CHAPTER 10

CONSOLIDATED STATEMENT OF FINANCIAL POSITION ACQUISITION METHOD

1. Calculating parents percentage of holding in subsidiary

When calculating the parents percentage of holding in a subsidiary, the number of
ORDINARY shares held by the parent is divided by the total units issued by the
subsidiary.
When calculating it is important to determine the PAR value of the shares so the
correct number of units can be calculated.
The balance of ordinary shares not owned by the parent would be owned by noncontrolling interest ie party or parties that have interest in the subsidiary company but
do not have control over the company.

2. Calculating goodwill

IFRS 3 requires goodwill be calculated on the date a company becomes a subsidiary

of another. (Date of acquisition)

The basic formula of computing goodwill is:

Consideration transferred
Add) Non-controlling interest
Less) Fair value of nets assets (subsidiary)
Goodwill / (bargain purchase)

Consideration transferred is the payment made to acquire the subsidiary. It can be in

the form of :
- Cash payment
- Equity
- Liability
- Future payments (must be discounted to date of acquisition)

Fair value of net assets can be calculated either by

- FV of Assets less FV of liabilities OR
- Equities (adjusted for fair value)

Refer to goodwill calculation worksheet

Full illustration
1

Statement of Financial Position as at 31.12.20X1

Ordinary share capital @ par RM1

Retained profits
Long term liabilities
Current liabilities
TOTAL

Parent (P)
RM000
1,000
600
300
100
2,000

Subsidiary(S)
RM000
400
200
200
100
900

1,000
300
700
2,000

400
200
300
900

Properties
Plant & machinery
Current assets
TOTAL

On 31.12.20X1, P acquired 100% of the ordinary shares belonging to S by paying

RM500,000 in cash and issuing 200,000 of Ps ordinary shares with market value of
RM2.50 on date of acquisition.
The fair value of Ss property on that date was RM500,000. S also owns patents and
licenses worth RM200,000.
SOLUTION
Consideration transferred:
Cash = RM500,000
Ord share cap (200,000 units x RM1.00) = RM200,000
Share premium (200,000 units x RM1.50) = RM300,000
The journal entries to reflect consideration transferred are as follows:
JOURNAL 1
DR Investment
1,000,000
CR Cash
CR Ord share capital (200k x RM1)
CR Share premium (200k x RM1.50)

500,000
200,000
300,000

The modified SOFP can be viewed as follows:

Parent (P) RM000
Ordinary share capital (1,000+200)
Share premium (+300)
Retained profits
Long term liabilities
Current liabilities
TOTAL

1,200
300
600
300
100
2,500

Subsidiary(S)
RM000
400
nil
200
200
100
900

Investment in S
Property
Plant and equipment
Current assets (-500)
TOTAL

1,000
1,000
300
200
2,500

400
200
300
900

Goodwill is calculated as follows:

2

RM000
1,000

Consideration transferred (500+200+300)

Less) Fair value of net assets:
Ordinary Share capital
Retained earnings
FV- adjustments (properties)
FV- adjustment (patents & licenses)
Goodwill

400
200
100
200

(900)
100

OR
RM000
Consideration transferred (500+200+300)
Less) Fair value of net assets:
Properties (400+100)
Plant & machinery
Current Assets
Patents & licenses
Long term liabilities
Current liabilities
Goodwill

1,000
500
200
300
200
(200)
(100)

(900)
100

JOURNAL 2
Journal entries to effect consolidation adjustments:
DR properties

100

DR Patents & licenses

200

CR Revaluation reserves

300

(to adjust assets of subsidiary to their fair values)

JOURNAL 3
DR Ordinary share capital of S

400

DR Revaluation reserves of S

300

DR Retained profits of S

200

DR Goodwill on combination

100

CR Investment in S

1,000

(to eliminate cost of investment against share capital and pre-acquisition reserves)

Using the modified SOFP the consolidation is prepared as follows:

The consolidated SOFP can be viewed as follows:
P RM000

S RM000

Workings

Conso
3

Ordinary share capital

Share premium
Retained profits
Long term liabilities
Current liabilities
TOTAL

1,200
300
600
300
100
2,500

Investment in S
Goodwill
Patents & licenses
Property
Plant and equipment
Current assets
TOTAL
Items in red has been used in
consolidation.

