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A guide to
Consolidated accounts
A SIMPLE GUIDE TO CONSOLIDATED ACCOUNTS
This is a basic guide prepared by the Technical Advisory service for members and their clients.
It is an introduction only and should not be used as a defnitive guide, since individual
circumstances may vary. Specifc advice should be obtained, where necessary.
Requirement to Prepare
The Companies Act 2! gives e"emption from the re#uirement to prepare group accounts to
small groups but not medium si$ed groups. %revious legislation permitted both small and
medium si$ed groups e"emption from preparing consolidated accounts. Therefore for
accounting periods beginning on or after ! April 2& small groups will still not be re#uired to
produce consolidated accounts but medium si$ed groups will.
'nder Companies Act 2! section ()), consolidated fnancial statements have only to be
prepared where, at the end of a fnancial year, an underta*ing is a parent company. Therefore,
parent underta*ings that are not companies are not re#uired by the Act to prepare
consolidated fnancial statements, but they are re#uired to do so in certain circumstances by
+,S 2. If the statutory framewor* under which an underta*ing is established re#uires the
underta*ing to prepare consolidated fnancial statements and to prepare fnancial statements
that give a true and fair view -and therefore comply with +,S 2. the partnership would be
re#uired to prepare consolidated fnancial statements in accordance with +,S 2. Also entities
such as partnerships could be subsidiaries and therefore may be re#uired to be included in
group accounts.
The Companies Acts apply to parent underta*ings registered in the '/. 0owever if a '/ parent
underta*ing has subsidiary underta*ings overseas those subsidiaries would need to be
included in the consolidated fnancial statements.
+or accounting periods beginning on or after ! April 2& small companies and small groups
need to satisfy the following conditions for two out of the last three years1
2. A small company must meet at least two of the following conditions1
-a. annual turnover must be not more than 3!.4m5
-b. the balance sheet total must be not more than 3(.2!m5
-c. the average number of employees must be not more than 4.
2
2
2. To #ualify as small, a group must meet at least two of the following conditions1
-a. aggregate turnover must be not more than 3!.4m net -or 36.& m gross.5
-b. the aggregate balance sheet total must not be more than 3(.2!m net -or 3(.)m
gross.5 and
-c. the aggregate average number of employees must be not more than 4.
There are also various criteria whereby companies and groups may become ineligible to be
small -see section (&7 Companies Act 2!. or where a company is e"empt from the
re#uirement to prepare group accounts for e"ample, sub8ect to conditions, if it is itself a
subsidiary underta*ing.
A parent company is e"empt from the re#uirement to prepare group accounts if under section
74 CA 2! all of its subsidiary underta*ings could be e"cluded from consolidation.
Section 74 CA 2! allows a subsidiary underta*ing to be e"cluded from consolidation if its
inclusion is not material for the purpose of giving a true and fair view. 0owever, two or more
underta*ings may be e"cluded only if they are not material ta*en together.
A subsidiary underta*ing may be e"cluded from consolidation where1
-a. severe long9term restrictions substantially hinder the e"ercise of the rights of the
parent company over the assets or management of that underta*ing, or
-b. the information necessary for the preparation of group accounts cannot be obtained
without disproportionate e"pense or undue delay, or
-c. the interest of the parent company is held e"clusively with a view to subse#uent
resale.
An :underta*ing; is defned in section 22!2 of the Companies Act 2! as1
a body corporate or partnership, or
an unincorporated association carrying on a trade or business, with or without a view to
proft.
Accounts Disclosure
Section 77 CA 2! re#uires Companies Act group accounts to include a consolidated balance
sheet and consolidated proft and loss account with additional information contained in the
notes. The accounts must give a true and fair view. If in special circumstances compliance with
the regulations and any other provision made by or under the CA 2! is inconsistent with the
re#uirement to give a true and fair view, the directors must depart from that provision to the
e"tent necessary to give a true and fair view. %articulars of any departure, the reason for it and
its e<ect must be given in a note to the accounts.
Section 7& CA 2! allows the parent company=s individual proft and loss account to be
omitted from the accounts, if the company prepares group accounts and if the accounts
disclose that this e"emption has been applied. The company=s proft or loss for the fnancial
year must be approved by the directors in accordance with section 727 -2..
