1、Session 4Consolidated Income StatementConsolidated Income Statement1.Principles of the consolidated income statement2.Sales, purchases and inventories3.Mid-year acquisition1. Principles of the consolidated income statementBasic principle: The consolidated income statement shows the profit generated
2、by all resources disclosed in the related consolidated statement of financial position, i.e. the net assets of the parent company (P) and its subsidiaries (Ss).lFrom revenue to profit after tax include all of Ps income and expenses plus all of Ss income and expenses (reflecting control of S)lAfter p
3、rofit after tax deduct share of profits due to the non-controlling interest (to reflect ownership)Mechanics of consolidationAs with the statement of financial position, it is common to use standard workings when producing a consolidated income statement:lConsolidation schedulelGroup structure diagra
4、mlNet assets of subsidiary at acquisition (required for goodwill calculation)lGoodwill calculation (required where an impairment is to be charged to profit)lNon-controlling interestConsolidation scheduleThis schedule is used as a tool to add together Ps and Ss income and expenses and make any necess
5、ary. It includes:l100% of Ps income and expensesl100% of Ss income and expenses (unless a mid-year acquisition has occurred in which case this is time apportioned)Cont.PSAdjTotalTime apportioned if mid-yearRevenuexx(x)XCost of sales(x)(x)x(x)Operating expenses(x)(x)(x)(x)Finance cost(x)(x)(x)Income
6、tax(x)(x)(x)Profit after taxXXXImpairment of goodwillOnce any impairment has been identified during the year, the charge for the year will be passed through operating expenses, however always follow instructions from the examiner.Total impairment to date is an adjustment in retained earnings in the
7、consolidated statement of financial position.Non-controlling interestThis is calculated as:NCI% x subsidiarys profit after tax (taken from Ss column of consolidation schedule).Illustration 1 Basic consolidated income statementPoplin acquired, several years ago, 80% of the ordinary share capital of S
8、ilk. Their results for the year ended 30 November 20 x4 were as:Prepare the consolidated income statement for the year ended 30 November 20 x4.PS$000$000Sales revenue8,5002,200Cost of sales and expenses(7,650)(1,980)Trading profit b4 tax850220Income taxes(400)(100)450120DividendsA payment of a divid
9、end by S to P will need to be cancelled. The effect of this on the consolidated income statement is:lOnly dividends paid by P to its own shareholders appear in the consolidated financial statement. These are shown within the consolidated statement of changes in equity which you will not be required
10、for this module.lAny dividend income shown in the consolidated income statement must arise from investments other than those in subsidiaries or associates. This will be will covered later)The NCI in S is calculated on the profit after tax and before dividends. The figure therefore includes the NCIs
11、share of Ss dividends and Ss retained earnings.Fair valuelIf a depreciating non-current asset of the subsidiary has been revalue as part of a fair value exercise when calculating goodwill, this will result in an adjustment to the consolidated income statement.lThe subsidiarys own income statement wi
12、ll include depreciation based on the value the asset is held at in the subsidiarys own SFPlThe consolidated income statement must include a depreciation charge based on the fair value of the asset, included in the consolidated SFPlExtra depreciation must therefore be calculated and charged to an app
13、ropriate cost category within the consolidation schedule.Test your understanding 1The income statement for Paddle and Skip for the year ended 31 August 20 x4 are shown below. Paddle acquired 75% of the ordinary share capital of Skip several years ago.Prepare the consolidated income statement for the
14、 year. Ignore goodwillPaddleSkip$Sales revenue2,400,000800,000Cost of sales and expenses(2,160,000)(720,000)Trading profit240,00080,000Investment income:Dividend received from Skip1,500Profit before tax241,50080,000Tax(115,000)(38,000)Profit for the year126,50042,0002. Sales, purchases and inventori
15、esThe effect of intra-group trading must be eliminated from the consolidated income statement.Sales and purchaseSuch trading will be included in the sales revenue of one group company and the purchase of another.lConsolidated sales revenue = Ps revenue + Ss revenue intra-group saleslConsolidated cos
16、t of sales = Ps COS + Ss COS intra-group salesThe deduction of the intra-group sales in both cases should be shown in the adjustments column of the consolidation schedule.InventoryIf any goods sold intra-group are included in closing inventory, their value must be adjusted to the lower of cost and n
17、et realisable value (NRV) to the group (as in the CSFP)The adjustment for unrealised profit should be shown as an increase to cost of sales in the sellers column in the consolidation schedule.Illustrate 2 Sales, purchase and inventoriesGiven below are the income statements for Paris and its subsidia
18、ry London for the year ended 31 December 20 x5.ParisLondon$000$000Sales revenue3,2002,560Cost of sales(2,200)(1,480)Cross profit1,0001,080Distribution costs(160)(120)Administration expenses(400)(80)440880Investment income160-600880Taxation(400)(480)Net profit for the year200400Cont.lParis paid $1.5m