1,000

400
nil
200
200
100
900

1200+400-400
300
600+200-200
300+200
100+100

1200
300
600
500
200
2800

1000-1000
100
200
1000+400+100
300+200
200+300

0
100
200
1,000
400
1500
300
200
500
200
300
500
2,500
900
2800
calculating goodwill and therefore eliminated in

Note:
There are cases where the fair value of net assets @ acquisition date >
consideration transferred and non-controlling interest. This will result in bargain
purchase or sometimes known as negative goodwill. For presentation purposes,
bargain purchase is accounted for in retained earnings of parent company. This will
zerorise the bargain purchase account and will not be presented in Conso SOFP
as a separate line item.

Attempt calculate the goodwill balances from the questions in Chapter 10.

CONSOLIDATING POST ACQUISITION DATE

Most often, .the parent company is required to prepare the consolidation after the
acquisition date. This will result in two types of reserves for the SUBSIDIARY ie:
4

1. Pre-acquisition reserves (balances of retained earnings, general reserves and

revaluation reserves BEFORE the acquisition date)
2. Post acquisition reserves (balances of retained earnings, general reserves and
revaluation reserves AFTER the acquisition date)
As shown in the earlier example, the pre-acquisition reserves belonging to the
SUBSIDIARY must be eliminated when consolidating. (refer journal 3)
Refer to pre-acquisition reserves adjustment worksheet

Full Illustration
The SOFP of P and S as at 31.12.20X1 are as follows:

Ordinary share capital @RM1 par

Share premium
Revaluation reserve
Retained profits
Long term liabilities
Current liabilities
TOTAL

Parent (P)
RM000
1,300
nil
100
700
300
200
2,600

Subsidiary(S) RM000

1,200
280
1,120
2,600

380
320
320
1,020

Property
Plant and equipment
Current assets
TOTAL

200
150
50
300
200
120
1,020

On 1.1.20X1, P acquired 90% of the ordinary shares belonging to S by paying

RM500,000 in cash and issuing 200,000 of Ps ordinary shares with market value of
RM2.50 on date of acquisition. The retained earnings of S at the date of acquisition is
RM200,000. Other reserves remain unchanged.

SOLUTION
The journal entries for the above changes are as follows:

JOURNAL 4
In Ps books @ acquisition date
DR Investment

1,000,000

CR Cash

500,000

CR Ordinary shares (200,000 x RM1.00)

200,000

CR Share premium (200,000 x RM1.50)

300,000

STEP 1: Calculating goodwill

Consideration transferred

1,000,000

Add) NCI (10% x FVNA)

60,000

Less) Fair value of net assets of S:

-) Ordinary share

200,000

-) Share premium

150,000

-) Revaluation reserve
-) Retained earnings

50,000
200,000

(600,000)

GOODWILL

460,000

STEP 2 : Preparing the adjustment for pre and post-acquisition reserves

RM000
NCI @ acquisition
Subsidiary:
RE @ conso
Less)RE @ acquisition
Post-acquisition RE
RR @ conso
Less) RR @ acquisition
Post-acquisition RR
Parent (@ conso
Retained earnings
Revaluation reserve
Total

300
(200)
100

NCI (10%)
(RM000)
60

CONSO RE
(RM000)

10

90

CONSO RR
(RM000)

50
(50)
nil
700
70

790

100
100

STEP 3 : PREPARING CONSOLIDATED SOFP:

CONSO
6

Assets
Goodwill
Property
Plant and equipment
Current assets
Total Assets
Equities & liabilities
Ordinary share capital

Share Premium
Retained earnings
Revaluation reserve
NCI
Long term liabilities
Current liabilities
Total Equities & Liabilities

(RM000)
460
Parents (1,200)
Subsidiary (380)
Parents (280)
Subsidiary (320)
Parents (1120-500)
320

Parent ONLY (1,300+200)

