Consolidated Statement of Profit or Loss Notes

Chapter Learning Objectives

  • Prepare a consolidated statement of profit or loss for a simple group.
  • Account for non-controlling interests in intra-group trading.
  • Prepare consolidated statements reflecting acquisitions in the period and goodwill impairment.
  • Prepare consolidated statements of profit or loss and other comprehensive income.

Overview of Consolidated Profit or Loss

  • The consolidated profit or loss statement and other comprehensive income involve:
    • Consolidation workings.
    • Dividends.
    • Intra-group trading.
    • Mid-year acquisitions.
  • Key components include sales, interest, and transfers of non-current assets.

Principles of Consolidated Statement of Profit or Loss

  • Reflects profit generated by both Parent (P) and Subsidiary (S).
  • Includes:
    • Parent's and Subsidiary's income and expenses.
    • Profit split according to ownership:
    • Amount for parent shareholders.
    • Amount for non-controlling interests.

Mechanics of Consolidation

  1. Standard Approach Used:
    • Group structure diagram.
    • Pro forma statement combining P and S results.
    • Work for adjustments (PUP, fair value depreciation).
    • Calculate non-controlling interest (NCI).

Non-controlling Interest in Statement of Profit or Loss

  • Calculation involves:
    • Subsidiary's profit after tax.
    • Adjustment for:
    • Fair value depreciation.
    • PUP (where subsidiary is seller).
    • Impairments.
  • Resulting NCI calculated as adjusted subsidiary profit multiplied by NCI percentage.

Intra-group Trading Effects: Sales & Purchases

  • Eliminate intra-group trading from consolidated profit or loss:
    • Sales Revenue:
      ext{Consolidated Sales Revenue} = P's Revenue + S's Revenue - ext{Intra-group Sales}
    • Cost of Sales (COS):
      ext{Consolidated COS} = P's COS + S's COS - ext{Intra-group Sales}

Intra-group Trading Effects: Interest

  • Eliminate interest received and paid on intra-group loans:
    • Adjust investment income and finance costs.
    • In case of mid-year acquisition, consider only post-acquisition finance costs.

Intra-group Trading Effects: Dividends

  • Dividends paid by S to P must be removed from consolidated profit:
    • Only dividends paid by P to its shareholders appear in financial statements.

Unrealised Profit in Inventory

  • If goods sold intra-group are in inventory, adjust to reflect cost to the group:
    • Increase cost of sales to eliminate unrealised profit.

Transfer of Non-current Assets

  • Adjustments needed when one group company sells a non-current asset to another:
    • Remove any profit from the seller's profit.
    • Adjust depreciation for the buyer based on the cost to the group.

Adjustments for Goodwill Impairment

  • Impairment is charged to the consolidated profit statement:
    • Usually recorded in operating expenses.
    • Fair value methods also affect NCI's share of profit.

Fair Values Adjustment

  • If non-current assets are revalued for goodwill calculation,:
    • Use fair value for depreciation in consolidated statements.
    • Calculate extra depreciation charged to an appropriate category (usually COS).

Mid-year Acquisitions

  • Only consolidate results from the acquisition date:
    • Identify net assets of subsidiary at acquisition.
    • Time-apportion results evenly to derive correct earnings.

Chapter Conclusion on Consolidated Statements

  • Consolidated profit or loss is foundational for further comprehensive income reporting.
  • Other comprehensive income may include:
    • Revaluation gains/losses.
    • Fair value through OCI gains/losses.