Preparing Simple Consolidated Financial Statements
Control is the test
A subsidiary is an entity controlled by the parent: power over the investee, exposure to variable returns, and the ability to use that power to affect those returns (IFRS 10). Control, not the percentage holding, decides consolidation - a 45% holding with board control can still be a subsidiary, and a 60% holding without power may not be.
The group statement of financial position combines parent and subsidiary assets and liabilities line by line, then:
- removes the cost of investment against the parent's share of net assets;
- recognises goodwill = consideration + NCI + previously held interest − fair value of net assets acquired;
- recognises non-controlling interest, at its proportionate share of net assets or at fair value;
- eliminates intra-group balances, loans, interest and dividends;
- removes unrealised profit on inventory still held, adjusting the seller's reserves;
- adjusts for fair value uplifts and the extra depreciation they create.
Group retained earnings = the parent's reserves + the parent's share of the subsidiary's post-acquisition reserves, adjusted for unrealised profit and goodwill impairment attributable to the parent.
Traps: pre-acquisition reserves are not group reserves; NCI is presented within equity; a fair value uplift creates extra depreciation; intra-group sales are removed from both revenue and purchases.
Worked example: P buys 80% of S for $720,000 when S's net assets were $800,000. NCI at proportionate share = 20% × $800,000 = $160,000. Goodwill = 720,000 + 160,000 − 800,000 = $80,000.
Rule of thumb: always compute net assets at acquisition and at the reporting date; the difference is post-acquisition, and the parent takes its share.