Subsidiary - eliminate
Parent (300)
Subsidiary eliminate

1,580
600
940
3,580
1,500
300
790
100
70

Parent (300)
Subsidiary (200)
Parent (200)
Subsidiary (120)

500
320
3,580

NON-CONTROLLING INTEREST
7

In many cases, subsidiary is not held wholly by the parent company. For instance subsidiary
S consists of 80% shareholding by parent and the remaining 20% is owned by other
party/parties. The other party is known as non-controlling interest (NCI) or sometimes
known as minority interest. One of the method used to determine NCI is, NCI is
proportionate to the fair value of net assets belonging to the subsidiary. Using this method
will result in partial goodwill; goodwill is only calculated for the parent.
Another method used is NCI is based on fair value of shares held whereby goodwill
calculated using this method is full goodwill. Under this method, goodwill is calculated for
both parent and NCI.
In preparing consolidated SOFP, NCI must be shown as a separate line item. The calculation
of NCI includes NCI balance @ acquisition date, its share of post-acquisition reserves and
preference shares belonging to the subsidiary not owned by the parent.
Example 1: The following are the SOFPs of P and S as at 31.12.X2

Ordinary share capital @RM1 par

Share premium
Retained profits
Preference shares @ RM1 par
Long term liabilities
Current liabilities
TOTAL

Parent (P)
RM000
1,300
200
800
120
300
200
2,920

Subsidiary(S) RM000

1,200
600
1,120
2,920

500
300
320
1,120

Property
Plant and equipment
Current assets
TOTAL

200
150
350
100
200
120
1,120

P acquired 80% of S on 1.1.20X1 with cash consideration of RM500,000 payable on the

acquisition date. P also purchased 20% of preference shares belonging to S with a cash
consideration of RM20,000. Ss retained earnings on that date amounted to RM150,000.
Other reserves remain unchanged.
The adjusting entries are as follows:
DR Investment ordinary shares

500,000

CR Cash

DR Investment preference shares

CR Cash

500,000

20,000
20,000

SOLUTION
8

Step 1 : Goodwill calculation

Consideration transferred

500,000

+) NCI (500,000 x 20%)

100,000

-) Fair value of Net Assets (Subsidiary @ acquisition):

-) Ordinary shares

200,000

-) Share Premium

150,000

-) Retained earnings

150,000

(500,000)

Goodwill

100,000

STEP 2 : Preparing the adjustment for pre and post-acquisition reserves

RM (000)
NCI @ acquisition
Subsidiary:
RE @ Conso
Less) RE @ Acquisition
Post Acquisition RE
Parent

NCI (20%)

GRE (80%)

RM(000)
100

RM(000)

40

160

350
(150)
200

RE @ Conso
Subsidiarys Preference shares
(100-20 owned by parent)
Total

800
80
220

960

STEP 3 : PREPARING CONSOLIDATED SOFP:

CONSO
(RM000)
100

Assets
Goodwill
Property
Plant and equipment
Current assets
Total Assets
Equities & liabilities
Ordinary share capital
Preference shares
Share Premium
Retained earnings
NCI

Parents (1,200)
Subsidiary (500)
Parents (600)
Subsidiary (300)
Parents (1120-500-20)
320

Parent ONLY (1,300)

Parent only (120)
Parent (200)
Subsidiary eliminate

1,700
900
920
3,620
1,300
120
200
960
220
9

Long term liabilities

Current liabilities
Total Equities & Liabilities

Parent (300)
Subsidiary (200)
Parent (200)
Subsidiary (120)

500
320
3,620

NCI calculated in the above example is calculated as proportionate to its share of fair value
of net assets. When using this method, goodwill is only calculated for the parent company
only. This method is known the partial goodwill method.
Another method of calculating NCI is based on fair value of shares held. The goodwill
calculated using this method is for both parent and NCI. To calculate NCI and goodwill using
this method requires the share price of subsidiary on the date of acquisition.
Using the same example above, we add extra information as follows:
On the date of acquisition the market value of Ps ordinary share was at RM3.00/share.
Using this information, the NCI @ acquisition can be calculated as (200,000x 20%) x RM3 =
RM120,000. This will result in goodwill of RM120,000. This means parents share of goodwill
is RM100,000 and NCIs share of goodwill is RM20,000. This method is also known as the
full goodwill method.
It is important to determine which method is used as it determined on how to charge out
impairment of goodwill.