Ho to Prepare
Share of ownership or the dominant in>uence approach will determine whether or not an entity
is a subsidiary underta*ing. 'nderta*ings other than limited companies are consolidated in a
similar fashion to those of limited companies. ?ther entities such as associates and 8oint
ventures that are not subsidiaries are not consolidated, instead they are accounted for
according to the rules contained in +,S ) or the +,SS@.
0aving established the number of underta*ings that re#uire inclusion in the consolidated
fnancial statements, it is important to identify the ad8ustments that are re#uired, these include
the following1
(
2. Inter group transactions and balances are cancelled.
2. Any profts resulting from inter group transactions are eliminated from the consolidated
accounts. -+or e"ample this would include f"ed assets, stoc*s, investments etc.
transferred within the group..
(. Any profts resulting from inter group transactions are eliminated from the consolidated
accounts. -+or e"ample this would include f"ed assets, stoc*s, investments etc.
transferred within the group..
7. Cost of investment in subsidiary is compared to fair value of assets and liabilities at the
date the shares in the subsidiary were ac#uired and the di<erence is goodwill on
consolidation. The pre9ac#uisition reserves of the subsidiary are eliminated from the
consolidated accounts.
4. ?nly post9ac#uisition profts of the subsidiary should be included in the consolidated
reserves of the group.
!. If a subsidiary pays a dividend out of pre9ac#uisition profts the parent deducts the
dividend received from the cost of investment in the subsidiary. This means the dividend
received by the parent is not distributable to its shareholders. Ahereas if the subsidiary
pays a dividend out of post ac#uisition profts it is treated as investment income by the
parent and will be added to distributable reserves.
7. 0owever in some cases the dividend has to be apportioned between the pre9 and post9
ac#uisition period, for which there are two methods1
a. time apportionment
b. ta*e the pre9ac#uisition dividend to be the portion of the dividend that cannot have
been paid out of post9ac#uisition reserves -sometimes referred to as the :modern;
treatment..
&. If f"ed assets are transferred from one group entity to another, ad8ustments may be
re#uired so that any proft or loss arising on the transfer is eliminated and the
depreciation charge is ad8usted so that it is based on the cost of the asset to the group
or its valuation -if a valuation policy is adopted..
Minorit! interest
Binority interest ad8ustments occurs when the parent does not own 2C of the subsidiary.
In the consolidated proft and loss account minority interest is that proportion of the results for
the year that relate to the minority holdings. The :minority interest; is disclosed on the face of
the consolidated proft and loss account under :%roft on ordinary activities after ta"ation;.
In the consolidated balance sheet, 2C of the subsidiary=s assets and liabilities, after
eliminating intergroup balances, are brought in together with a liability to represent that part of
the net assets which are controlled but not owned by the parent.
Goo"ill in consoli"ate" #nancial statements
Doodwill arises where an underta*ing is purchased for more than the fair value of its net
assets. The goodwill normally has a limited useful economic life and should be amortised on a
systematic basis over that life in accordance with +,S 2. It would also be sub8ect to
impairment as referred to in +,S 22.
Ne$ati%e $oo"ill in consoli"ate" #nancial statements
Eegative goodwill arises where an entity is purchased for less than the fair value of its net
assets. +,S 2 re#uires the following treatment of negative goodwill1
It should be separately disclosed on the face of the balance sheet, immediately below the
goodwill heading and followed by a subtotal showing the net amount of positive or negative
goodwill.
7
Eegative goodwill up to the fair values of the non9monetary assets, for e"ample f"ed assets,
ac#uired should be recognised in the proft and loss account in the periods in which the non9
monetary assets are recovered, whether through depreciation or sale.
Any negative goodwill in e"cess of the fair values of the non9monetary assets ac#uired should
be recognised in the proft and loss account in the periods where the beneft is e"pected to be
felt.
Mer$er Accountin$
Ahen accounting for a subsidiary in consolidated accounts the two methods that can be used
are ac#uisition accounting and merger accounting. This factsheet e"plains the basics of
ac#uisition accounting, however merger accounting can be used when the conditions of +,S !
are met.
