Transcription
All right, good day. Welcome to part two of our lesson on the consolidated statement of financial position. Today, we are going to continue from where we left off by solving a question with a different scenario. As we move forward, we advance towards full understanding.
Now, what I'm going to do now is that I'm going to solve a question. In fact, it's the same question we solved in part one, but I'm going to make some slight modifications by making it a partly owned subsidiary. Now, in the first video, we assumed that it was a fully owned subsidiary and it was consolidated on the date of acquisition. Now, in this one, it's the same question that I'm modifying to make it a partly owned subsidiary, but we are still consolidating on the date of acquisition. And take note that the moment you are consolidating on the date of acquisition, there is nothing like post-acquisition profit. So, group income surplus will always be the same as that of the parent company. Just get that. The only time group profit becomes applause is when the profit of the subsidiary will be added is when it says post-acquisition date consolidation. So, without wasting my time, let's look at the question I'm talking about and then let's try and understand that.
So, P Limited acquired 15 million shares in S Limited on 31st December 2018. S Limited is capitalized with 20 million shares. The separate financial statements of the two companies on 31st December 2018 are as follows. So, this is the same statement of financial position we used in the previous one. We have non-current assets to be 80,000 for P Limited and 25,000 for S. In this case, P means parent, S means subsidiary, any way you want to take it. Then there is investment in S Limited, 34,000. Then we have the net current assets to be 6,000 for parent, 3,000 for subsidiary, giving us 120,000 and 28,000 dollar cities respectively. And then we have the stated capital, 90,000 and 20,000, and also we have the income surplus balances to be 30,000 for the parent and 8,000 for the subsidiary. You are required to prepare a consolidated statement of financial position for P Limited Group as at 31st December 2018.
All right, so we are already familiar with this statement of financial position because I used it in the first video. Now, what we are doing now is that we are going to prepare the same consolidated statement of financial position but with a slight modification because now the group structure is going to change. Now, we are told, let's assume that we are solving this question, you don't know what to do. You see, most of the time, people go to the exam or meet consolidation, they don't even know where to start from. And I'm telling you that always start with the group structure, then you come to the goodwill on acquisition, and then you move on.
Now, we are told in this question that P acquired 15 million shares in S Limited. Then S Limited is, we are told that it is capitalized with 20 million shares. So, if someone is buying 15 million out of 20 million shares, then it's not 100% acquisition. So, this is not a fully owned subsidiary. This would be a partly owned subsidiary on a part of the parent. So, P owns just a part, 15 million out of 20 million. And we have to find the percentages for that. So, that will bring us to our first working, which I call the group structure.
So, workings.
Working one: Group structure.
So, we see the parent's holding will be 15 million over 20 million shares times 100, and that is going to give us 75%. So, 15 million over 20 million times 100 gives us 75. So, the parent holds 75% of the subsidiary's net assets. That is the meaning. And if it is so, then the rest of 25% belongs to non-controlling interest or NCI. NCI owns 25%. So, that is how to go by the group structure. You show workings how you ascertain the parent's percentage: the shares acquired over the total shares capitalized times 100, and that gives you the percentage. So, this is working one, group structure. I'm sure the understanding is coming up.
The second working. In fact, I have told you, they are always go by that. Once you are done with this, come to the goodwill on acquisition. When you master the steps I'm giving you, you have no problem.
Goodwill on acquisition.
So, on acquisition date, okay, we look at the purchase consideration. Purchase consideration is 34,000 as per the question. And then we less fair value of the net assets taking over. And listen, further, the net assets here, we are going to list the items of equity, but all of them must be at acquisition date. That is why goodwill on acquisition, the net assets you are using for your goodwill must be all on acquisition date. That is why on in the post-acquisition date consolidation, we will be careful with the income surplus. We bring, we always have to bring the one that was there on the date of acquisition. That is why the heading is goodwill on acquisition, not on reporting date, and so on.
