Duration: 60

mins
Slides: 22

LMT SCHOOL OF MANAGEMENT, THAPAR

UNIVERSITY
Masters of Business Administration

Course: Financial Reporting and Analysis

Faculty: Dr. Sonia Garg (Email:
sonia.garg@thapar.edu)

Session 17: Consolidation of Financial Statements

AS-21 weblink
The objective of this Standard is to lay down principles and
procedures for preparation and presentation of consolidated
financial statements.
Consolidated financial statements are presented by a
parent to provide financial information about the economic
activities of the parent and its subsidiaries as a single entity.
It does not mandate presentation of consolidation of
financial statements.
It does not not apply to amalgamation, associates and joint
ventures.
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Important Terms
Control is
the ownership, directly or indirectly through subsidiary(ies), of more than one-half
of the voting power of an enterprise;
control of the composition of the board of directors or governing body of any
enterprise so as to obtain economic benefits from its activities.

A subsidiary is an enterprise that is controlled by another enterprise

(known as the parent).
A parent is an enterprise that has one or more subsidiaries. A group is a
parent and all its subsidiaries.
Consolidated financial statements are the financial statements of a
group presented as those of a single enterprise.
Minority interest is that part of the net results of operations and of the
net assets of a subsidiary attributable to interests which are not owned,
directly or indirectly through subsidiary(ies), by the parent.
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Exclusions
A subsidiary should be excluded from
consolidation when:
control is intended to be temporary
because the subsidiary is acquired and
held exclusively with a view to its
subsequent disposal in the near future;
it operates under severe long-term
restrictions which significantly impair its
ability to transfer funds to the parent
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Process of Consolidation
Line-by-line consolidation
Elimination of parents investment and determination of goodwill/capital reserve (if
cost > equity acquired it leads to goodwill otherwise capital reserve)
Minority Interest adjustment in both net income and net assets

Intra group transactions, balances and unrealized profits

Provision for taxation (tax authorities do not recognise consolidation)
Provision for dividend tax (tax authorities do not recognise consolidation)

Reporting date: adjust for if not same

Uniform accounting policies: should be same as far as possible
Cessation of Parent-subsidiary relationship
Format of Consolidated Financial Statements: same as parents F/S
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Example

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Steps in Consolidation
1. Minority Interest is zero because
AHL acquired 100% of ASL
2. Determination of Goodwill/Capital
reserve
Rs. in crores
AHLs cost

9.00

Equity acquired = Equity + General Reserve

and Balance in P/L account

4.00 + 2.00
+1.22 = 7.22

Cost > Equity acquired implies goodwill = Cost 9.00 7.22 =

- Equity acquired
1.78

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3. Identification of adjustments
Parents Investment to be eliminated from parents asset side and
equity acquired to be eliminated from subsidiarys owners equity
(also create asset in consolidated B/S for goodwill or liability in
consolidated B/S for Capital Reserve)
AHLs sales and ASLs purchases to be reduced by 5.6 crores. AHLs
debtors (or A/C Receivables) and ASLs creditors (or A/C Payables) to
be reduced by 2.2 crores
AHL earned a profit of 1.1 crore on sale of goods, out of which 10% is
the closing inventory of ASL which represents a 0.11 crore unrealized
profit, this should be reduced from both P/L and B/S of ASL
AHLs unsecured loans and ASLs loans and advances need to be
reduced by Rs. 1.00 crore
Dividend income and dividend receivable of AHL and Dividend
expense and dividend payable of ASL amounting to Rs. 1.20 Crore
needs to reduced
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Has AHL gained from investing in

ASL?

Sales increased
PAT increased
Net Worth increased
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Steps in Consolidation
1.

Minority Interest

2.

Determination of Goodwill/Capital reserve

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3. Identification of adjustments
Parents investment of Rs. 3.20 crore to be eliminated from parents
asset side, capital reserve of Rs. 3.75 crore to be added to consolidated
B/S in owners equity, equity of subsidiary of Rs. 9.93 crore to
eliminated from subsidiarys owners equity, new line item of minority
interest of Rs. 2.98 crore to be added to consolidated B/S in liability
KKLs gain on fixed assets of Rs. 0.75 crore to be removed and Rs. 0.75
crore reduced from fixed assets of MML
MMLs depreciation expense to be reduced by Rs. 0.06 (0.4/5 *0.75)
crore and Rs. 0.06 crore added to MMLs fixed asset
Dividend income and dividend receivable of KKL to be reduced by Rs.
0.98 (70% of 1.40) crore and dividend proposed and dividend payable
of MML to be reduced by Rs. 0.98 crore
Remove dividend proposed and dividend payable to the minority
interest of Rs. 0.42 (30% of 1.40) crore by MML and add 30% of PAT to
minority interest (also subtract any dividend tax to be borne by the
minority interest)
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Analysis

Sales increased
PAT increased
Net Worth increased
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IFRS Converged IND AS 27

vs AS-21
The converged IND AS 27 mandates the preparation of consolidated F/S
for the parent
The converged IND AS 27 widens the scope of control to the power to
govern the financing and operating policies to obtain benefits from its
activities
The converged IND AS 27 considers the effect of potential voting rights in
assessing control
The converged IND AS 27 requires the Minority Interest to be presented in
total equity separate from parent shareholders equity whereas the
existing standard requires it to presented separate from liabilities and
parent shareholders equity
The converged IND AS 27 requires the length of difference in reporting
dates not to be more than 3 months
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