Accountin$ &or associates
Associate is defned in +,S ) as :an entity -other than a subsidiary. in which another entity -the
investor. has a participating interest and over whose operating and fnancial policies the
investor e"ercises a signifcant in>uence.;
+,S ) also defnes the phrases :participating interest; and :e"ercise of signifcant in>uence;.
@#uity accounting in the consolidated accounts is used for1
a. associates under +,S )
b. e"clusion of subsidiaries from consolidation under +,S 2
c. 8oint ventures under +,S ) -with additional disclosures.
'nder the e#uity method the investment is initially accounted for at cost. The carrying amount
of the investment is ad8usted in each period by the investor=s share of the results of its investee
less any amortisation or write9o< for goodwill.
In the investor=s consolidated proft and loss account the investor=s share of its associates=
operating result should be included immediately after group operating result. +rom the level of
proft before ta", the investor=s share of the relevant amounts for associates should be included
within the amounts for the group. In the proft and loss account the amortisation or write down
of goodwill should be separately disclosed as part of the investor=s share of its associates=
results.
In the consolidated statement of total recognised gains and losses the investor=s share of the
total recognised gains and losses of its associates should be included, shown separately under
each heading, if material.
The cash >ow statement should include the cash >ows between the investor and its associates.
Di'erent accountin$ "ates
Ahere the fnancial year of a subsidiary di<ers from that of the parent company, interim
accounts for that subsidiary, prepared to the parent company=s accounting date, should be
used. If this is impracticable, earlier fnancial statements of the subsidiary underta*ing may be
used, provided they are prepared for a fnancial year that ended not more than three months
earlier.
ACCA has made available a basic guide for public practice and corporate sector, for members
to advise businesses. The guide sets out the changes and information that will be re#uired. This
is available at1 http1FFwww.accaglobal.comFdocumentsFconsolidatedGaccounts2.doc
Appen"ices
2.@"ample of consolidation with a 2C subsidiary
2.@"ample of consolidation with a &C subsidiary
4
(.@<ect on consolidation where1
a. Stoc*s have been sold by one company to another in the same group
b. +i"ed assets have been sold by one company to another in the same group
7.Berger accounting
!
Appen"i( )* E(ample o& consoli"ation it+ a ),,- su.si"iar!
0 Htd ac#uired all the shares in S Htd on (2 Iecember 2& for a cost 34 million.
Doodwill is amortised over fve years on a straight line basis.
Consoli"ation Consoli"ate"
H Lt" S Lt" A"/ustment Accounts
0alance s+eet at 1) Decem.er 2,,3 45,,, 45,,, 45,,, 45,,,
+i"ed assets 2, (, 7,
Doodwill on consolidation 2,44 2,44
Doodwill amortised - (2. - (2.
Investment in S Htd 4, - 4,.
Current assets
Iue from group company 2,7 ) - (,(.
?ther current assets 2,! 2,6 7,(
Current liabilities
Iue to group company - ). - 2,7. (,(
?ther current liabilities - !. - 2. - 6.
GGGGGG GGGGGG GGGGGG GGGGGG
&,4 7,2 - (,6!. &,&7
GGGGGG GGGGGG GGGGGG GGGGGG
?rdinary shares 2, 2, - 2,. 2,
% J H account pre (2.22.& 4,( 2,74 - 2,74. 4,(
yFe (2.22.) 2,2 !4 - (2. 2,47
GGGGGG GGGGGG GGGGGG GGGGGG
&,4 7,2 - (,6!. &,&7
GGGGGG GGGGGG GGGGGG GGGGGG
Pro#t 6 loss account
7ear en"e" 1) Decem.er 2,,3
Sales e"ternal 2, 7, 27,
inter group 2,! 2, - (,!.
Cost of sales e"ternal - 6,4. - (,2. - 2,!.
inter group - 2,. - 2,!. (,!
GGGGGG GGGGGG GGGGGG
Dross proft 2,2 2,( (,7
Admin e"penses - 6. - 4. - (2. - 2,42.
GGGGGG GGGGGG GGGGGG GGGGGG
Eet proft before ta" 2,7 & - (2. 2,&)
Ta"ation - 2. - 24. - (4.
