C HAP TER 25

Accounting for group

structures
LEARNING OBJECTIVES (LO)
  25.1 Understand what it means to ‘consolidate’ the financial statements of a group of entities,
and what the rationale is for doing so.
  25.2 Be aware of some of the history behind the development of Australian accounting standards
pertaining to consolidated financial statements.
  25.3 Be aware that if an organisation is considered to be an ‘investment entity’ then it does not need to
consolidate those entities over which it has a potentially controlling ownership interest.
  25.4 Understand the alternative consolidation concepts.
  25.5 Understand that control is the criterion for determining whether or not to consolidate the accounts of
a legal entity within the ‘group accounts’, and be able to explain what control means, and what factors
should be considered in determining the existence of control.
  25.6 Be able to differentiate between direct and indirect control.
  25.7 Understand the basics involved in preparing consolidated financial statements and, in doing so, be able
to use a ‘consolidation worksheet’ to perform relatively simple consolidations, including those that lead
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to the recognition of goodwill.

  25.8 Understand what a ‘gain on bargain purchase’ represents, and how it shall be accounted for.
  25.9 Know how to perform a consolidation when the subsidiary’s assets are not recorded at fair value prior
to consolidation.
25.10 Know how to perform a consolidation when the subsidiary’s accounts, at the time of acquisition,
exclude identifiable intangible assets that the subsidiary controls.
25.11 Know how to perform a consolidation in a period subsequent to the initial acquisition of a subsidiary.
25.12 Be aware of some of the disclosure requirements of AASB 12.
25.13 Understand the relative meanings of ‘control’, ‘joint control’ and ‘significant influence’.

Before reading this chapter, watch the accompanying video of Craig Deegan explaining why this topic is important
for your studies.

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Deegan, C. (2019).
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 CHAPTER 25: Accounting for group structures 949

OPENING QUESTIONS
Before reading this chapter, please consider how you would answer the following six questions. We will
return to these questions at the end of the chapter, where we suggest some answers.
1. What is a ‘parent entity’, and what is a ‘subsidiary’? LO 25.1, 25.7
2. What are ‘consolidated financial statements’? LO 25.1
3. What does ‘control’ mean in the context of consolidation accounting, and of what relevance is ‘control’ to the
decision to include, or exclude, the financial accounts of an entity within the consolidated financial statements?
LO 25.5
4. What is ‘goodwill’, and how is it determined? LO 25.7
5. If some intangible assets were not recognised by a subsidiary because they were internally developed, can
those same intangible assets be recognised in the consolidated financial statements? LO 25.10
6. Will the retained earnings and equity reserves of a subsidiary be included within the consolidated financial
statements? LO 25.7

AASB STANDARDS REFERRED TO IN THIS CHAPTER AND IFRS/IAS EQUIVALENTS

AASB no. Title IFRS/IAS equivalent
3 Business Combinations IFRS 3
9 Financial Instruments IFRS 9
10 Consolidated Financial Statements IFRS 10
11 Joint Arrangements IFRS 11
12 Disclosure of Interests in Other Entities IFRS 12
13 Fair Value Measurement IFRS 13
112 Income Taxes IAS 12
116 Property, Plant and Equipment IAS 16
127 Separate Financial Statements IAS 27
128 Investments in Associates and Joint Ventures IAS 28
136 Impairment of Assets IAS 36
137 Provisions, Contingent Liabilities and Contingent Assets IAS 37
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138 Intangible Assets IAS 38

25.1 The meaning of ‘consolidated financial statements’, and the rationale

for consolidating the financial statements of different legal entities LO 25.1
In this and the next four chapters we will consider how to account for groups of entities. Specifically,
we will consider how to consolidate (or combine) the financial statements of a parent entity and its group
subsidiaries. Typically, a group of
entities comprising the
It is common in Australia, and elsewhere, for groups of companies to combine in the pursuit parent entity and each of
of common goals. For example, a company might gain a controlling equity ownership in another its subsidiaries.
company, with the intention of increasing the total assets and, relatedly, the profits of the group
(the ‘group’ would comprise the parent entity and its subsidiaries). Where a reporting entity controls
consolidation
another entity, AASB 10 Consolidated Financial Statements requires that consolidated financial The aggregation of the
statements be prepared. In this chapter we will consider issues relating to the consolidation process, accounts of a number of
including: separate legal entities.

∙ the rationale for presenting consolidated financial statements

∙ a brief review of the history of the Australian consolidated accounting requirements
∙ the importance of control to the decision to consolidate an entity
∙ the basic mechanics of the consolidation process, together with a consideration of how to account for any goodwill
or gain on bargain purchases that might arise on consolidation.
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 950 PART 8: Accounting for equity interests in other entities

Chapters 26, 27 and 28 will consider consolidation issues relating to intragroup transactions, non-controlling
interests and indirect ownership interests. Accounting issues relating to consolidations are numerous. In the following
chapters we hope to provide a solid foundation for understanding the process of consolidating separate legal entities.
There are a number of key terms used in this chapter. We will briefly introduce some key terms now, which
we will revisit throughout this and the next four chapters. In defining these key terms we will rely upon definitions
provided in AASB 10. Consolidation accounting key terms that we will use include:
∙ 
consolidated financial statements, which are the financial statements of a group presented as
control over an those of a single economic entity
investee ∙ a group, which comprises a parent and its subsidiaries
When the investor is ∙ a parent, which is an entity that controls one or more entities known as subsidiaries
exposed, or has rights,
∙ a subsidiary, which is an entity, typically a company but would also include an unincorporated
to variable returns from
its involvement with the entity such as a partnership or a trust, that is controlled by another entity (known as the parent)
investee and has the ∙ 
control over an investee, which is defined in AASB 10, paragraph 5, as being in existence when
ability to affect those
the investor ‘is exposed, or has rights, to variable returns from its involvement with the investee
returns through its power
over the investee. and has the ability to affect those returns through its power over the investee’.
As we can see from the above definitions, an entity must ‘control’ an organisation before that
organisation is considered to be a ‘subsidiary’ of the investor.
Consolidated financial statements provide information about the financial performance and position of an entity
that exists in an economic, but not a legal, sense. The ‘legal entities’ are the separate organisations within the group. As
a simple example of a ‘group’—or an economic entity as it is also called—we can consider Figure 25.1. In Figure 25.1,
Company A holds all of the issued capital—and voting rights—in Company B. Company A and Company B would each
be considered to be separate legal entities. Company A would be considered to be the ‘parent’ and, because Company
B is controlled by Company A, Company B would be considered to be the subsidiary of Company A. Company A and
Company B together would be considered to represent a ‘group’, and while Company A and Company B might be
considered to be separate legal entities, Company A and Company B together would constitute a single economic entity.

