Introductions:
Consolidated financial statements are prepared by the holding company and include all the financial statements of its subsidiary companies.
The Consolidated financial statements are the combination of the financial statements of the holding company as well as all the subsidiary companies. As we are aware that companies are doing the business through the multiple subsidiaries holding as well as they are having the chain of interrelated transactions and chain of holdings as well as the cross-holdings.
Due to this type of complex structure if all the company will report on a stand-alone basis there are chances that the cross-holding transactions, as well as the interrelated company transaction, will not be reported.
Hence it is must for all the holding company to reports all the transactions of the subsidiary when every it is required. The Financial Accosting standards board defines the consolidation of financial statement reporting as the reporting for the combined entity of the parent company as well as the subsidiary company.
The private company is having very limited requirements for the reporting of the financial statements but the reporting requirements of the public company are quite huge. The company has to reports according to the requirements of the FASB generally accepted accounting principle and if the companies are involved in the international business in that situation the requirement of the IFRS is playing a very important role and we have to prepare the reports as per the IFRS and the GAAP for the consolidated financial statements of the company.
We have to prepare the two sets of financial statements, one is for the balance sheets as well as the other is for the income statements. We have to do the consolidation based on the line by line items for all the items of the balance sheets as well as the incomes statements.
While preparing the consolidated financial statements we have to remove all the common transactions between the holding and the subsidiary companies.
For example, all the cost of the investments of the shares in the subsidiary companies must be removed as well as the share capital of the subsidiary must also be removed.
There are two types of subsidiary companies, one is known as fully owned subsidiary companies where the holding companies have invested 100 % in the subsidiary companies, or the other kind of the subsidiary companies where the holding company has held more than 51 % but less than the 100 %.
In this type of company, we need to find out the Minority Interest where the holding is less than 100 %. the minority interest is for the outside shareholder’s interest.
All the common account receivables and the account payables must be removed as well as all the investment and the common bonds must be removed. All the cross-holding transactions must be removed.
Consolidation worksheet.
A consolidation worksheet is a kind of tool which helps us for preparation of the consolidated financial statements of the parent and the subsidiary company. The process of preparation of the consolidated financial statement is a cumbersome task and we need some background working sheets for the preparation of the CFS. Hence we prepare the consolidated worksheet as a tool that helps us in the preparation of the consolidated financial statement.
The combination of the business takes place due to statutory merger or due to the improvement of the synergy in the business. Once the company is working under the holding and the subsidiary relationship in this situation the consolidation of the financial is statutory in some country and some country, it is obligatory. The business combination leads to a single combined entity for reporting purposes we need the consolidated worksheet as the simulation of the consolidation process on each reporting dates.
Answer :
Calculation
Ethan Ltd. Acquired on 1 July 2017 for $ 110,000 and at this date, the recorded dividend payable is $ 10,000, and the details of the equity capital, retained earnings as well as assets revaluation reserve is as follows :
The details are following :
Share capital – $ 54,000
Retained Earnings = $ 36,000
Assets revaluation surplus = $ 18,000
All the identifiable assets and the liabilities of Darren Ltd. Were recorded at the amounts equals to their fair value at the acquisition date except for the followings:
Particulars | Carrying Amount | Fair Value |
Inventories | $ 14000 | $ 16000 |
Machinery ( Cost $ 100,000) | $ 92,500 | $ 94,000 |
There is an increase in the fair value of the inventory = $ 2000
There is an increase in the fair value of the Machinery = $ 1500
Calculation of the Goodwill
Total value received from the company Darren Ltd.
Particulars | Amount |
Share capital | $ 54,000 |
Retained earnings | $ 36,000 |
Assets revaluation reserve | $ 18000 |
Fair Value increase in the Inventories | $ 2000 |
Fair Value increase in the Machinery | $ 1500 |
Total Value received at the time of acquisitions | $ 111500 |
Amount paid for the acquisition of Darren Ltd. | $ 1,10,000 |
Capital Reserve | $ 1500 |
Analysis
Consolidated worksheets are as follows as of 31/ 07/2018
Consolidated income statements
Particulars | Ethan Ltd. | Darren Ltd. | Debit | Credit | Consolidation Amount |
Profit Before tax | $ 120,000 | $ 12500 | $ 132500 | ||
Less: Income tax expenses | ( $ 56,000) | ( $ 4,200) | ( $ 60,200) | ||
Profit after tax for the year | $ 64,000 | $ 8,300 | $ 10,000 | $ 82,300 | |
Retained earnings | $ 80,000 | $ 36,000 | $ 36,000 | $ 80000 | |
Transferred to general reserve | ( $ 3000) | ( $ 3000) | |||
Retained earning as on 31/07/2018 | $ 144,000 | $ 5,300 | $ 10000 | $ 159,300 |
The consolidation worksheet for the Balance sheets is as follows as on 31/07/18
Particulars | Ethan Ltd. | Darren Ltd. | Debit | Credit | Consolidation Amount |
Share Capital | $ 360,000 | $ 54,000 | $ 54,000 | $ 360,000 | |
Retained earnings | $ 144,000 | $ 41300 | $ 36000 | $ 10000 | $ 159,300 |
General reserve | $ 10,000 | $ 3,000 | $ 13,000 | ||
Assets revaluation reserve | $ 18,500 | $ 20,000 | $ 18000 | $ 20500 | |
Capital Reserve | $ 1500 | $ 1500 | |||
Liabilities | $ 42,500 | $ 13,000 | $ 10000 | $ 45,500 | |
Total | $ 599,800 | ||||
Assets | |||||
Land | $ 160000 | $ 20000 | $ 180,000 | ||
Plant and machinery | $ 360000 | $ 125600 | $ 1500 | $ 4,87,100 | |
Less: Accumulated Depreciation | ( $ 110000) | ( $ 33000) | ( $ 143,000) | ||
Inventories | $ 55000 | $ 18700 | $ 2000 | $ 75,700 | |
Shares in Darren Ltd. | $ 110,000 | $ 110,000 | 0 | ||
Total | $ 599,800 |
Assumptions: The financial year and the rate of depreciation are same for the Ethan Ltd. As well as for the Darren Ltd…
Consolidated income statements for the year ended on 30/06/2018
Particulars | Amount – Consolidated |
Profit Before tax | $ 132500 |
Less: Income tax expenses | ( $ 60,200) |
Profit after tax for the year | $ 82,300 |
Retained earnings | $ 80000 |
Transferred to general reserve | ( $ 3000) |
Retained earnings as on 31/07/2018 | $ 159,300 |
Consolidated Balance sheet as at 30/06/2018
Particulars | Amount – Consolidated |
Share Capital | $ 360,000 |
Retained earnings | $ 159,300 |
General reserve | $ 13,000 |
Assets revaluation reserve | $ 20500 |
Capital Reserve | $ 1500 |
Liabilities | $ 45,500 |
Total | $ 599,800 |
Assets | |
Land | $ 180,000 |
Plant and machinery | $ 4,87,100 |
Less: Accumulated Depreciation | ( $ 143,000) |
Inventories | $ 75,700 |
Shares in Darren Ltd. | 0 |
Total | $ 599,800 |
Communication:
The consolidated financial statements have been prepared and this will be communicated to all the stakeholders for all the reporting as well as the corporate governance purpose.