On acquisition, we are fortunate because with this question, we are doing consolidation on the date of acquisition. So, the stated capital on the date of acquisition for the subsidiary is 20,000. The income surplus of the subsidiary on the date of acquisition, 8,000. So, when we add that, we have 28,000. Now, in the first video, we would have brought it here. Now, watch this. This 28,000, it's not what the parent is buying. The parent is buying. If you add this, it's 28,000, we know. But the parent is only acquiring 75% of these two. Okay? So, if you add this and you have 28,000, you still have to find 75% of 28,000 before you show that as the net asset being acquired. Listen, they are paying 34,000 for their net assets, but the 34,000 they are paying, it's not for 28,000 because another person who is 25%. So, they are buying only 75% of these two for 34,000. So, the goodwill will be bigger than what you are expecting. That is the meaning.
Now, you could have just said, when you got here, you could have done: stated capital, 75% of 20,000, then you put it there. Income surplus or retained earnings, 75%, and you would have gotten your figure straight. And taken out another way is to add it up this way and say 28,000. So, I'm not bringing it to the right straight away because all of them does not belong to the parent. This is what we call a partly owned subsidiary. And so, you now find 75% of these total net assets, 28,000, and that is going to give us 21,000. So, in other words, even though the total net asset is 28,000, the subsidiary and the parent only have 75%. And therefore, they are paying 34,000 for only 21,000 net assets. And that means they are paying more goodwill than we are thinking they are. So, the goodwill value will now be 13,000. It will no more be 6,000. So, that is your goodwill.
So, you see that there is a difference between a fully owned subsidiary and a partly owned subsidiary in the calculation of goodwill. If it is a partly owned subsidiary, make sure that the net asset you have found, a percentage of it. You could have done straight away, 75% of this, put it in brackets here, 75% or not put this in brackets here, you would have gotten 15,000 here and 6,000 here, and that will still be 21,000, which you could have subtracted. But the most important thing is that when it is a partly owned subsidiary, you have to calculate goodwill for their parent, except going forward, they will give us a fair value of NCI, which we will adapt, which I will also explain. I don't want to run ahead of myself, but for now, just understand this and understand it very well. So, these are the basics. So, that is the value of goodwill.
Now, okay, then the third working that we have to do is to find the group income surplus or the consolidated retained earnings, a group retained earnings. And I've told you that will always be the income surplus of the parent company on the reporting date, which is 30,000. So, we have that in the question as 30,000. You can see on your screen. And then after the 30,000, if there is any post-acquisition profit of the subsidiary, then the group will have a share. But since we are consolidating on the same date of acquisition, there is no post-acquisition profit. So, the parent company's income surplus becomes the total group income surplus.
And then finally, we look at the non-controlling interest value of non-controlling interest. Now, it's very simple. The value of non-controlling interest will be 25% because they have 25%. So, it will be 25% of their stated capital and the income surplus, that is the equity items or the net assets. And so, 25% of the two. So, when we come here, we'll see with the stated capital, they have 25% of 20,000, and that gives them 5,000. And then with the income surplus, if there was any other item of equity, we would have found 25% for them because they own 25% of their equity shares. So, that is, um, of 8,000. And that is going to give us 2,000. So, when we add the two, our non-controlling interest total value will be 7,000.
So, this is the big four. Always go by the group structure, goodwill on acquisition, the group income surplus, and the non-controlling interest. On acquisition date, these two, sorry, are reporting date. This is at acquisition date, and these two are on reporting dates. And once you are done with this, then you can proceed to prepare your consolidated statement of financial position.
Okay, and so we are preparing the consolidated statement of financial position. For P Group Limited, we say consolidated statement of financial position as at 31st December 2018. So, we bring our currency sign and then we'll begin by adding across. So, from the question, we can see that for the non-current assets, it's 80,000 and 25,000. So, we add that. Non-current assets, 80,000 plus 25,000, that gives us 105,000. Then we know that the investment in S Limited is not appearing again. So, it is being replaced by goodwill. And goodwill is from working two. Our goodwill figure is now 13,000. Then we can have that we are the net current assets, which is the working capital for the parent is 6,000, for the subsidiary is 3,000. So, that gives us a total of 9,000 Ghana cities. And therefore, our total or our total net assets to be 127,000. That is the total.