Figure 25.1
A simple parent
and subsidiary Economic
relationship entity
Company A
(parent)
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Separate
100%
legal
entities

Company B
(subsidiary)

Rationale for consolidating the financial statements of different legal entities

Virtually every company listed on a securities exchange has subsidiaries. Therefore, investors in a parent entity (which
has control over the subsidiaries) have effectively invested in the group comprising the parent entity and its subsidiaries.
Many public companies have subsidiaries that can number in the hundreds. Often, people do not appreciate that when
we talk about the results of large organisations listed on a securities exchange, we are actually talking about the
combined (consolidated) results and financial positions of many entities all consolidated together. Therefore, when we
are talking about a large organisation’s performance as a whole (as reflected in the consolidated financial statements),
we are aggregating the results of a large number of different (but controlled) legal entities, some of which might have
done very well, and some very poorly.
If investors in a large organisation wish to review the operations of the group under the control of the parent entity
concerned, it would be extremely confusing for them to have to study hundreds of separate financial statements, each
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 CHAPTER 25: Accounting for group structures 951

prepared separately for each entity making up the group. The purpose of providing consolidated financial statements
is to show the results and financial position of a group of organisations as if they are operating as a single economic
entity; but remember, these consolidated financial statements represent the consolidation of the financial statements of
many separate legal entities. That is, the consolidated financial statements represent the combination of the financial
statements of all the entities within the group, with the ‘group’ comprising the parent entity and all of its subsidiaries.
When consolidated financial statements are prepared we get one set of financial statements (plus supporting notes)
that cover the entire group. That is, we get:
∙ one consolidated statement of profit or loss and other comprehensive income covering the group
∙ one consolidated statement of financial position covering the group
∙ one consolidated statement of changes in equity covering the group
∙ one consolidated statement of cash flows covering the group.
In terms of the act of preparing consolidated financial statements, paragraph B86 of AASB 10 states (within
AASB 10, paragraphs commencing with B are part of the Application Guidance, which is attached to AASB 10):

Consolidated financial statements combine like items of assets, liabilities, equity, income, expenses and cash flows
of the parent with those of its subsidiaries. (AASB 10)

For example, if Company A and Company B, as shown in Figure 25.1, have cash of $500 000 and $400 000
respectively, the consolidated financial statements would show cash of $900 000 being controlled by the economic
entity. As we will see in this and the next three chapters, the process of aggregating items will also often involve
undertaking various eliminations and adjustments. As will be stressed in this and in Chapter 26, the consolidation
process does not involve any adjustments to the financial accounts of the individual entities making up the group.
The effect of previous consolidation adjustments will also not be reflected in the opening balances
of the ledger accounts of any entities within the group. Supplementary worksheets are utilised to
perform the consolidation, and we will call these ‘consolidation worksheets’. The preparation of consolidated
statement of profit
consolidated financial statements will not obviate the need for separate entities to prepare their own,
or loss and other
separate financial statements.
comprehensive
Following the consolidation process, the consolidated statement of profit or loss and other income
comprehensive income will show the result derived from operations with parties external to A statement of profit
the group of entities. The effects of all intragroup transactions—in other words, the transactions or loss and other
comprehensive income
between organisations within the economic entity—are eliminated, since from the economic entity’s that combines, with
perspective (that is, the controlling or parent entity and its controlled entities) income will not be various eliminations
derived as a result of transactions within the group, only from transactions with external parties. and adjustments, the
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statements of profit or loss

The consolidated statement of financial position will show the total assets controlled by the and other comprehensive
economic entity and the total liabilities owed to parties outside the economic entity. Liabilities owing income of the various
to organisations within the group (that is, within the economic entity) by other group members will entities within the
economic entity.
be eliminated in the consolidation process and so will not be shown in the consolidated statement
of financial position.

25.2 History of Australian accounting standards that govern the

preparation of consolidated financial statements LO 25.2
In June 1990 the Australian Accounting Research Foundation (now defunct) issued AAS 24 Consolidated
Financial Statements. The standard was applicable to all reporting entities in the public and private sector. It became
operative for financial years ending on or after 30 June 1991. AAS 24 followed the release in June
1987 of ED 40 Consolidated Financial Statements. AAS 24 ultimately became AASB 1024.
consolidated
One aim in releasing first ED 40, and then AAS 24, was to engineer the demise of the practice
statement of financial
of using partnerships and trusts to keep debt off the consolidated statement of financial position.
position
We will discuss this practice below. A statement of financial
Prior to the original issue of an accounting standard pertaining to consolidations (AAS 24), position that combines,
with various eliminations
companies had a great deal of freedom in how they accounted for their subsidiaries, and many
and adjustments, the
companies used this freedom opportunistically, or ‘creatively’, to present financial statements in statements of financial
the best possible light. Sullivan (1985) identified examples of companies using unit trusts to keep position of the various
entities within the
debt off the consolidated statement of financial position (balance sheet). As shown by Sullivan, the
economic entity.
consolidation of the trust itself might not greatly alter the entity’s statement of financial position,
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 952 PART 8: Accounting for equity interests in other entities

but consolidation of the entities below the trust might have considerable effects. Sullivan showed how, by interposing
a unit trust into a group’s structure, an organisation could effectively keep both the debt incurred by the trust and
the debt incurred by other entities under the control of the trust off the consolidated statement of financial position.
Companies were able to do this because they were able to exploit a legal loophole, which restricted consolidated
financial statements to including only ‘companies’. That is, any entity that was not a company could not be legally
included within the consolidation process. Where a unit trust, for example, was interposed within a group structure, the
parent entity would disclose its investment in the trust at cost—usually a relatively insignificant amount—and none of
the assets or liabilities of the trust would be reflected in the consolidated financial statements.
Before the Corporations Legislation Amendment Act 1991 came into force, s. 295 of The Corporations Law
required group financial statements to be prepared. However, s. 9 defined a ‘group’ as meaning ‘(a) the company; and,
(b) its subsidiaries at the end of the financial year’. In explaining why trusts could not be included (and, remember, it is
the parent entity’s and its subsidiaries’ financial statements that are included in the consolidated financial statements),
subsidiaries were defined in The Corporations Law in such a way that they had to be companies; so any entity that
was not a company could not be legally consolidated as it could not be included within the ‘group’. Nor could entities
controlled by a non-corporate entity be consolidated—even if the controlled entities happened to be companies. This
introduced what Sullivan labelled a partition effect (see Figure 25.2).
Hence, before the amendments to The Corporations Law in 1991 (discussed below), group consolidated financial
statements could include only entities that were companies. Therefore, by interposing a unit trust (such as A Trust in
Figure 25.2), which in turn would own the equities in other companies (C Ltd and D Ltd in Figure 25.2), none of the
financial statements of the companies controlled by the trust, or of the trust itself, could legally be included in the
consolidation process. This was referred to as a partition effect as everything from the trust down was partitioned off
and excluded from the consolidation process. This could have a beneficial impact on the leverage indicators (such as
debt to assets) derived from the consolidated financial statements.
Referring again to Figure 25.2, if the trust had not been interposed but instead C Ltd and D Ltd were directly
controlled by B Ltd, the debt-to-assets ratio of the economic entity would be 57 per cent. By interposing a unit trust
and not including C Ltd, D Ltd or the trust itself in the consolidation process, the debt-to-assets ratio falls to a more
favourable 40 per cent.
As an actual example of the practice of non-consolidation by using non-corporate entities, Sullivan considered
CSR Ltd’s use of an interposed unit trust. The arrangement is represented in Figure 25.3. According to Sullivan, CSR
Ltd’s investment in Delhi Australia Fund (DAF) was $189 million and in Delhi Petroleum Pty Ltd (DPPL) $60 million
by way of redeemable preference shares. This total of $249 million, of which $188 million was loan finance, was
separately captioned on CSR’s statement of financial position with a break-up provided in the notes to the financial
statements. However, this was the only amount disclosed on CSR’s statement of financial position concerning its
DAF–DPPL interests.
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Figure 25.2
Illustration of A Ltd
the partition (assets 100, liabilities 40)
effect caused by
interposing a unit
trust within a group
structure
B Ltd
(assets 50, liabilities 20)

A Trust
(assets 2, liabilities 1)

C Ltd D Ltd
(assets 60, liabilities 50) (assets 70, liabilities 50)

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 CHAPTER 25: Accounting for group structures 953

