading concepts discussed above remain same in complex group structures.

5. Foreign Subsidiary

Valuation rates:

Description Exchange rate for conversion of
foreign financial statements at:
Assets (including FVA), Liabilities and Goodwill Closing Date
Equity at Acquisition (Share capital, premium, Reserves, FVAs) Acquisition date
Revenue and Expenses Transaction date (if available), else
average rate
Post reserves include: Post profits and exchange gain/ loss


From the register of Uzair Aziz Abro| Senior Audit Incharge| Nasir Mahmood & Co. Page 6

Step-wise Solving Procedure:

1. Compute goodwill in foreign currency in normal way
2. Translate goodwill as below:

Goodwill at closing rate xxx
Goodwill at acquisition rate (xxx)
Exchange gain/ (loss) xxx/ (xxx)

3. Balance Sheet Approach:

Translate subsidiarys balance sheet at rates specified above including retained earning as at the
time of acquisition. Take post acquisition profit as balancing figure.
Compute CRE and NCI. (Post acquisition profits are computed in above step)
Consolidate parents balance sheet with subsidiarys translated balance sheet.

4. P&L Approach:

Translate subsidiarys P&L at rates specified above and consolidate with parents P&L.
Include exchange gains/ losses on goodwill and net assets (Format as below) in OCI. Other effect
in CRE & NCI.
Attribute P&L between parent and NCI
Compute CRE and NCI in normal way
Consolidate balance sheet

Exchange gain/ loss on net assets:

Net assets at acquisition ( at closing rate) xxx
Less: Net assets at acquisition ( at acquisition rate) (xxx) xxx/ (xxx)

Additional net assets (at closing rate) xxx
Additional net assets (at transaction or average rate) (xxx) xxx/ (xxx)
Exchange gain / (loss) xxx/ (xxx)

Tip 18: Additional net assets are equal to subsidiarys profit amount.













From the register of Uzair Aziz Abro| Senior Audit Incharge| Nasir Mahmood & Co. Page 7

6. Consolidated Cash flow

Tip 19: Single entry approach should be used (making of T-accounts to get balancing figures)

Tip 20: Increase/ decrease in debtors under working capital change in indirect method or under receipts
from debtors in direct method shall be computed on gross debtor (i.e. net debtors + bad debts).
However, bad debts are non-cash items and shall also be adjusted under adjustments for in indirect
method and under payments to suppliers and employees in direct method as under.

Tip 21: Short term borrowings/ bank overdraft are a part of cash and cash equivalent.

Tip 22: Repayment by employees of interest free loan given to employees shall be included in cash-flow
with finance cost and tax paid.

Comparison of Direct Method with Indirect Method

Direct Method Format Whether same as
Indirect Method?
Receipts from debtors
Revenue xxx Included in PBIT
Other income (not being interest or investment income) xxx
Add: Decrease in account receivables xxx Included in
Working capital
change (WCC)
Decrease in other income receivable xxx
increase in unearned other income xxx xxx
Payments to suppliers and employees
C.O.S. xxx Included in PBIT
Operating and admin expenses xxx
Less: Non-cash items included in COS and admin expenses (xxx) Included in
adjustments Losses on disposals (xxx)
Retirement benefit expenses (xxx)
Less: Increase in trade payable (xxx) Inverse treatment
in WCC Increase in accrued expenses (xxx)
Decrease in inventory (xxx)
Decrease in prepayments (xxx) (xxx)
Cash generated from operations xxx/ (xxx) Same result in
both methods
Finance cost paid (xxx) Exactly the same
Tax paid (xxx)
Retirement contributions paid (xxx)
Investing Activities xxx/ (xxx)
Financing Activities xxx/ (xxx)
Net Cash Inflow/ (Outflow) during the period xxx/ (xxx)
Add: Opening Cash & Cash Equivalents xxx
Closing Cash & Cash Equivalents xxx

Tip 23: In case where subsidiary is acquired during the year, current assets of subsidiary at acquisition
shall be subtracted from consolidated ending balances while computing WCC.

Tip 24: In case where subsidiary is disposed during the year, subsidiaries separate current assets at the
time of disposal shall be added in parents balances for computing WCC.

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