Then we look at the equity component. I told you that the stated capital, no matter what, should be that of the parent company alone in the consolidated statement of financial position. So, the stated capital of the parent company is 90,000. Then we can bring our group income surplus. In this case, it is 30,000 because there was no post-acquisition profit to check. So, when we add these two, it gives us 120,000 for the group's equity. Now, we can add the non-controlling interest value. The group income surplus is working three, and the non-controlling interest is from working four. So, when we add that, that is 7,000 Ghana cities. So, we add that, we have a total of 127,000, which is consistent with the assets.
So, ladies and gentlemen, this is how to handle a partly owned subsidiary on the date of acquisition when you are consolidating on the date of acquisition. I'm sure your understanding is coming up. We are looking at the next question, which is still a modification of this same question, but in our next question, we are going to look at a partly owned subsidiary consolidated later than the date of acquisition. So, this is going to be a post-acquisition date consolidation. Ladies and gentlemen, usually that is what you're going to get in the exam. That no one is going to give you 100% acquisition, and it's not likely you're going to consolidate on the date of acquisition, but I'm using that as a basis to help you understand it. So, in the next one, which is more important than this, we are going to look at one, a partly owned subsidiary, two, post-acquisition profit is going to come in now. So, we are going to consolidate after that. So, you see something like you bought that in 2019, by your accounts, you bought the company in 2019, but you are consolidating somewhere in 2022. Then that is where three-year period has come. We have to look at the profit that has been earned after the three-year period and then give the share of the group to them. So, without wasting my time, I'm going to go on to the next question and then we are going to solve it to understand as well.
Okay, so let's take this question together. P Limited acquired 15 million FPT shares in S Limited at a cost of 34,000 Ghana cities. S Limited is capitalized with 20 million equity shares at one Ghana city per share as at the date of acquisition, 1st January 2016. The income surplus balance of S Limited was 2,000 Ghana cities. The individual statement of financial positions of the two companies are as at 31st December 2019 is given as follows. So, it is the same statement of financial position that you have seen and seen over again, but we are going to use that with different, but we are going to use that with different scenarios. So, we have the PP, property, plant, and equipment to be 80,000 and 25,000 for parent and subsidiary. We have investments in subsidiary, the same things that you know. In fact, nothing has changed with the statement of financial position. So, you are required to prepare consolidated statements of financial position for P Limited Group as at 31st December 2019.
Now, this is very, very interesting. We are using the same statement of financial position for the two companies, but the scenarios have changed. We are told P Limited acquired 15 million shares and out of 20 million shares that is being capitalized by S Limited. So, that is the same as what we knew for the group structure. But we are also told something very important that as at the date, no, they bought it in 2016. So, the date of acquisition has changed. And it says that as at the date of acquisition, which is 2016, the income surplus balance of S Limited was 2,000 Ghana cities. That is another clause that has been reintroduced, which was not in our previous ones. We are moving forward in understanding the income surplus balance after the date of acquisition was 2,000. That is what we call the pre-acquisition profit. In other words, at the date of acquisition, the income surplus of the company, on the date of acquisition, was 2,000. So, it means that that one, the parent company has no share in that 2,000 because that one was there on the date of acquisition. But that is what we are going to use for our goodwill calculation because goodwill should be on acquisition date. So, just take notes.
Then it says that the individual statement of financial positions of the two companies are as at 31st December 2019. That is what makes you know that consolidation did not happen. This financial statement that we have been given is as at 31st December 2019, but the business was acquired in 2016. So, three years has come. Even if it's a year, there is a post-acquisition profit. And what we are trying to say is that on the date of acquisition, there was a 2,000 Ghana cities income surplus balance, but now in this new financial statement, which is after three years of acquisition, let's look at it carefully. Sorry, this is even after four years of acquisition because it was bought on 1st January 2016, and we are now in 31st December 2019. Make no mistake, it says four years because the whole of 2016, 17, 18, and the whole of 2019, making it a four-year period.