Figure 25.3
CSR WPAC Illustration of an
interposed unit
trust arrangement

DAF Lenders

CSRI*

DPPL

Joint
venture

CSRI* = CSR Investments Pty Limited

DAF’s liabilities did not appear on CSR’s consolidated statement of financial position, even though CSR
effectively controlled the operations of DAF. This was consistent with the restriction that only the assets and liabilities
of companies could be included in the consolidation process. Sullivan (1985, p. 182) stated:
DAF is primarily supported by loan finance of $188 million from CSR and $854 million from the bank sources.
These funds are basically deployed as equity investments in DPPL of $548 million, a loan to DPPL of $288 million
and with various expenses deferred totalling $307 million.
DAF being a unit trust is not subject to the Companies Act 1981, and hence no presumption of subsidiary
company status can arise. It follows simply that neither can it be a subsidiary under s. 7(i) of the Act. In fact legal
opinion sought by CSR supports this view. Nothing turns, therefore, on the 50 per cent holding and the Trustees Act
1925 is silent. (From SULLIVAN, G., ‘Accounting and Legal Implications of the Interposed Unit Trust Agreement’,
Abacus, 21(2), p 182 (c) 1985. Reproduced with permission of John Wiley & Sons Ltd.)
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By ‘blacking out’ DAF and its investments (that is, excluding them from the consolidation process), CSR’s
consolidated statement of financial position provided lower debt ratios than would otherwise have been the case. As
Sullivan (p. 186) states:
The effect of incorporating the off-balance sheet funds on CSR’s consolidated balance sheet would be quite severe
on the gearing ratio. For the past ten years, this ratio has ranged from 25 per cent to 34.3 per cent, being 25 per cent
at 31 March 1984. It is possible to perform a consolidation of DAF and DPPL and then to consolidate this DAF
‘group’ into CSR, using publicly available information. This exercise brings a further $854 million in long-term
debt, $9 million in current liabilities, $801 million of interests in joint arrangements, $316 million in non-current
assets and $48 million in current assets onto the revised consolidated balance sheet. What impact does this have
on the gearing ratio? Quite simply, it nearly doubles to 47.6 per cent. The implication for a restrictive trust deed
gearing covenant is clear enough. (SULLIVAN, G., (1985). Reproduced with permission of John Wiley & Sons Ltd.)
It would appear questionable whether CSR’s consolidated financial statements could present a ‘true and fair’ view
without disclosing the activities and financial position of a sizeable and material portion of the group. Consistent with
this concern, Sullivan (p. 195) remarks:
It is difficult to concede that the preparation of group accounts can proceed to any fulfilment of the true and fair
notion, however conceived, when entire segments of a group’s operations can be partitioned from scrutiny and
when the accounts of the instrument itself need not be prepared for public purposes. The use of the interposed unit
trust instrument is at once antipathetical to common-sense precepts of any system of accounting based on the true
and fair concept and espousing corollary doctrines of full and fair disclosure and the duty to report the substance,
and not the mere form, of commercial transactions. (SULLIVAN, G., (1985). Reproduced with permission of John
Wiley & Sons Ltd.)
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 954 PART 8: Accounting for equity interests in other entities

Another loophole (now closed) to consolidation was provided by the ‘old’ s. 9 of The Corporations Law. Section
9 provided that ‘group accounts’ might be presented as:

(a) one set of consolidated accounts for the group;

(b) two or more sets of consolidated accounts together covering the group;
(c) separate accounts for each body corporate in the group;
(d) the combination of one or more sets of consolidated accounts, and one or more sets of separate accounts,
together covering the group.

Therefore, in the past the entity could be selective about which organisations it included within the consolidated
financial statements.
Amendments to The Corporations Law deleted the definitions of ‘group’ and ‘group accounts’. The Corporations
Act 2001 now adopts the requirements embodied within AASB 10 (which is now the relevant accounting standard).
Specifically, s. 295(2)(d) now states that:

consolidated entity The financial statements for the year are:

A combined entity (a)   the financial statements in relation to the entity reported on that are required by the accounting
constituted by a parent
standards; and
entity and its controlled
entities. (b)   if required by the accounting standards—the financial statements in relation to the consolidated
entity that are required by the accounting standards.

That is, the Corporations Act now requires consolidated financial statements to be prepared in the manner required
by Australian Accounting Standards. AASB 10 does not allow an entity to selectively choose which subsidiaries it will
include within the consolidated financial statements. Rather, with limited exceptions (and a specific exception relates
to situations where a parent entity is deemed to be an ‘investment entity’; we will consider this limited exception
shortly), AASB 10 requires all controlled entities to be incorporated within the consolidated financial statements
regardless of their legal form (that is, regardless of whether the subsidiary is a company, partnership, trust or so forth
it must be included within the consolidation process), and regardless of whether the subsidiary is involved in dissimilar
business activities. Specifically, paragraph 19 requires that a parent shall prepare consolidated financial statements.
A parent is defined as ‘an entity that controls one or more entities’. As parents are required to prepare ‘consolidated
financial statements’, we therefore need a definition of ‘consolidated financial statements’. Consolidated financial
statements are defined in Appendix A as:
The financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the
parent and its subsidiaries are presented as those of a single economic entity. (AASB 10)
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The above definition in turn refers to subsidiaries. A subsidiary is defined as ‘an entity that is controlled by
another entity’.
Therefore, to reiterate some of the important points above, it is now a requirement—and has been for many
years—that (other than the exception applying to ‘investment entities’) the consolidated financial statements shall
incorporate the financial statements of the parent entity and all of the entities it controls (that is, all of its subsidiaries)
and this is the case regardless of the legal form of the subsidiaries or the nature of the operations of the subsidiaries.
These requirements act to eliminate many of the apparently opportunistic accounting practices that were reported by
Sullivan (1985), as briefly discussed earlier in this section.
In Chapter 1 we considered the requirement that financial statements be ‘true and fair’. This requirement extends
to the consolidated financial statements. That is, the Corporations Act has a requirement that the directors are to ensure
that both the financial statements of the parent entity, as well as the consolidated financial statements, are prepared in
a manner that provides a true and fair view of the financial position and performance of the parent entity and group
respectively. In this regard, s. 297 of the Corporations Act states:

the financial statements and notes for a financial year must give a true and fair view of:
(a) the financial position and performance of the company, registered scheme or disclosing entity and,
(b) if consolidated financial statements are required, the financial position and performance of the consolidated
entity. This section does not affect the obligation under section 296 for a financial report to comply with
accounting standards.

It should be noted that when we review the annual reports of corporations we will typically see two columns of
numbers for the current year, and two columns for the preceding year. One set will relate to the group (the consolidated
numbers) and one set will relate only to the parent entity.
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 CHAPTER 25: Accounting for group structures 955

As emphasised in Chapter 22 (on segment disclosures), consolidated financial statements must be read with care.
They frequently provide details of the aggregated financial position and financial performance of a large number of
entities that are involved in many different industries and localities. Some organisations within an economic entity
might have performed very well, while others might have performed poorly. This information will be lost in the
consolidation process. Also, the consolidated statement of financial position represents the consolidation of many
entities, which conceivably have vastly different financial structures. As such, it is possible that the consolidated
statement of financial position might not be representative of the statements of financial position of individual legal
entities. Hence, where consolidated financial data is provided, it is essential that it is supplemented by segment data
(that provides information about the different operating segments in the economic entity). Chapter 22 explains how to
produce segment disclosures.
While ‘control’ of another entity is a central requirement for that entity to be included in the consolidation process,
AASB 10 requires that even where control is only temporary, the consolidated statements should incorporate the
results of a subsidiary (which as we know is defined as an entity that is controlled by a parent entity) during the time
in which control existed, even though this might have been for only a small part of the year. If control is lost during
the period, the income and expenses of a subsidiary shall be included in the consolidated financial statements until the
date on which the parent ceases to control the subsidiary.