GGGGGG GGGGGG GGGGGG GGGGGG
Eet proft after ta" 2,2 !4 - (2. 2,47
GGGGGG GGGGGG GGGGGG GGGGGG
8or9in$s 3K
+air value of net assets in S Htd at (2 Iecember 2& (,74
%roft of S Htd for year ended (2 Iecember 2) !4
GGGGGG
7,2
GGGGGG
Consideration paid for S Htd on (2 Iecember 2& 4,
+air value of net assets in S Htd at (2 Iecember 2& (,74
GGGGGG
Doodwil on ac#uisition 2,44
GGGGGG
Iepreciating goodwill over 4 years at rate each year of (2
GGGGGG
6
Appen"i( 2* E(ample o& consoli"ation it+ a ),,- su.si"iar!
0 Htd ac#uired &C of the shares in S Htd on (2 Iecember 2& for a cost 37 million.
Doodwill is amortised over fve years on a straight line basis.
Consoli"ation /nlConsoli"ate"
H Lt" S Lt" A"/ustment re& Accounts
0alance s+eet at 1) Decem.er 2,,3 45,,, 45,,, 45,,, 45,,,
+i"ed assets 2, (, 7,
Doodwill on consolidation 2,27 C
2,27
Doodwill amortised - 27&. I - 27&.
Investment in S Htd 7, - 7,. C
Current assets
Iue from group company 2,7 ) - (,(. A
?ther current assets 2,! 2,6 4,(
Current liabilities
Iue to group company - ). - 2,7. (,( A
?ther current liabilities - !. - 2.
- 6.
Binority interest - !). C - &2.
- 2(. @
GGGGGG GGGGGG GGGGGG GGGGGG
&,4 7,2 - (,&2&. &,662
GGGGGG GGGGGG GGGGGG GGGGGG
?rdinary shares 2, 2, - 2,. C 2,
% J H account pre (2.22.& 4,( 2,74 - 2,74. C 4,(
yFe (2.22.) 2,2 !4 - 27&. I 2,!2
minority interest - 2(. @ - 2(.
GGGGGG GGGGGG GGGGGG GGGGGG
&,4 7,2 - (,&2&. &,662
GGGGGG GGGGGG GGGGGG GGGGGG
Pro#t 6 loss account
7ear en"e" 1) Decem.er 2,,3
Sales e"ternal 2, 7, 27,
inter group 2,! 2, - (,!. L
Cost of sales e"ternal - 6,4. - (,2. - 2,!.
inter group - 2,. - 2,!. (,! L
GGGGGG GGGGGG GGGGGG
Dross proft 2,2 2,( (,7
Admin e"penses - 6. - 4. - 27&. I - 2,77&.
GGGGGG GGGGGG GGGGGG GGGGGG
Eet proft before ta" 2,7 & - 27&. 2,)42
Ta"ation - 2. - 24. - (4.
GGGGGG GGGGGG GGGGGG GGGGGG
Eet proft after ta" 2,2 !4 - 27&. 2,!2
Binority interest - 2(. @ - 2(.
GGGGGG GGGGGG GGGGGG GGGGGG
2,2 !4 - (6&. 2,762
GGGGGG GGGGGG GGGGGG GGGGGG
&
8OR:INGS 3K 3K
Binority interest
Share capital of S at (2 Iecember 2& 2,
%roft and loss account at (2 Iecember 2& 2,74
GGGGGG
(,74
GGGGGG
Binority interest 2C !)
GGGGGG
Binority interest in proft for year ended
(2 Iecember 2) 3!4 " 2C 2(
GGGGGG
Doodwill
Cost of investment 7,
Hess1 share of net assets ac#uired
Share capital 2,
%roft and loss account 2,74
GGGGGG
(,74
GGGGGG
Droup share &C - 2,6!.
GGGGGG
2,27
Amortisation for the year - 27&.
GGGGGG
))2
GGGGGG
)
Appen"i( 1* E'ect on consoli"ation +ere*
a; Stoc9s +a%e .een sol" .! one compan! to anot+er in t+e same $roup
.; <i(e" assets +a%e .een sol" .! one compan! to anot+er in t+e same $roup
a. Ahere goods have been sold by one group company to another at a proft or loss and some
of these goods are still in the purchaserKs stoc* at the year end, then the proft or loss is
unrealised from the point of view of the group. 0owever stoc*s would still be valued at the
lower of cost and net realisable value from the point of view of the group.