Now, we can see that the income surplus balance of S Limited here is now 8,000. But at the date of acquisition, it was 2,000. After four years, look at the income surplus balance that we have on the statement of financial position as at 2019 for S Limited, it is 8,000 Ghana cities. What does it tell us? It tells us that after acquisition, within this four-year period, the group owner, the subsidiary, has worked under the ownership of the majority ownership of the parent and has earned 6,000 additional profits and added to the income surplus. Now, what does it mean? It means that after the date of acquisition, the subsidiary, within those four-year period, has been able to add 6,000 more. Because if you are buying a company at a time, profit is 2,000, income surplus is profit is 2,000, and now it's 8,000. How much have you added? So, it means that post-acquisition profit is the difference, and the difference is 6,000. So, they have added, the subsidiary has worked and added 6,000 since the day it was bought.
Now, listen. It means that the parent company has no share in the original 2,000, still yes, but they have a share in this 6,000. They don't, you can't say they have a share in all the 8,000 because inside this 8,000, they saw the 2,000 you don't have a share. So, it is only the difference, the post-acquisition income surplus, that is where they have a share of their profits. So, they have a share of 6,000, and the share will be the 75% that they hold of that 6,000. So, that the other share goes to the non-controlling interest. It's very, very simple. So, that is what we mean by that. And we are going to use the 2,000 to calculate goodwill. So, let's move on. This is the only addition that I have brought into this question. And so, we are going to solve it again and then look at how it's going to go.
So, we begin with our workings. We start with our group structure. The group structure, the parent company acquired 15 million of 20 million shares, and that gives us 75% holding. So, non-controlling interest, NCI, will hold 25%, giving us a total of 100%, which is always obvious. So, the group structure will be done.
The second one is the goodwill on acquisition. So, you see that my big four will never fail you.
Goodwill on acquisition.
The purchase consideration per the question is 34,000. Then we less fair value of the net assets, which is in this case, the equity items. So, stated capital, just like I told you, instead of combining the 28 and finally 75%, you can just see 75% of 20,000, which is the stated capital. I'm trying to make it more easier for you. I'm giving you an alternative way. So, you put that in brackets. Then the income surplus also is 75%. The income surplus balance as per the question. Now, take notes, which income surplus are we using for goodwill calculation? Goodwill is on acquisition. So, we cannot use the 8,000. On acquisition, income surplus was 2,000, according to the question. It says that on after that, the income surplus balance of S Limited was 2,000. So, it is the 2,000 you are going to use for your goodwill calculation, not the, what we call it, the 8,000. So, this is the change that will come. The moment you are consolidating after the date of acquisition, be mindful that you are not picking the current income surplus for your goodwill. In the previous ones, we picked the 8,000 because it was on the same day, so that was their pre-acquisition. But here, we need to factor only the 2,000, not the 8,000. So, 75% of 20,000 is what we are going to put here, and that is going to give us 15,000. In brackets.
So, listen, you could have also done it like the previous one. Stated capital, put your 20,000. Income surplus, put your 2,000, to give you 22,000. And then you could have found a 75% of that. So, this is 65. So, it means that our goodwill calculation is going to be 17,500 for goodwill. Now, what I want you to be mindful of is the fact that we do not use the current income surplus for this. 8,000 is the income surplus balance on the reporting date. This is income surplus at acquisition date. Now, watch the goodwill is on acquisition. This is what it makes sense. That is why I told you that the acquisition that I'm bringing is not for bringing sick. It should give you an idea that the goodwill is on acquisition, therefore, you bring the pre-acquisition profit.
Now, another way you could have done it is that, let's say purchase consideration, as we have done, 34,000. Then you see, less the equity or the net assets. You see, stated capital, 20,000. Then income surplus or retained earnings, 2,000. Then you have 22,000. Then you take 75% of 22,000, and that will give us 16,500. So, when you take that out, you still have 17,500. Whichever value you want to calculate the goodwill, you are going to get the same thing. You see that you are applying the percentages directly on the figures to get this, or you can add them and then strike your percentage to get a 65, and still have your goodwill of 17,500. But the most important thing I want you to learn from this new thing is that you need the income surplus balance or the retained earnings at acquisition date to do the goodwill. That is what you need. And you need the post-acquisition for the group income surplus. So, I'm done with the goodwill calculation.