WHY DO I NEED TO KNOW THE MEANING OF ‘CONSOLIDATED FINANCIAL

STATEMENTS’?
When the results of a large organisation are released by the directors of an organisation, or are being discussed
in the news media, it is the group, or consolidated, results that are being discussed and not the results of the
parent entity alone. Therefore, to grasp the focus of the discussion, and to make sense of what the numbers
being discussed actually represent, it is important that we understand the nature of consolidated financial
statements. Further, to understand the contents and context of consolidated financial statements, we need to
comprehend the rules that determine which entities are included in the group accounts (that is, we need to
know what a ‘parent’ is and what a ‘subsidiary’ is), as well as the accounting requirements pertaining to the
types of eliminations and adjustments that occur in respect of the financial statements of the separate legal
entities (the parent entity and the subsidiaries’ financial statements) that are included within the consolidated
financial statements.
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25.3 ‘Investment entities’: exception to consolidation

LO 25.3
While the earlier material has stressed that a parent entity has to consolidate all of the entities it controls, or
has the capacity to control, there is one exception that we have referred to and this relates to situations where
‘investment entities’ are the parent entity.
Investment entities are defined at paragraph 27 of AASB 10 as:

An entity that:
(a) obtains funds from one or more investors for the purpose of providing those investor(s) with investment
management services;
(b) commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation,
investment income, or both; and
(c) measures and evaluates the performance of substantially all of its investments on a fair value basis. (AASB 10)

The standard also identifies the typical characteristics of an investment entity. Paragraph 28 states:

In assessing whether it meets the definition described in paragraph 27, an entity shall consider whether it has the
following typical characteristics of an investment entity:
(a) it has more than one investment (see paragraphs B85O–B85P);
(b) it has more than one investor (see paragraphs B85Q–B85S);
(c) it has investors that are not related parties of the entity (see paragraphs B85T–B85U); and
(d) it has ownership interests in the form of equity or similar interests (see paragraphs B85V–B85W).
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 956 PART 8: Accounting for equity interests in other entities

The absence of any of these typical characteristics does not necessarily disqualify an entity from being
classified as an investment entity. An investment entity that does not have all of these typical characteristics
provides additional disclosure required by paragraph 9A of AASB 12 Disclosure of Interests in Other Entities.
(AASB 10)

With limited exceptions, investment entities are not required to consolidate subsidiaries, or apply AASB 3 Business
Combinations consolidation-related measurement requirements. Rather, the investment entity would measure its
investment in the subsidiary at fair value with gains and losses going to profit or loss in a manner consistent with the
requirements of AASB 9 Financial Instruments. As paragraphs 31 to 33 of AASB 10 state:
31. Except as described in paragraph 32, an investment entity shall not consolidate its subsidiaries or apply AASB
3 when it obtains control of another entity. Instead, an investment entity shall measure an investment in a
subsidiary at fair value through profit or loss in accordance with AASB 9.
32. Notwithstanding the requirement in paragraph 31, if an investment entity has a subsidiary that is not itself an
investment entity and whose main purpose and activities are providing services that relate to the investment
entity’s investment activities (see paragraphs B85C–B85E), it shall consolidate that subsidiary in accordance with
paragraphs 19–26 of this Standard and apply the requirements of AASB 3 to the acquisition of any such subsidiary.
33. A parent of an investment entity shall consolidate all entities that it controls, including those controlled through
an investment entity subsidiary, unless the parent itself is an investment entity. (AASB 10)
Therefore, while there is a general requirement that the financial statements of entities controlled by the parent
entity (or potentially controlled by the parent entity—an issue that we will discuss shortly) shall be consolidated with
those of the parent entity, there is a limited exception when the parent entity is an investment entity. The view that has
been taken by the IASB is that if the investment entity is not playing an active managerial role within the investee, and
has acquired the equity interest only for a business purpose, which is to invest funds solely for returns from capital
appreciation, investment income or both, then it would be misleading to consolidate the financial statements of the
investee with those of the investment entity.

25.4 Alternative consolidation concepts

LO 25.4
Generally speaking, there are three main consolidation concepts that have been discussed over time by
researchers as being relevant to the consolidation process. These three alternative concepts are:
1. the entity concept
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2. the proprietary concept

3. the parent-entity concept.
AASB 10 adopts the entity concept (as did its predecessors, AASB 127 Separate Financial Statements and,
before that, AASB 1024). Pursuant to the entity concept, the entire group is viewed as a single economic entity,
which incorporates all of the assets and liabilities of the parent entity and its subsidiaries (subject to the elimination
of the impacts of intragroup transactions). The consolidated financial statements reflect the financial position and
financial performance of the economic entity as if it were operating as a single economic unit under common
managerial control—the control emanating from the management group of the ultimate parent organisation. The
consolidated statement of profit or loss and other comprehensive income reflects the profit or loss and other items
of comprehensive income that arise from transactions with parties external to the economic entity. The consolidated
statement of financial position shows the assets of the economic entity (and, remember, the ‘economic entity’
means the parent entity and all of its subsidiaries) and all liabilities owing to parties external to the economic entity.
No liabilities owing to any member of the economic entity by another member will be shown in the consolidated
statement of financial position. What this means is that transactions between the individual entities making up the
economic entity, for example, sales and purchases, dividends paid and received, and receivables and payables, must
be eliminated as part of the consolidation process.
Pursuant to the entity concept of consolidation, non-controlling interests are treated as part of consolidated equity.
Non-controlling interests are defined in Appendix A of AASB 10 as: ‘equity in a subsidiary not attributable, directly
or indirectly, to a parent’.
For example, if Company A owned 80 per cent of Company B (with Company A therefore being considered to
be the ‘parent entity’) and the remaining 20 per cent of the shareholding was owned by an unrelated entity, the non-
controlling interest in Company B is 20 per cent.
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 CHAPTER 25: Accounting for group structures 957

By contrast, under the proprietary concept of consolidation, all assets and liabilities of the parent entity and only a
proportionate share of the subsidiaries’ assets and liabilities are included in the consolidation process. Non-controlling
interest is not included if the proprietary concept is embraced by virtue of the view that any non-controlling interest
is external to the consolidated group. This would mean that if the parent entity holds 70 per cent of the shares in the
subsidiary, it would include 70 per cent of the assets, liabilities, revenues and expenses in the consolidation process
(and not 100 per cent of the assets and liabilities, as would be the case under the entity concept). That is, under the
proprietary concept only 70 per cent of the subsidiary’s assets would be included, although the parent entity would
effectively be able to control all of the subsidiary’s assets.
Under the final concept—the parent-entity concept—all assets and liabilities of the parent and its subsidiaries are
included. The non-controlling interest is treated as a liability, rather than as part of equity.
As just indicated, AASB 10 requires the adoption of the entity concept. In rejecting the parent-entity concept, the
accounting standard-setters considered that it was inappropriate to classify the interests of outside shareholders, that is,
the non-controlling interests, as liabilities because their claim on the net assets of a subsidiary is not of the nature of a
liability. In the Basis for Conclusions on IFRS 10 (on which AASB 10 is based), paragraphs BCZ157 to BCZ159 state
(the Basis for Conclusions to IFRS 10 incorporates some material from the Basis for Conclusions that was provided
some years earlier for IAS 27; to the extent that the discussion is still relevant to the new accounting standard IFRS 10,
the older material has been reproduced in the Basis for Conclusions that was released with IFRS 10; reused material
is identified by the use of the initials ‘BCZ’ before the paragraph number):