Example 2
P acquired 200,000 units of ordinary shares out of a total of 250,000 units of ordinary shares
belonging to S on 31.12.X5. The market price for Ss ordinary shares on acquisition date
was RM3.20 / share. Calculate the NCI based on FV of shares held.
Solution:
NCI owns 50,000 units of ord shares (250k-200K)
The mkt price of Ss shares on acq date = RM3.20
Therefore NCI based on FV of shares held = 50,000 x RM3.20 = RM160,000
Using this NCI will result in FULL GOODWILL.

Question to attempt:

10

P acquired 80% of ordinary shares belonging to S on 31.12.X5 by issuing 60,000 units of its
own ordinary shares. The retained earnings of S on that date was RM56,000. The following
is an extract of SOFP for P and S @ 31.12.X8:

Ordinary shares @ RM1 par

Share premium
Retained earnings
Liabilities

P (RM)

S (RM)

2,000,000

100,000

150,000

20,000

1,458,200

87,000

890,600

66,300

Market price for ordinary shares

P (RM)

S (RM)

@ 31.12.X5

3.20

2.50

@ 31.12.X6

3.60

2.40

@ 31.12.X7

3.15

2.25

@ 31.12.X8

3.00

2.30

Determine FULL GOODWILL.

IMPAIRMENT OF GOODWILL
11

Goodwill is impaired not amortised.

Goodwill can be impaired subsequent to acquisition date. Goodwill impairment is a reduction
in the value of assets and therefore need to be charged to retained earnings.
As we have learnt, goodwill can be calculated using the partial or the full method. The
impairment of goodwill to retained earnings is dependent on whether goodwill is calculated
as partial goodwill of full goodwill.
For partial goodwill, all impairment will be charged to the groups retained earnings. For full
goodwill, the impairment needs to be allocated to NCI and group retained earnings in
accordance to its share of shareholding.

Example : Impairment adjustment for partial goodwill

NCI (30%)
Parents Retained Earnings
Subsidiary post-acquisition retained
earnings
Goodwill impairment partial GW

500,000
100,000

30,000

10,000

GRE (70%)
500,000
70,000
10,000

Example : Impairment adjustment for full goodwill

NCI (30%)
Parents Retained Earnings
Subsidiary post-acquisition retained
earnings
Goodwill impairment full GW

500,000
100,000

30,000

GRE (70%)
500,000
70,000

10,000

3,000

7,000

FAIR VALUE CHANGES

12

Fair value accounting is now an important element in reporting. Fair value of assets and
liabilities can experience an increase or a reduction in value. For consolidation purposes all
fair value adjustments must be accounted for unless specifically stated otherwise. Both
parent and subsidiary assets can be revalued upwards or downwards. The treatment of fair
value adjustment for subsidiary pre-acquisition and post-acquisition is different.

Fair value changes for non-depreciable assets

Treatment for fair value changes at the date of acquisition:
Land belongs to

Subsidiary
Parent

Book Value/Carrying
value @ Acquisition
date
RM300,000
RM1,000,000

Fair Value @
Acquisition date

Fair Value
Changes

RM450,000
RM1,500,000

+ RM150,000
+ RM500,000

For subsidiary:
DR Non- Current Assets

150,000

CR Revaluation Reserve

150,000

(Please take note that this fair value change took place @ acquisition date and therefore is
considered as revaluation reserve balance @ acquisition. Therefore RM150,000 is used in
calculating goodwill and will not be shown as RR in consolidated accounts.)

The goodwill calculation can be viewed as follows:

Consideration transferred

XX

+) NCI

XX

-) Fair value of net assets:

Ordinary shares

Retained earnings

Revaluation reserve

150,000

Goodwill / Bargain purchase

(X)
X

For parent:
DR Non- Current Assets
CR Revaluation Reserve

500,000
500,000

(Please note, this fair value changes affect the parents books. Therefore it WILL NOT be
used as goodwill calculation. It will however be shown as part of revaluation reserve in
consolidated accounts.)

