Is inventory included in the statement of financial position?
This brief article looks at how to prepare a consolidated statement of financial position. Consolidated financial statements are often referred to as ‘group accounts’. Assets and liabilitiesWhen preparing a consolidated statement of financial position, the assets and liabilities of the parent and the subsidiary are added together and then subject to consolidation adjustments. For example, as the objective of the exercise is to prepare the consolidated statement of financial position as if the group were a single entity, it is necessary to eliminate the balances on any intra-group current accounts as the group should only be reporting assets and liabilities external to the group. In addition, it is also necessary to recognise any fair value (FV) adjustments that will have arisen on the subsidiary’s net assets at the date of acquisition and to replace the parent’s investment in the subsidiary with the goodwill arising on consolidation. EquityIn the FA/FFA exam, the equity section of the consolidated statement of financial position will contain the share capital and share premium of the parent only. Share premium may be presented as ‘Other components of equity’. It may also be necessary to ascertain the correct balance on the retained earnings. This will include the parent’s retained earnings and the group’s share of the post-acquisition profits of the subsidiary. The post-acquisition profits of the subsidiary will be shared between the parent (in the group retained earnings) and non-controlling interest (NCI) in the proportion that they share profits and losses. The following example explains the whole process by taking you through an exercise where all of these issues feature. Question
Additional information (ii) For consolidation purposes, at the date of acquisition the fair value of the non-depreciable land of Marina Bay Co exceeded its carrying value by $25,000. Marina Bay Co has not incorporated this fair value adjustment into its individual financial statements. (iii) At the reporting date, Singapore Co is owed $5,000 by Marina Bay Co. Required – Prepare the consolidated statement of financial position for the Singapore Group as at 31 December 20X2.
W1 Group structure
In the next working, the fair value of the net assets of the subsidiary at the date of acquisition are established by taking into account the fair value adjustment on the land. The post-acquisition profits of the subsidiary are also determined and split between the parent and the NCI in the proportion of their shareholdings. The net assets of the subsidiary are represented by its equity (share capital plus all reserves). Note that the subsidiary's net assets at the date of acquisition need a fair value adjustment on its PPE. This adjustment is still necessary at the reporting date as the asset is still held. W2 Net assets of the subsidiary
From this we can see the subsidiary’s post-acquisition profits are $15,000. These belong to, and so are allocated, 80% to the group’s retained earnings and 20% to the NCI. Further we can note that the net assets of the subsidiary at acquisition is $65,000. This is a key figure for the calculation of goodwill which is our next working. Now the goodwill (the premium arising on consolidation) can be established by comparing the value of the whole business as represented by what the parent paid for its controlling interest combined with the NCI, set against the fair value of the identifiable net assets of the subsidiary. W3 Goodwill
The next working is to determine the NCI at the reporting date. This is done by taking account of the entries that we have already seen above. NCI is part of equity (the ownership) of the group and so the opening balance at the date of acquisition will increase with its share of any profits and decrease with any share of losses. W4 NCI
Our final working is the retained earnings of the group which comprises the parent’s retained earnings plus its share of the subsidiary’s post-acquisition profits and losses from the above workings. W5 Group retained earnings (RE)
Finally, the consolidated statement of financial position can be prepared. The parent’s investment in the subsidiary is eliminated as an intra-group item and is replaced with the goodwill. The assets and liabilities are then added together in full (100%) as, despite the parent only owning 80% of the shares of the subsidiary, the subsidiary is fully controlled. The NCI in the subsidiary’s net assets is separately reported. There is a consolidation adjustment in respect of the fair value adjustment on the PPE. Because at the reporting date Singapore Co is owed $5,000 by Marina Bay Co, this is an intra-group item and this receivable is eliminated from the group accounts as a consolidation adjustment. It also means that Marina Bay Co must have a payable to Singapore Co of the same amount which will also be eliminated. Singapore consolidated statement of financial position
Note where the NCI is presented – it is part of equity and should never be presented in liabilities. Written by a member of the FA/FFA examining team What is included in statement of financial position?Definition: A statement of the assets, liabilities, and capital of a business or other organization at a particular point in time, detailing the balance of income and expenditure over the preceding period.
How do you show inventory in financial statements?A manufacturer's inventory will be reported in the current assets section of the balance sheet and in the notes to the financial statements. In the current assets section the amount of the manufacturer's inventory will be positioned after cash and cash equivalents, short-term investments, and receivables.
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