BCZ157 
As part of its revision of IAS 27 in 2003, the Board amended the requirement to require non-controlling
interests to be presented in the consolidated statement of financial position within equity, separately
from the equity of the shareholders of the parent. The Board concluded that a non-controlling interest is
not a liability because it did not meet the definition of a liability in the Framework for the Preparation
and Presentation of Financial Statements (replaced in 2010 by the Conceptual Framework for Financial
Reporting, which was subsequently revised in 2018).
BCZ158 
Paragraph 49(b) of the Framework (now paragraph 4.4(b) of the Conceptual Framework) stated
that a liability is a present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits. Paragraph
60 of the Framework (now paragraph 4.15 of the Conceptual Framework) explained that an essential
characteristic of a liability is that the entity has a present obligation and that an obligation is a duty
or responsibility to act or perform in a particular way. The Board noted that the existence of a non-
controlling interest in the net assets of a subsidiary does not give rise to a present obligation, the
settlement of which is expected to result in an outflow of economic benefits from the group.
BCZ159 
Instead, the Board noted that non-controlling interests represent the residual interest in the net assets of
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those subsidiaries held by some of the shareholders of the subsidiaries within the group, and therefore
met the Framework’s definition of equity. Paragraph 49(c) of the Framework (now paragraph 4.4(c)
of the Conceptual Framework) stated that equity is the residual interest in the assets of the entity after
deducting all its liabilities.

Therefore, the view is that non-controlling interests are to be disclosed as part of owners’ equity. Non-controlling
interests will be explored in depth in Chapter 27.

25.5 The concept of control

LO 25.5
As we should now appreciate, the definitions of ‘control’ and ‘subsidiary’ are central to determining the entities
to be consolidated and the nature of the group. Paragraph 20 of AASB 10 requires that consolidation of an
investee shall begin from the date the investor obtains control of the investee, and shall cease when the investor loses
control of the investee.
Further, as we also know, the definition of a subsidiary directly relies upon the concept of ‘control’. A subsidiary
is defined in Appendix A of AASB 10 as:

an entity that is controlled by another entity. (AASB 10)

Further, a ‘parent’ is defined as:

an entity that controls one or more entities. (AASB 10)

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 958 PART 8: Accounting for equity interests in other entities

Hence, the definitions of ‘control’ and ‘subsidiary’ are fundamental to the whole consolidation process, with the
definition of subsidiary directly relying upon the concept of ‘control’. AASB 10 defines control as requiring three
elements, these being:
∙ power
∙ exposure to variable returns, and
∙ the investor’s ability to use power to affect its amount of variable returns.
Specifically, ‘control of an investee’ is defined in Appendix A of AASB 10 as:
An investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement
with the investee and has the ability to affect those returns through its power over the investee. (AASB 10) [emphasis
added]
The three elements of control are explained in some detail throughout AASB 10 and in the associated Application
Guidance that accompanies the standard. For control to be deemed to exist, all three elements just identified must be
present.
As we can see, ‘power’ over the investee is essential for there to be ‘control’ over the investee. Power is defined
in Appendix A of AASB 10 as ‘existing rights that give the current ability to direct the relevant activities’. Paragraph
10 further states that:
an investor has power over an investee when the investor has existing rights that give it the current ability to direct
the relevant activities, i.e. the activities that significantly affect the investee’s returns. (AASB 10)
Determining the existence of ‘power’ will not always be a straightforward exercise. As paragraph 11 states:
Power arises from rights. Sometimes assessing power is straightforward, such as when power over an investee
is obtained directly and solely from the voting rights granted by equity instruments such as shares, and can be
assessed by considering the voting rights from those shareholdings. In other cases, the assessment will be more
complex and require more than one factor to be considered, for example when power results from one or more
contractual arrangements. (AASB 10)
In deciding whether an entity is a subsidiary it is not necessary that the investor has actually exercised its power.
Rather, it is necessary to show it has the capacity to exercise power. As paragraph 12 states:
An investor with the current ability to direct the relevant activities has power even if its rights to direct have yet
to be exercised. Evidence that the investor has been directing relevant activities can help determine whether the
investor has power, but such evidence is not, in itself, conclusive in determining whether the investor has power
over an investee. (AASB 10)
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Where control is considered to exist, the amount of returns to be derived from the interest in the investee would
be expected to vary depending upon the efforts and performance of both the investee and the investor. According to
paragraph 17:
An investor controls an investee if the investor not only has power over the investee and exposure or rights to variable
returns from its involvement with the investee, but also has the ability to use its power to affect the investor’s returns
from its involvement with the investee. (AASB 10)
In much of the discussion above we are using the terms ‘investor’ and ‘investee’. If the investor controls the
investee then the investor would also be the ‘parent’ and the investee would be the ‘subsidiary’.
In further considering the link between power and returns, paragraph BC68 of IFRS 10 states:
To have control, an investor must have power and exposure or rights to variable returns and be able to use that
power to affect its own returns from its involvement with the investee. Thus, power and the returns to which an
investor is exposed, or has rights to, must be linked. The link between power and returns does not mean that the
proportion of returns accruing to an investor needs to be perfectly correlated with the amount of power that the
investor has. The Board noted that many parties can have the right to receive variable returns from an investee (e.g.
shareholders, debt providers and agents), but only one party can control an investee.
The above paragraph raises the important point that only one party can be in ‘control’ of an entity before that
controlling entity can be considered to be the parent entity. If an entity ‘jointly controls’ another entity, then that
entity cannot be considered to be a subsidiary, and rather than applying AASB 10, another standard—AASB 11
Joint Arrangements—needs to be applied (and this standard—which is discussed in Chapter 29—does not allow
consolidation for jointly controlled entities).
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The Basis for Conclusions that accompanied the release of IFRS 10 (and AASB 10) addressed a number of
situations that could lead to control, these being:
∙ where a majority of voting rights are held by the investor
∙ where less than a majority of the voting rights are held by the investor (but perhaps where the balance of the voting
rights are widely dispersed among many different owners)
∙ where the investor holds some potential voting rights in the investee.
We will consider these attributes of ‘control’ in more detail below.

WHY DO I NEED TO KNOW THE MEANING OF ‘CONTROL’?

Control is the fundamental issue in deciding whether the accounts of a separate legal entity are to be included
within the consolidated financial statements. Therefore, to understand the contents of consolidated financial
statements we need to understand the definition of control (including the difference between ‘direct control’
and ‘indirect control’), and how that definition is applied.

Majority of voting rights

It is generally understood that, in most circumstances, if the investor holds the majority of the voting rights (for
example, the majority of the ordinary shares in a company), then that should provide the investor with control over the
investee. In this regard, paragraph BC97 of the Basis for Conclusions to IFRS 10 states:
an investor that holds more than half the voting rights of an investee has power over the investee when those
voting rights give the investor the current ability to direct the relevant activities (either directly or by appointing
the members of the governing body). The Board concluded that such an investor’s voting rights are sufficient to
give it power over the investee regardless of whether it has exercised its voting power, unless those rights are not
substantive or there are separate arrangements providing another entity with power over the investee (such as
through a contractual arrangement over decision making or substantive potential voting rights).