Okay, so after we are done with the first two out of the big four, we have two more big boys to deal with. So, the third one is the group income surplus or the consolidated retained earnings. So, the group income surplus, now this time, we all know that it will always be that of the parent company, after the parent company 100%, 30,000 income surplus, plus their share in their post-acquisition profit. And this is how to get the post-acquisition profit. That is what I was explaining to you over here, that on the face of the financial statement, the income surplus balance is 8,000. That is at reporting date. Then at acquisition date, it was 2,000. So, it means that since the day this company was being, was bought, they have added a profit of 6,000. This is what we call post-acquisition profit. And this post-acquisition profit that the group has a share because NCI is not part of the group. So, the group, the P Limited Group, has a share, and their shareholding is 75%. And so, you have to calculate share of post-acquisition profits, and that is going to be 75% of 6,000. And 75% of 6,000 will be 4,500. So, we add that to the parent company's income surplus, and we have 34,500 as a value of our group income surplus. I'm sure it is really, really making sense to you.
Okay, so this is it. Now, let me say this before I move on. In as much as getting the group post-acquisition profit is very easy by comparing the difference between the pre-acquisition income surplus and their post-acquisition, after this one, in the next video, I'm going to teach you something called net asset list. And we are going to use the net asset list to find this. That is more accurate. In some questions, it's not all questions. This may be accurate. Some questions may bring in other tricks, but the net asset list will always be accurate in finding your post-acquisition profit. But for now, let us assume that is just the difference between these two. And that most of the time is the difference between the two, except something triggers a change, which I'm going to show you. That is, other items of equity might also go up, which will be added up to the because here it's only profit that is going down by 6,000. So, if you have a revaluation surplus at the date of acquisition to be 200, and then at the date of, um, consolidation or reporting date, it's 500, then it means that 300 has been added. That is also a post-acquisition profit, which should be added to this before we share. So, that one will be ascertained with the net asset list. For now, I'm using the income surplus to make it more understandable, but I'm sure it will not be confusing as we move on. So, please, this is how to get the group income surplus.
And then finally, we look for the non-controlling interest at reporting date. The value of non-controlling interest at reporting date. Now, we have always known that it is the share of their stated capital and the share of the income surplus. But now, as we are growing in consolidation, we have come to understand the fact that there is something called pre-acquisition income surplus and post-acquisition. So, now, as for the non-controlling interest, they have a share both in their pre-acquisition and the post. Take note, their non-controlling interest is not like the parent that will have a share only in their post-acquisition. Non-controlling interest have a share in both their pre and the post. So, look at how it's going to be. The stated capital, we have 25%, they have 25% of the 20,000 of the subsidiary, so giving them 5,000. Then because they have a share both in their post and their pre, someone can, you can decide to just say you are adding the two to make it one. But I want to split it and I'll use it to explain something to you. So, their share in pre-acquisition profit will be 25% of 2,000, which is going to give us 500. 25% of 2,000 gives us 500. Then also, they have a share in the post-acquisition profit. Now, we all know that the pre-acquisition profit is 2,000, but the post-acquisition is 6,000, not 8,000. 8,000 is a combination of the two. So, share in the post-acquisition will be 25% of 6,000, and 25% of 6,000 will give 1,500. 1,500. So, when we add the two, our non-controlling interest total value will be 7,000.
Now, don't be confused about this. I'm going to use the previous approach to also do it, then afterwards, I'll tell you something very important for the next ones that we are going to solve. So, look at an alternative way you could have presented this for the NCI. You could have brought your stated capital, and this is what you have known all this while, 20,000, 25% of 20,000, which is the 5,000. Then you combine, because they are having a share in both post and pre. So, why are we not combining the two? So, you can just say share of income surplus, which will be 25% of 8,000. This time, we are combining 2,000 and 6,000. So, we are picking the 8,000, and that is going to give us 2,000. And when we add, we still have the same 7,000. So, whether you are going by this way or that way, it's going to be the same.