19、 on 31 December 20 x1 for 80% of Londons ordinary share capital of $800,000. The balance on Londons retained earnings was $600,000 at that time.lGoodwill impairments at 1 January 20 x5 amounted to $152,000. A further impairment of $38,000 was found to be necessary at the year end. Impairments are in
20、cluded within administrative expenses.lParis made sales to London, at a selling price of $600,000 during the year. Not all of the goods had been sold externally by the year end. The profit element included in Londons closing inventory was $30,000.lThe figure for investment income in Pariss income st
21、atement comprises the parent companys share of the subsidiarys total dividend for the year.lThe figure for investment income in Pariss income statement comprises the parent companys share of the subsidiarys total dividend for the year.Prepare a consolidated income statement for the year ended 31 Dec
22、ember 20 x5 for the Paris group.Test your understanding 2On 1 January 20 x9 Zebedee acquired 60% of the ordinary shares of Xavier.The following income statements have been produced by Zebedee and Xavier for the year ended 31 December 20 x9.ZebedeeXavier$000$000Sales revenue1,260520Cost of sales(420)
23、(210)Gross profit840310Distribution costs(180)(60)Administration expenses(120)(90)Profit from operation540160Investment income from Xavier36-Profit before taxation576160Taxation(130)(26)Profit after taxation446134Cont.During the year ended 31 December 20 x9 Zebedee had sold $84,000 worth of goods to
24、 Xavier. These goods had cost Zebedee $56,000. On 31 December 20 x9 Xavier still had $36,000 worth of these goods in inventories (held at cost to Xavier).Prepare the consolidated income statement to incorporate Zebedee and Xavier for the year ended 31 December 20 x9.Note: Goodwill on consolidation h
25、ad not been impaired.InterestIf loans are outstanding between group companies, intra-group loan interest will be paid and received.Both the loan and loan interest must be excluded from the consolidated results.The relevant amount of interest should be deducted from group investment income and group
26、finance costs through the adjustment column of the consolidation schedule.Transfers of non-current assetsIf one group company sells a non-current asset to another group company the following adjustments are needed in the income statement.lAny profit or loss arising on the transfer must be deducted f
27、rom the appropriate category within the sellers column in the consolidation schedule.lThe depreciation charge must be adjusted (again in the sellers column of the schedule) so that it is based on the cost of the asset to the group.3. Mid-year acquisitionIf a subsidiary is acquired part way through t
28、he year, then the subsidiarys results should only be consolidated from the date of acquisition, i.e. the date on which control is obtained.In practice this will require:lIdentification of the net assets of S at the date of acquisition in order to calculate goodwill.lTime apportionment of the results
29、 of S in the year of acquisition. For this purpose, unless indicated otherwise, assume that revenue and expenses accrue evenly.lAfter time-apportioning Ss results, deduction of post acquisition intra-group items as normal.Illustration 3 Mid-year acquisition The following income statements were prepa
30、red for the year ended 31 March 20 x9.EthosPathos$000$000Sales revenue303,600217,700Cost of sales(143,800)(102,200)Gross profit159,800115,500Operating costs(71,200)(51,300)Operating profit88,60064,200Dividends received and receivableQuoted investments2,8001,200Profit before tax91,40065,400Taxation(4
31、6,200)(32,600)Profit after tax45,20032,800Cont.On 30 November 20 x8 Ethos acquired 75% of the issued ordinary capital of Pathos.The profit of both companies are deemed to accrue evenly over the year.Prepare the consolidated income statement for the year ended 31 March 20 x9. Ignore goodwill.Test you
32、r understanding 3Set out below are the draft income statements of Smiths and its subsidiary company Flowers for the year ended 31 December 20 x7.On 1 January 20 x6 Smiths purchased 75,000 ordinary shares in Flowers at a cost of $170,000. The issued share capital of Flowers is 100,000 $1 ordinary sha
33、res. At that date the income statement of Flowers showed a credit balance of $60,000.Cont.Income statements for the year ended 31 December 20 x7SmithsFlowers$000$000Sales revenue600300Cost of sales(360)(140)Gross profit240160Operating costs(93)(45)Operating profit147115Invest payable-(3)Profit befor
34、e tax147112Tax(50)(32)Profit for the year9780Cont.The following additional information is relevant.1)During the year Flowers sold goods to Smiths for $20,000, making a mark-up of one third. Only 20% of these goods were sold before the end of the year, the rest were still in inventory.2)Goodwill has
35、been subject to an impairment review at the end of each year since acquisition. The first review at the end of last year revealed an impairment of $5,000 and the review at the end of this year revealed another impairment of $5,000. The current impairment is to be recognised as an operating cost.3)Smith values the non-controlling interests using the fair value method.Prepare for presentation to members the consolidated income statement account for the year ended 31 December 20 x7.