Less than the majority of voting rights

It is quite common that an investor can control an investee even if it does not hold the majority of the voting rights. As
paragraphs BC99, BC107 and BC108 of the Basis for Conclusions to IFRS 10 state:
BC99  The Board decided that in Exposure Draft 10 (which preceded the release of the Accounting Standard) it
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would explain clearly that an investor can control an investee even if the investor does not have more than
half the voting rights, as long as the investor’s voting rights are sufficient to give the investor the current
ability to direct the relevant activities. ED 10 included an example of when a dominant shareholder holds
voting rights and all other shareholdings are widely dispersed, and those other shareholders do not actively
cooperate when they exercise their votes, so as to have more voting power than the dominant shareholder.
BC107 In response to the concerns raised by respondents to ED 10, the Board clarified that its intentions were neither
to require the consolidation of all investees, nor to require an investor that owns a low percentage of voting
rights of an investee (such as 10 per cent or 15 per cent) to consolidate that investee. An investor should always
assess whether its rights, including any voting rights that it owns, are sufficient to give it the current ability to
direct the relevant activities. That assessment requires judgement, considering all available evidence.
BC108 The Board decided to add application requirements setting out some of the factors to consider when
applying that judgement to situations in which no single party holds more than half the voting rights of an
investee. In particular, the Board decided to clarify that it expects that:
(a) the more voting rights an investor holds (i.e. the larger its absolute holding), the more likely it will
have power over an investee;
(b) the more voting rights an investor holds relative to other vote holders (i.e. the larger its relative
holding), the more likely the investor will have power over an investee; and
(c) the more parties that would need to act together to outvote the investor, the more likely the investor
will have power over an investee.

Potential voting rights

Another factor that requires consideration when determining whether an investor might control an investee (and
remember, what is important is the existence of capacity to control, and not necessarily whether the control has yet
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to be used) is the existence of potential voting rights. Potential voting rights are financial instruments that do not in
themselves have voting rights, but they can potentially be converted into other financial instruments—such as ordinary
shares—that would then provide voting rights. For example, the investor might hold share options, convertible bonds
or preference shares, which in themselves do not have voting rights, but they can potentially be converted to ordinary
shares that would provide voting rights. An increase in voting rights would increase the potential for an investor to
control the investee. Therefore, where the ‘potential voting rights’ are currently exercisable they should be taken into
account when assessing the existence of ‘control’. In relation to potential voting rights, paragraphs BC120, BC121 and
BC124 of the Basis for Conclusions to IFRS 10 state:
BC120 
Potential voting rights can give the holder the current ability to direct the relevant activities. This will be
the case if those rights are substantive and on exercise or conversion (when considered together with any
other existing rights the holder has) they give the holder the current ability to direct the relevant activities.
The holder of such potential voting rights has the contractual right to ‘step in’, obtain voting rights and
subsequently exercise its voting power to direct the relevant activities—thus the holder has the current ability
to direct the activities of an investee at the time that decisions need to be taken if those rights are substantive.
BC121 
The Board noted that the holder of such potential voting rights is, in effect, in the same position as a
passive majority shareholder or the holder of substantive kick-out rights. The control model would provide
that, in the absence of other factors, a majority shareholder controls an investee even though it can take
time for the shareholder to organise a meeting and exercise its voting rights. In a similar manner, it can
take time for a principal to remove or ‘kick out’ an agent. The holder of potential voting rights must also
take steps to obtain its voting rights. In each case, the question is whether those steps are so significant that
they prevent the investor from having the current ability to direct the relevant activities of an investee.
BC124 
Some constituents were concerned about whether the proposed model would lead to frequent changes in the control
assessment solely because of changes in market conditions—would an investor consolidate and deconsolidate
an investee if potential voting rights moved in and out of the money? In response to those comments, the Board
noted that determining whether a potential voting right is substantive is not based solely on a comparison
of the strike or conversion price of the instrument and the then current market price of its underlying share.
Although the strike or conversion price is one factor to consider, determining whether potential voting rights are
substantive requires a holistic approach, considering a variety of factors. This includes assessing the purpose
and design of the instrument, considering whether the investor can benefit for other reasons such as by realising
synergies between the investor and the investee, and determining whether there are any barriers (financial or
otherwise) that would prevent the holder of potential voting rights from exercising or converting those rights.
Accordingly, the Board believes that a change in market conditions (i.e. the market price of the underlying
shares) alone would not typically result in a change in the consolidation conclusion.
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As we can see from the above paragraphs, as with control generally, professional judgement needs to be employed
to determine whether the existence of potential voting rights impacts on the assessment of whether an entity has
control over another entity.
Worked Example 25.1 provides a number of scenarios adapted from the Implementation Guidance accompanying
AASB 10 that illustrate individual aspects of potential voting rights.

WORKED EXAMPLE 25.1: Consideration of potential voting rights

Part A
Options are out of the money
A Ltd and B Ltd own 70 per cent and 30 per cent respectively of the ordinary contributed equity that carries
voting rights in C Ltd. A Ltd sells 70 per cent of its interest in C Ltd to D Ltd. At the same time, A Ltd purchases call
options from D Ltd that are exercisable at any time at a premium to the market price when issued. If the options
are exercised, they give A Ltd its original 70 per cent ownership interest and voting rights in C Ltd.
Part B
Possibility of exercise or conversion
A Ltd, B Ltd and C Ltd own 40 per cent, 30 per cent and 30 per cent respectively of the ordinary contributed
equity that carries voting rights in D Ltd. A Ltd also owns call options that are exercisable at any time at the fair
value of the underlying shares. If the options are exercised, A Ltd receives an extra 20 per cent of the voting
rights in D Ltd, while B Ltd’s and C Ltd’s interests are reduced to 20 per cent each.

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Part C
Management intention
A Ltd, B Ltd and C Ltd each own 33.33 per cent of the ordinary contributed equity that carries voting rights in D
Ltd. A Ltd, B Ltd and C Ltd each have the right to appoint two directors to the Board of D Ltd. A Ltd also owns call
options that are exercisable at a fixed price at any time and, if exercised, would give it all the voting rights in D
Ltd. The management of A Ltd does not intend to exercise the call options, even if B Ltd and C Ltd do not vote
along the same lines as A Ltd.

Part D
Financial ability
A Ltd and B Ltd own 55 per cent and 45 per cent respectively of the ordinary contributed equity that carries
voting rights in C Ltd. B Ltd also holds debt instruments that are convertible into ordinary shares of C Ltd. The debt
can be converted at a substantial price, in comparison with B Ltd’s net assets, at any time. If the debt instruments
were converted, B Ltd would be required to borrow additional funds to make the payment. Should the debt be
converted, B Ltd would hold 70 per cent of the voting rights and A Ltd’s interest would reduce to 30 per cent.

REQUIRED Taking the potential voting rights into consideration in each of the above scenarios, explain which
entity has control over the other.

SOLUTION

Part A
In this scenario, the options are out of the money. However, because A Ltd can exercise its options now (they are
currently exercisable), A Ltd has the power to continue to set the operating and financial policies of C Ltd. The
existence of the potential voting rights means that A Ltd controls C Ltd.

Part B
If the options are exercised, A Ltd will have control over more than half of the voting over D Ltd. The existence of
the potential voting rights means that A Ltd controls D Ltd.

Part C
The existence of the potential voting rights means that A Ltd controls D Ltd. The intention of A Ltd’s management
does not influence the assessment of control.

Part D
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Although the debt instruments are convertible at a substantial price, they are currently convertible. This
conversion feature gives B Ltd the power to set the operating and financial policies of C Ltd. The existence of the
potential voting rights means that it is B Ltd and not A Ltd that controls C Ltd. The financial ability of B Ltd to pay
the conversion price does not influence the assessment of control.

Delegated power (agency relationships)

Pursuant to AASB 10, another factor to consider in determining whether to consolidate an entity is whether any
power to be exerted over the entity is being used in the context of an agency relationship, or whether the power is
being exercised to benefit the investor directly. In defining an ‘agency relationship’, paragraph BC129 of the Basis for
Conclusions to IFRS 10 states:

The Board decided to base its principal/agent guidance on the thinking developed in agency theory. Jensen and
Meckling (1976) define an agency relationship as ‘a contractual relationship in which one or more persons (the
principal) engage another person (the agent) to perform some service on their behalf which involves delegating
some decision-making authority to the agent.