But and it's a big but, going forward, we are going to face in the next video, we are going to see something called fair value of NCI. Now, the question is going to give us a fair value for a non-controlling interest, and the fair value for non-controlling interest will be given at acquisition date. And if it is given at acquisition date, then it's going to replace these two, the first two, stated capital, the share of the stated capital, and then the share of the pre-acquisition profit. These two will be replaced by a value called a fair value of non-controlling interest. It means that the share of the post-acquisition profit is not part of the value of NCI. And therefore, our new way that we are going to calculate the non-controlling interest is going to be the fair value of NCI plus their share of post-acquisition profit. The fair value of NCI is replacing the first two, that is the stated capital at acquisition, which normally doesn't change, and their share in the pre-acquisition profit. These two is what is going to be replaced by the fair value of NCI. And therefore, if you are giving, for example, fair value of NCI to be, let's say, 5,005. Let's say, uh-huh. So, in this case, they wouldn't have, they would have given you fair value of NCI to be 5,005. So, what you would have done is that in your calculation of NCI, you say that you have fair value to be 5,005, then you add share of post-acquisition profit, which would have been 1,500 in this case, then you get your 7,000. So, you see that this 500 will be replaced by something called a fair value. In the subsequent videos, where we start looking at valuation of, evaluation of NCI, and it means that if you are always used to sharing it completely, you may pick the fair value and still come and share everything. When you share everything, don't forget that the pre-acquisition is also in there, and that is already inside the fair value. So, you don't need it. So, anytime there is a fair value, you only share the post-acquisition for the non-controlling interest. And that is why I believe that even though they don't give you the fair value of NCI, you still need to separate their share of their pre-acquisition profit from their share of their post-acquisition profit. So, that in a question where they have given you the fair value of NCI, the fair value of NCI will now replace the stated capital and the pre-acquisition. But it cannot replace the share of the post-acquisition because the fair value of NCI will be given at the date of acquisition. And at acquisition date, once you have your fair value at acquisition date, you add the post, share of the post-acquisition profit to give you the value of NCI at reporting date. Not at acquisition. This, I'm sure your understanding has been enlightened from what I've explained. So, yes, we are going to prepare the consolidation, but this is the workings that we have done. So, we can now move on to prepare a consolidated statement of financial position.
All right, so now we can prepare for P Limited Group consolidated statement of financial position as at 31st December 2019. This is the reporting date. So, we begin with non-current assets, and we have PP, property, plant, and equipment. So, in this question, the property, plant, and equipment for the parent is 80,000, subsidiary is 25,000. So, when we add the two, we have 105,000. And then we bring our goodwill. We know goodwill always replaces the cost of investment. In fact, in this question, the cost of investment was even mentioned in the introduction, it's the same as the investment. So, goodwill, working two, the value of our goodwill is 17,500. And then we bring our working capital, which is the net current assets. And for the parent is 6,000, for the subsidiary is 3,000. So, when we add the two, we have 9,000. So, that we can now add up to get our total net assets, which is going to be 131,500. 131,500.
Then we come to the equity, which is stated capital first. And as for that one, we all know stated capital will always be that of the parent company alone. So, we have that in the question to be 90,000. And then we can add our group income surplus. So, that will be the equity of the group. So, group income surplus, according to the third working, is 34,500. So, when we add that, we have 124,500. Now, we can add the value of non-controlling interest. And the value of non-controlling interest is 7,000, according to the working we just did. And so, that gives us 131,500. So, it has balanced as well.
So, ladies and gentlemen, consolidation made easy is only found on this channel. Now, listen, I'm sure up to this point, we have achieved a lot of understanding with the big four. Now, going forward, this will bring us to the actual end of this part two of this lesson. Now, in part three, which is the next video, we are going to talk about so many things like the forms of purchase consideration. We are going to look at different forms of purchase consideration. They are also going to look at a situation where there is fair value for NCI. And then later, we can even look at impairment of goodwill. After we have calculated goodwill, it will be impaired, how it will be treated. And that is what we are going to look at. I will look at a complex question. And afterwards, in the next video again, we are going to look at the intra-group adjustment, and then we will finalize on the consolidated statement of financial position. Remember to subscribe to this channel if you are new. Share this video and let others also have the benefit. Until we meet again another time for part three, it is bye for now.