13

Fair value changes for depreciable assets

80% of the ordinary shares belonging to S was acquired by P on 1.1.20X1. The following are
the details of Ss properties which has useful life of 10 years @ date of acquisition. The
group practices depreciation on a straight line method. The subsidiary has not adjusted its
assets to fair value. Consolidation date is 31.12.20X1.
Book value @ 1.1.20X1 = RM300,000
Fair value @ 1.1.20X1 = RM350,000
SOLUTION
Date
1.1.2
0X1

Book Value
(RM)
300,000

Fair Value
(RM)
350,000

FV adjustmt Accounting treatment

(RM)
+ 50,000 Treated as an increase in
revaluation reserve to be used in
calculating goodwill because this
is considered as pre-acq reserves.
The asset must be reported at its
fair value @ date of acquisition in
the consolidated accounts. In the
conso accounts, the revaluation
reserve at the date of acquisition
is EXCLUDED from conso as it is
considered to pre-acquisition
reserves which have been used in
calculating goodwill.

Since the subsidiary is reporting the asset at its book value in its books and the group is
reporting the asset at fair value, adjustment must be made for depreciation differences
between the book value and the fair value.
Date
Depreciation Depreciation Depreciation Accounting treatment
on book value
on fair value
adjustment
31.12
30,000
35,000
5,000 Additional RM5,000/year must be
.20X1
(300,000/10
(350,000/10
charged to retained earnings and
years)
years)
allocated to both NCI and group
retained earnings

14

(Please note the amount of depreciation expenses adjusted depends on the number of
years that has lapsed since acquisition date up to consolidation date. In this example, 1 year
has lapse from acquisition to consolidate date. Therefore the depreciation expenses
adjustment is only made for 1 year only).
The same depreciation principle is applied for parents fair value changes in depreciable
assets. The adjustments can be viewed as:
Adjustment
Ps books
Parents RE @ consolidation

XX

+ / - ) depreciation adjustment

x / (x)

15

Post-acquisition fair value changes

Sometimes we encounter cases where the asset has fair value changes post acquisition
date.
Example:
Subsidiary S was acquired on 1.1.20X1. The following are the details of its properties which
has useful life of 10 years @ date of acquisition. The group practices depreciation on a
straight line method. The subsidiary has not adjusted its assets to fair value.
Book value @ 1.1.20X1 = RM300,000
Fair value @ 1.1.20X1 = RM350,000
Fair value @ 31.12.20X1 = RM360,000
NBV @
1.1.20X1
300,000

FV less acc
depn @
31.12.X1
315,000

FV @
1.1..20X1
350,000

Fair value
changes
50,000

New FV @
31.12.X1

Fair value
changes

360,000

45,000

Accounting treatment
DR properties
RM50,000
CR RR
RM50,000
(This RM50,000 change is to be used in goodwill
calculation since the change occurred @
acquisition date)
Depreciation adjustment @ 31.12.X1:
Depreciation exp based on RM300k
DR Depreciation exp (RE)
RM30,000
CR Accumulated depn
RM 30,000
Additional depn exp due to FV change@ acq date
DR Depreciation exp (RE)
RM5,000
CR Accumulated depn
RE 5,000
(After adjusting for total depreciation of RM35,000;
the asset less accumulated depreciation is
RM315,000
Accounting treatment

DR properties
CR RR

RM45,000
RM45,000

(Please note there would not be any additional

depreciation besides the RM35,000 because the
date fair value is adjusted for the second time is
the same as consolidation date.)

