Learning Outcomes
After reading this article, you will be able to prepare a consolidated statement of profit or loss and other comprehensive income (OCI) for a group. You will understand how to eliminate intra-group transactions, adjust for unrealised profits, and correctly account for impairment and non-controlling interests. You will be able to explain the reasoning and impact of each consolidation adjustment, ensuring accurate group financial statements.
ACCA Financial Reporting (FR) Syllabus
For ACCA Financial Reporting (FR), you are required to understand and apply consolidation techniques to profit or loss and OCI. In particular, focus your revision on:
- The preparation of consolidated statements of profit or loss and comprehensive income for a simple group (a parent and up to two subsidiaries)
- The elimination of intra-group income and expenses from consolidated profit or loss and OCI
- The adjustment for unrealised profit in closing inventory and non-current assets within the group
- The treatment of non-controlling interests in the consolidated statement of profit or loss and OCI
- The effect of goodwill impairment and fair value adjustments on group profit
- Handling of dividends, loans, interest, and other intra-group balances
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What must be removed from consolidated revenue and cost of sales when two group companies trade goods between each other?
- If a parent sold goods to its subsidiary for $80,000 with a profit of $20,000, and $24,000 of those goods remain in inventory at year-end, what is the unrealised profit for consolidation adjustment?
- True or false? Unrealised profit in closing inventory is always deducted from group retained earnings regardless of which company made the sale.
- Briefly describe how to calculate the non-controlling interest (NCI)'s share of profit in the consolidated statement of profit or loss.
- If goodwill impairment relates to a subsidiary measured using the fair value NCI method, how is the impairment allocated in consolidated profit?
Introduction
A group must present consolidated profit or loss and other comprehensive income as if it is a single economic unit. Adjustments are required to eliminate intra-group income, expenses, and profits to avoid double-counting and to reflect only results from external parties. This article explains the practical process and rationale for these adjustments, focusing on typical examination scenarios.
Key Term: consolidated statement of profit or loss
A financial statement combining the income and expenses of the parent and its subsidiaries, adjusted for intra-group transactions, to present the results of the group as if it were a single entity.Key Term: intra-group transaction
Any trade or transfer of goods, services, or assets between companies within the same group.Key Term: unrealised profit
Profit included in inventory or non-current assets held within the group that has not yet been realised by sale to an external party.Key Term: non-controlling interest (NCI)
The share of a subsidiary’s profit or net assets attributable to equity holders other than the parent, presented separately in consolidated statements.
Principles of the Consolidated Statement of Profit or Loss and OCI
The consolidated statement of profit or loss combines all income and expenses of the parent and subsidiaries, excluding results of intra-group trading. The main steps:
- Add together the parent’s and subsidiaries’ income and expenses on a line-by-line basis for the relevant period of control.
- Eliminate intra-group sales, purchases, and other transactions to remove double-counting.
- Adjust for unrealised profits in group inventory or non-current assets arising from group sales where goods or assets remain unsold within the group at the reporting date.
- Adjust for goodwill impairment and any fair value adjustments.
- Show the profit or loss split between the parent’s shareholders and the non-controlling interest at the end.
Intra-group Sales and Purchases
When companies within a group trade with each other, revenue and expenses from these intra-group sales must be eliminated in consolidation. Only sales to third parties are included in the consolidated figures.
Key Term: elimination of intra-group transactions
The process of removing the effects of transactions between group companies in consolidated financial statements.
Unrealised Profits in Inventory
If group inventory at year-end includes goods bought from another group company, any profit on these goods is not realised for the group's standpoint and must be eliminated.
- If the parent is the seller: Deduct unrealised profit from group retained earnings.
- If the subsidiary is the seller: Eliminate through subsidiary's retained earnings so it is shared between the group and NCI.
The profit is calculated using the portion of goods remaining in inventory multiplied by the gross profit margin or mark-up.