8+oll! one" su.si"iar!
Ahere goods are sold by 0 Htd -parent company. to S Htd -a wholly owned subsidiary. -or
from S Htd to 0 Htd. for a proft and some of the items are in stoc* at the year end then the
stoc* value in the consolidated accounts will need to be reduced by the proft element in
the goods still held and remove unrealised proft from the consolidated proft and loss
account.
Partl! one" su.si"iar!
%rofts or losses on intra9group transactions should be eliminated in full from consolidated
accounts. The elimination should be set against the interests held by the group and the
minority interest in proportion to their holdings in the underta*ing whose individual fnancial
statements recorded those profts or losses. Sales from the parent company to the
subsidiary produce a proft or loss to the parent therefore any unrealised proft or loss
should be charged against the group. Sales from the subsidiary to the parent company
produce a proft or loss to the subsidiary therefore any unrealised proft or loss should be
split between the group and the minority.
E(ample
0 Htd owns &C of S Htd. Iuring the year S Htd sells goods to 0 Htd at cost plus 24C. At the
year end 0 Htd still held goods which it purchased from S Htd, the goods cost S Htd 32,
and were sold to 0 Htd for 32,24.
The consolidated stoc* will be stoc* held by S Htd at cost together with stoc* held by 0 Htd
at cost to 0 Htd less 324. The minority interest will be reduced by its share of this -324 "
2C. and the remaining &C will reduce the consolidated proft for the year -324 " &C M
322..
The consolidation ad8ustment will be Ir Cr
Ir Consolidated proft for the year 22
Binority interest (
Cr Consolidated stoc*s 24
b. Trans&er o& #(e" assets it+in t+e $roup
If f"ed assets are sold by one group member to another ad8ustments must be made to
recreate the situation that would have e"isted had the sale not occurred1
There would have been no proft or loss on sale
The depreciation would have been based on the original cost to the group -unless there was
a policy of revaluation..
2
Appen"i( =* Mer$er Accountin$
+,S ! states that a business combination should be accounted for by using merger accounting
if1
The use of merger accounting for the combination is not prohibited by companies legislation5
and
The combination meets all the specifc criteria set out in paragraphs ! to 22 of +,S !.
Also merger accounting may be used for group reconstructions and combinations which are
e<ected by using a new parent company.
Aith merger accounting the carrying values of the assets and liabilities of the parties to the
combination are not re#uired to be ad8usted to fair value on consolidation, although
appropriate ad8ustments should be made to achieve uniformity of accounting policies in the
combining entities.
The results and cash >ows of all the combining entities should be brought into the fnancial
statements of the group from the beginning of the fnancial year in which the combination
occurred, ad8usted so as to achieve uniformity of accounting policies. The corresponding fgures
should be restated by including the results for all the combining entities for the previous period
and their balance sheets for the previous balance sheet date, ad8usted as necessary to achieve
uniformity of accounting policies.
The di<erence, if any, between the nominal value of the shares issued plus the fair value of any
other consideration given, and the nominal value of the shares received in e"change should be
shown as a movement on other reserves in the consolidated fnancial statements. Any e"isting
balance on the share premium account or capital redemption reserve of the new subsidiary
underta*ing should be brought in by being shown as a movement on other reserves. These
movements should be shown in the reconciliation of movement in shareholders= funds.
Berger e"penses are not to be included as part of this ad8ustment, but should be charged to
the proft and loss account of the combined entity at the e<ective date of the merger, as
reorganisation or restructuring e"penses, in accordance with paragraph 2 of +,S (.
ACCA LEGAL NOTICE
22
T+is is a .asic $ui"e prepare" .! t+e ACCA UK5s Tec+nical A"%isor! Ser%ice &or mem.ers an" t+eir clients>
It s+oul" not .e use" as a "e#niti%e $ui"e? since in"i%i"ual circumstances ma! %ar!> Speci#c a"%ice
s+oul" .e o.taine"? +ere necessar!>
22