16

The workings of fair value adjustment are illustrated as follows:

Step 1 : Goodwill calculation
Consideration transferred

XX

+) NCI

XX

-) Fair value of Net Assets (Subsidiary @ acquisition):

-) Ordinary shares

XX

-) Share Premium

XX

-) Retained earnings

XX

-) FV adjustment property

50,000

(XX)

Goodwill

XX

Preparing the adjustment for pre and post-acquisition reserves @ conso date
NCI @ acquisition
Subsidiary:
RE @ Conso
Less) RE @ Acquisition
Post Acquisition RE

Group RE

X (20%)
9,000

X (80%)

Group RR

XX
(XX)
XX

Less) additional depreciation

(5,000)

Adjusted post RE
Subsidiarys post RR
Parent

XX
45,000

RE @ Conso
Total

NCI (20%)
XX

XX

36,000
XX
XX

XX

Full Illustration
17

The SOFP of P and S as at 31.12.20X1 are as follows:

Ordinary share capital @RM1 par

Share premium
Retained profits
Long term liabilities
Current liabilities
TOTAL

Parent (P)
RM000
1,300
nil
800
300
200
2,600

Subsidiary(S) RM000

1,200
280
1,120
2,600

380
320
320
1,020

Property
Plant and equipment
Current assets
TOTAL

200
150
350
200
120
1,020

On 1.1.20X1, P acquired 90% of the ordinary shares belonging to S by paying

RM500,000 in cash and issuing 200,000 of Ps ordinary shares with market value of
RM2.50 on date of acquisition. The retained earnings of S at the date of acquisition is
RM250,000. Other reserves remain unchanged.
The fair value of Ss property on acquisition date was RM500,000. Subsequently on
31.12.20X1 the fair value of Ss property is estimated to be at RM600,000. As at
acquisition date, property is depreciated over 20 years on a straight line basis.
As at acquisition date, S also owns patents and licenses worth RM200,000 which has
5 years useful life.
SOLUTION
The journal entries for the above changes are as follows:
JOURNAL 5
In Ps books @ acquisition date
DR Investment

1,000,000

CR Cash

500,000

CR Ordinary shares (200,000 x RM1.00)

200,000

CR Share premium (200,000 x RM1.50)

300,000

JOURNAL 6
In Ss books @ acquisition date (pre-acquisition adjustments)
DR Property

100,000

DR Patents & Licenses

200,000

CR Revaluation reserve

300,000

JOURNAL 7

18

In Ss books @ consolidation date (post acquisition adjustments)

DR Property

125,000

CR Revaluation reserve

125,000

STEP 1: Calculating goodwill

Consideration transferred

1,000,000

Add) NCI (10% x FVNA)

90,000

Less) Fair value of net assets of S:

-) Ordinary share

200,000

-) Share premium

150,000

-) Retained earnings

250,000

-) Revaluation reserve (patents)

200,000

-) Revaluation reserve (property)

100,000

(900,000)

GOODWILL

190,000

Since there is a fair value adjustment in property and patents& licenses, depreciation
and amortization adjustments must be made:
Property : FV adjustment 500,000 400,000) / 20 years = 5,000/year
Patents & licenses : FV adjustment 200,000/5 years = 40,000/year
STEP 2 : Preparing the adjustment for pre and post-acquisition reserves

RM000
NCI @ acquisition
Subsidiary:
RE @ conso
Less)RE @ acquisition
Post-acquisition RE
Depreciation (500,000-380,000)/20
Amortisation (200,000/5 years)

Revaluation reserve post

acquisition (600-475)
Parent:
Retained earnings
Total

NCI
(RM000)
90

CONSO RE
(RM000)

350
(250)
100
(5)
(40)
55

5.5

49.5

125

12.5

CONSO RR
(RM000)

112.5

800
108

849.5

112.5

19

STEP 3 : PREPARING CONSOLIDATED SOFP:

Assets
Goodwill
Patents & licenses
Property
Plant and equipment
Current assets
Total Assets
Equities & liabilities
Ordinary share capital
Share Premium
Retained earnings
Revaluation reserve
NCI

Subsidiary (200,000-40,000)
Parents (1,200)
Subsidiary (380+100+125-5)
Parents (280)
Subsidiary (320)
Parents (1120-500)
320

Parent ONLY (1,300+200)