Key Term: provision for unrealised profit (PUP)
An adjustment in consolidated accounts to remove profit not yet realised by external sale, restoring inventory value to original group cost.
Non-controlling Interest (NCI) in Profit
NCI’s share of profit is calculated by adjusting the subsidiary’s result for:
- Intra-group adjustments (e.g. fair value depreciation, PUP)
- Any impairment of goodwill (share split based on the NCI valuation method)
The NCI’s share is then presented on a separate line in the consolidated profit or loss and OCI.
Goodwill Impairment and Fair Value Adjustments
Impairment losses on goodwill, and extra depreciation from fair value adjustments made at acquisition, will reduce group profit. Where NCI is measured at fair value, the NCI’s share of goodwill impairment must also be deducted from its profit share.
Dividends and Interest
Dividends paid by a subsidiary to the parent are not included as consolidated income—they are eliminated as an intra-group item. Similarly, any intra-group interest on loans is cancelled out, removing both income and expense.
Other Comprehensive Income (OCI)
Items such as revaluation gains or fair value movements on financial assets are consolidated, eliminating intra-group elements. The share attributable to the NCI is included in the proportion of OCI items (unless inapplicable).
Worked Example 1.1
Sintra Co owns 80% of Setubal Co. During the year, Sintra sold goods to Setubal for $60,000 at a mark-up of 25%. As at year-end, $12,000 of these goods remain in Setubal’s inventory. Sintra has also received $7,000 in dividends from Setubal. Calculate:
a) The elimination adjustment for consolidated revenue and cost of sales. b) The adjustment for unrealised profit. c) The treatment of the dividend.
Answer:
a) The $60,000 intra-group sale is eliminated from both revenue and cost of sales in consolidation.
b) Profit on these goods = $60,000 × 25/125 = $12,000. Since $12,000 worth remains in inventory, unrealised profit = $12,000 × ($12,000/$60,000) = $2,400. Deduct $2,400 from group retained earnings and from closing inventory.
c) The $7,000 dividend from Setubal to Sintra is eliminated; it does not appear in consolidated profit.
Worked Example 1.2
Cordoba Co owns 60% of Granada Co, acquiring all shares at the start of the year. Granada sells a non-current asset to Cordoba for $50,000, making a profit of $10,000. Cordoba depreciates the asset over 5 years. At year-end, what is the unrealised profit in the asset, and how is it adjusted?
Answer:
The $10,000 profit is unrealised for the group. After 1 year, Cordoba will have charged depreciation of $10,000 × 1/5 = $2,000, so the remaining unrealised profit is $8,000. The group deducts $8,000 from non-current assets and reduces Granada’s profit for group purposes. The NCI shares the reduction according to its ownership.
Exam Warning
In FR exams, failing to adjust group retained earnings (or subsidiary’s in the case of non-parent seller) for unrealised profits in inventory or non-current assets commonly results in loss of marks. Always clearly show which adjustment is required and where it is posted. The examiner will expect full workings.
Summary
The consolidated statement of profit or loss and OCI must present the group’s financial performance as one unit, with all intra-group transactions, profits, and related items eliminated. Unrealised profits inflate profits and inventory values if not removed. Goodwill impairment and fair value adjustments reduce group profit and often affect NCI. NCI’s profit share must always be calculated after all adjustments.
Key Point Checklist
This article has covered the following key knowledge points:
- Principles of consolidation for profit or loss and OCI
- The purpose and method of eliminating intra-group sales, purchases, and other income/expenses
- Calculation and adjustment for unrealised profits in closing inventory and non-current assets
- Determining the NCI’s share of profit after all group adjustments
- The accounting for goodwill impairment and additional fair value depreciation
- The treatment of intra-group dividends and interest in consolidated profit
- Splitting consolidated profit between parent and NCI
Key Terms and Concepts
- consolidated statement of profit or loss
- intra-group transaction
- unrealised profit
- non-controlling interest (NCI)
- elimination of intra-group transactions
- provision for unrealised profit (PUP)