Parent (300)
Subsidiary eliminate

Long term liabilities

Current liabilities
Total Equities & Liabilities

CONSO
(RM000)
190
160
1,800
600
940
3,690
1,500
300
849.5
112.5
108

Parent (300)
Subsidiary (200)
Parent (200)
Subsidiary (120)

500
320
3,690

INTERCOMPANY BALANCES AND TRANSACTIONS

It is common for companies within the same group to conduct transactions among each
other. This will result in asset balances in one companys book whilst it will be reported as
liability in another companys books. Since the preparation of consolidation consists of
aggregation of assets and liabilities of all the companies in a group, this will result in double
reporting. Therefore before consolidation is done, intercompany balances must be
eliminated.
Some of the balances can be shown as follows:
1.
2.
3.
4.
5.
6.

Loans receivable/payable
Accounts receivables/ payables
Current accounts
Bills receivables/payables
Interest receivables/payables
Dividends receivables/payables

In cases where one party has remitted cash payment of deliver goods which have yet to be
accounted for by the other party, the payment or goods is to be treated as asset in transit.

20

INTERCOMPANY BALANCES
Example 1

21

P acquired 80% of the ordinary shares in S on 31.12.X7.

The following is the extract of SOFP for P and S as at 31.12.X9:

Land
Plant
Machineries
Loan to S
Current account
Inventories
Trade receivables
Cash in bank

Ordinary shares
Retained earnings
Loan from P
Current account
Trade payables

P (RM'000)
10,000
3,000
2,000
500
200
300
250
250
16,500

S (RM'000)
4,000
1,500
900
nil
nil
100
120
80
6,700

10,000
5,500
nil
nil
1,000
16,500

4,000
1,500
500
200
500
6,700

1. P has given a loan to S amounting to RM500,000

2. P has made some advance payments on behalf of S and all advances are recorded in current account
3. In trade receivables of P, there is amount due from S valued at RM50,000. S has recorded
this
as part of its trade payables
Solution
Loan - recorded as asset in P's books and liability in S's books. Need to eliminate.
Current account - recorded as asset in P's books and liability in S's books. Need to eliminate.
Trade receivables in P's books contained amount due from S. So RM50,000 must be deducted
from trade receivables of P. RM50,000 must also be deducted from trade payables in S's books.
Therefore in consolidating SOFP, the following items are zerorised:
- loan to S / loan to P
- both current accounts
- trade receivables of P (250-50 = 200)
- trade payables of S(500-50=450)
ITEMS IN TRANSIT
Sometimes overlapping balances in parents books and subsidiary's books do not match.
This can be caused by:
1. payment in transit
2. inventories in transit
The differences between the balances in parent's and subsidary's books are added back to
either cash in bank account or inventories account depending on which item is in transit.

STATEMENT OF FINANCIAL POSITION

22

DEFERRED TAX IMPLICATION ON FAIR VALUE ADJUSTMENT

For consolidation purposes, assets are required to be reported at fair value, therefore
depreciation charged will be based on fair value.
At the company level, the subsidiary may not report its assets at fair value, therefore
depreciation charged will be based on book value.
In circumstances where fair value is higher than book value, depreciation charged at
consolidation level will be higher than at company level. This increases depreciation
expenses which in turn will reduce net profits. This will result in lower tax value than actual
tax payable. This creates deferred tax liability.
Example:
As at 1.1.20X1 the following values were given

Plant

Useful life

Book Value

Fair Value

5 years

20,000

25,000

4,000

5,000

Depreciation per year

Assume company tax at 25%
Adjusting entries:
DR Plant

5,000

CR Revaluation surplus (75%)

3,750

CR Deferred tax liability (25%)

1,250

Deferred tax liability will eventually be depleted over the useful life of the asset:
@ 31.12.20X1 one year after acquisition, the group needs to adjust for additional
depreciation of 1,000. The adjusting entries are:
DR Depreciation expense (SOCI)

1,000

CR Accumulated Depreciation
DR Deferred tax liability
CR SOCI

1,000
250
250

After 5 years there will be nil balance in deferred tax liability.

For non-depreciable non-current assets, deferred tax liability will remain until the asset is
disposed.

23