If an entity has power, but is acting under the direction of another entity—perhaps as an ‘agent’ of that other
entity—then control would not be deemed to exist and the entity would not be required to consolidate the entity over
which it had power.
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In relation to the various factors to consider in determining whether decision-making authority has been delegated
to an agent, paragraph B60 of AASB 10 states:
A decision maker shall consider the overall relationship between itself, the investee being managed and other
parties involved with the investee, in particular all the factors below, in determining whether it is an agent:
(a) the scope of its decision-making authority over the investee (paragraphs B62 and B63).
(b) the rights held by other parties (paragraphs B64–B67).
(c) the remuneration to which it is entitled in accordance with the remuneration agreement(s) (paragraphs B68–B70).
(d) the decision maker’s exposure to variability of returns from other interests that it holds in the investee
(paragraphs B71 and B72).
Different weightings shall be applied to each of the factors on the basis of particular facts and circumstances. (AASB 10)

controlled entity
So in summarising the discussion on agency relationships, if an organisation has power over
An organisation that is another entity but it is acting as an agent, then the agent is not to consolidate the accounts of the
controlled by another controlled entity.
entity; often called a
subsidiary.
As stated earlier, it is possible for control to be passive—that is, it might be possible to exert
control over another entity even though the option to exert such control might never have been
exercised. Nevertheless, capacity to control a subsidiary is sufficient to require consolidation of
that subsidiary (although there is an exception where the parent entity is an investment entity as discussed earlier in
this chapter). Where control is ‘passive’, and perhaps another entity is formulating the policies of the subsidiary, a
particular entity would nevertheless be considered to be in ‘control’ to the extent that it ultimately has the ability to
modify or change the policies being applied by another entity if it deems it necessary to step in and make such a change.
As emphasised earlier in this chapter, by adopting the criterion of ‘control’ (and not legal form) as the basis for
determining the necessity to consolidate, the economic entity may include organisations of a corporate and non-
corporate form. That is, adoption of the criterion of control will enable a complete economic entity to be reflected
in consolidated financial statements even though, for example, some of the subsidiaries might be in the form of
partnerships or trusts. Including entities such as trusts and partnerships in the consolidation process prevents entities
from opportunistically omitting certain key (non-corporate) entities from the consolidation process—the practice that
was investigated by Sullivan and discussed earlier in this chapter.
As we have noted, another necessary attribute of ‘control’ (see paragraph 15 of AASB 10) is that there is an
expectation that the investor will be exposed to variable returns from its involvement with the investee, meaning that
the investor’s returns from its involvement have the potential to vary as a result of the investee’s performance.
This requirement means that parties such as receivers and managers of financially troubled organisations, as well
as trustees, would not be required to consolidate a controlled entity’s financial statements with their own statements
because, apart from the professional fees being received, those concerned would not be managing such organisations
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for their own benefit, but on behalf of owners and creditors.

Loss of control
As we noted earlier in this chapter, just as control can be established, it can also be lost. That is, a parent entity might
subsequently lose control over its subsidiary. It is not necessary for a change in the level of ownership to occur for
control to be lost. Once an entity has lost control, the consolidated statement of profit or loss and other comprehensive
income is to include only the results of the subsidiary for the period during which control existed.

25.6 Direct and indirect control

LO 25.6
A number of scenarios are possible to illustrate the concept of control. Control can exist by virtue of direct
ownership interests, indirect ownership interests, or perhaps a combination of the two. Consider Figure 25.4,
which provides an illustration of direct control—in this case Company A’s ownership (and voting) interest in Company
B. Company A owns 70 per cent of the issued capital of Company B. This would be expected to lead to Company A
having control of B directly. Company A’s 70 per cent voting interest in Company B will also amount to a 70 per cent
beneficial interest in the profits being generated by Company B. For example, with a 70 per cent ownership interest
in Company B, for each $1 of dividends paid by Company B, 70 cents will go to Company A, while 30 per cent will
go to non-controlling interests. The voting interest and beneficial interest will not always be the same, as some of the
examples that follow will demonstrate.
If we turn our attention to Figure 25.5, we may contemplate the case in which Company A has control
of Company C by virtue of its control of Company B. This form of control would be considered to be ‘indirect
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 CHAPTER 25: Accounting for group structures 963

Figure 25.4
An example of
Company A direct control

70%
Non-controlling
30% interests

Company B

Figure 25.5
An example of
Company A
indirect control

75%

Non-controlling
Company B 25%
interests

60%

40% Non-controlling
Company C
interests

control’—something we referred to earlier in this chapter. Because Company B is considered to control Company C,
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and because Company A controls Company B, Company A therefore effectively controls Company C even though it
has no direct shareholding in Company C. The beneficial interest of Company A in Company C’s profits will equate
to 0.75 × 0.60, which equals 45 per cent. That means that for every dollar of dividends paid by Company C, 45 cents
will find its way back to Company A. This can be explained as follows: when Company C pays a dividend, 60 per cent
of the dividend will flow to Company B. Hence, for every dollar of dividends paid by Company C, 60 cents goes to
Company B. If Company B in turn pays this amount to its shareholders, 75 per cent (or 45 cents) will go to Company
A, and 25 per cent (or 15 cents) will go to those parties holding the non-controlling interest in Company B.
Moving on to Figure 25.6, we can see that control of another entity may also be achieved in a combination of
direct and indirect ownership interests. Company A has direct voting interests in Company C of 40 per cent, as well

Figure 25.6
Situation where
Company A control is
established
through a mix of
Non-controlling 65% 40% Non-controlling
direct and indirect
interests interests
ownership interests
35% 35%

Company B 25% Company C

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 964 PART 8: Accounting for equity interests in other entities

as indirectly controlling 25 per cent of the voting interests through its control of Company B. The economic entity
would be considered to be constituted by all three companies. Company A’s beneficial interest in Company C would
be 40 per cent, plus 65 per cent of 25 per cent (which equals 16.25 per cent), which amounts to 56.25 per cent in total.

25.7 Accounting for business combinations

LO 25.7
To this point we have discussed when we should consolidate particular entities (when they are controlled),
but we have not discussed how to actually undertake the consolidation process. We will start addressing this
issue within this section. We consolidate another entity when the parent entity is effectively combining the acquired
business (a ‘business combination’) with that of the parent entity and its other subsidiaries.
According to AASB 3 Business Combinations, a ‘business combination’ is a transaction or other event in which
an acquirer obtains control of one or more businesses.
AASB 3 and AASB 10 must both be considered when compiling and presenting consolidated financial statements.
The objectives of the respective standards are identified within the standards as:
AASB 10 The objective of this standard is to establish principles for the preparation and presentation of
consolidated financial statements when an entity controls one or more other entities.
AASB 3  The objective of this standard is to improve the relevance, reliability and comparability of the information
that a reporting entity provides in its financial statements about a business combination and its effects.
To accomplish that, this standard establishes principles and requirements for how the acquirer:
(a)   recognises and measures in its financial statements the identifiable assets acquired, the liabilities
assumed and any non-controlling interest in the acquiree;
(b)   recognises and measures the goodwill acquired in the business combination or a gain from a
bargain purchase; and
(c)   determines what information to disclose to enable users of the financial statements to evaluate the
nature and financial effects of the business combination.
As a central requirement, AASB 3 requires an entity to determine whether a transaction or other event is a
business combination, as defined above. When we consolidate other entities we are consolidating businesses and
we can recognise the goodwill of the businesses being acquired. This requires that the assets acquired, and liabilities
assumed, constitute a ‘business’. A ‘business’ is defined in AASB 3 as ‘an integrated set of activities and assets that
is capable of being conducted and managed for the purpose of providing goods or services to customers, generating
investment income (such as dividends or interest), or generating other income from ordinary activities’.
Guidance on what constitutes a business is provided in the Application Guidance accompanying AASB 3.
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According to paragraph B7:

A business consists of inputs and processes applied to those inputs that have the ability to contribute to the creation
of outputs. The three elements of a business are defined as follows:
(a) Input: Any economic resource that creates outputs, or has the ability to contribute to the creation of outputs,
when one or more processes are applied to it. Examples include non-current assets (including intangible
assets or rights to use non-current assets), intellectual property, the ability to obtain access to necessary
materials or rights and employees.
(b) Process: Any system, standard, protocol, convention or rule that when applied to an input or inputs, creates
outputs or has the ability to contribute to the creation of outputs. Examples include strategic management
processes, operational processes and resource management processes. These processes typically are
documented, but the intellectual capacity of an organised workforce having the necessary skills and experience
following rules and conventions may provide the necessary processes that are capable of being applied to
inputs to create outputs. (Accounting, billing, payroll and other administrative systems typically are not
processes used to create outputs.)
(c) Output: The result of inputs and processes applied to those inputs that provide goods or services to customers,
generate investment income (such as dividends or interest), or generate other income from ordinary activities.
(AASB 3)
If the assets acquired do not fit the description of business considered above, the transaction shall represent the
acquisition of a group of assets and the appropriate accounting treatment would be covered by AASB 116 Property,
Plant and Equipment and AASB 138 Intangible Assets rather than AASB 3. If we are not acquiring a business then
we would not recognise goodwill.
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 CHAPTER 25: Accounting for group structures 965

AASB 3 requires entities to account for business combinations using what is referred to as the acquisition method.
The acquisition method requires four steps to be taken, these being:
1. identifying the acquirer
2. determining the acquisition date
3. recognising and measuring the identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree, and
4. recognising and measuring goodwill or a gain from a bargain purchase.
These four steps will be considered in turn below.

WHY DO I NEED TO KNOW THE DIFFERENCE BETWEEN A BUSINESS

ACQUISITION AND THE ACQUISITION OF A GROUP OF ASSETS?
When we prepare consolidated financial statements, we consolidate the accounts of a business with those of
the parent entity; in doing so, we recognise goodwill (or in rare cases, a bargain purchase on acquisition). If the
parent entity is acquiring a business, then, as accountants, we need to know that it is a requirement to apply
AASB 10 and AASB 3.
By contrast, if an organisation is simply acquiring a group of assets, then no goodwill (or bargain purchase
on acquisition) arises, and the acquired assets are simply included within the financial statements of the parent
entity. In such an instance, AASB 10 and AASB 3 do not apply. Rather, accounting standards such as AASB 116
and AASB 138 apply.

Identifying the acquirer

For each business combination, AASB 3 requires one of the combining entities to be identified as the acquirer. An
acquirer might obtain control of an acquiree in a variety of ways. These include:
∙ transferring cash, cash equivalents or other assets (including net assets that constitute a business)
∙ incurring liabilities
∙ issuing equity interests
∙ providing more than one type of consideration, or
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∙ without transferring consideration, including by contract alone.

In a business combination, the acquirer is usually the entity that transfers the cash, cash equivalents or other assets,
incurs the liabilities or issues the equity interests. There are, however, occasions where, in some business combinations,
known as ‘reverse acquisitions’, the issuing entity is the acquiree. Determining the acquirer in a business combination
involving more than two entities shall include a consideration of, among other things, which of the combining entities
initiated the combination, as well as the relative size of the combining entities. Where the relative size (measured in,
for example, assets, revenues or profit) of one entity is significantly greater than that of the other combining entity or
entities, the acquirer is usually the combining entity whose relative size is the greater.

Determining the acquisition date

Paragraph 8 of AASB 3 identifies the acquisition date as the date on which the acquirer obtains control of the acquiree.
This is usually the date on which the acquirer legally transfers the consideration, acquires the assets and assumes the
liabilities of the acquiree—the closing date. However, AASB 3 acknowledges that the acquirer may obtain control on
a date other than the closing date.

Recognising and measuring the identifiable assets acquired,

and the liabilities assumed
At the acquisition date, the acquirer is required to recognise:
∙ goodwill separately from the identifiable assets acquired
∙ the liabilities assumed, and
∙ any non-controlling interest in the acquiree.
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 966 PART 8: Accounting for equity interests in other entities

To qualify for recognition as part of applying the acquisition method, at the acquisition date the identifiable assets
acquired, and liabilities assumed, must meet the definitions of assets and liabilities in the Conceptual Framework for
Financial Reporting.
By applying the recognition principles contained in AASB 3, it is possible for the acquirer to recognise assets and
liabilities that the acquiree had not previously recognised in its own financial statements. Examples of assets that may
be recognised by the acquirer, but not previously by the acquiree, would include identifiable intangible assets, such
as a brand name, a patent, publishing titles, customer lists and so forth. These assets may not have been recognised
by the acquiree in its financial statements because it developed them internally and expensed the related costs in the
period in which they were incurred, in compliance with AASB 138, as explained in Chapter 8 of this text. In Chapter
8 we discussed how certain internally developed intangible assets, such as brand names or publishing titles, shall not
be recognised. Specifically, paragraph 63 states:

Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall not be
recognised as intangible assets. (AASB 138)

However, should another entity (the acquirer, or investor) subsequently acquire the business of another entity (the
acquiree, or the investee), then the acquirer is permitted to recognise such assets at their fair value. To the acquiring
entity, such assets would not have been ‘internally generated’; rather, they would have been ‘acquired’ as part of the
business combination and therefore be eligible for recognition within the consolidated financial statements.
The general rule for measuring the identifiable assets acquired and the liabilities assumed is provided by AASB
3. Under paragraph 18, the acquirer measures each identifiable asset acquired (including identifiable intangible assets)
and liability assumed, at their acquisition-date fair values. ‘Fair value’ is defined in Appendix A to AASB 3 (and in
other accounting standards) as:
the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. (AASB 13)

Specifically, paragraph 18 of AASB 3 states:

The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair
values. (AASB 3)

An exception to the recognition principle is contingent liabilities. Contingent liabilities are defined in AASB 137
Provisions, Contingent Liabilities and Contingent Assets as:

(a) a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence
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or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or
(b) a present obligation that arises from past events but is not recognised because:
(i) it is not probable that an outflow of resources embodying economic benefits will be required to settle
the obligation; or
(ii) the amount of the obligation cannot be measured with sufficient reliability. (AASB 137)

As indicated in paragraph 23 of AASB 3, the requirements in AASB 137 do not apply in determining which
contingent liabilities to recognise at the acquisition date. On acquisition date a contingent liability in a business
combination is recognised if it is a present obligation that arises from past events and its fair value can be measured
reliably. In other words, a contingent liability is recognised at the acquisition date even if it is not probable that an
outflow of resources embodying economic benefits will be required to settle the obligation.

Recognising and measuring goodwill

Goodwill is defined in AASB 3 as:

An asset representing the future economic benefits arising from assets acquired in a business combination that are
not individually identified and separately recognised. (AASB 3)

In the context of business combinations, paragraph 32 requires that:

The acquirer shall recognise goodwill as of the acquisition date measured as the excess of (a) over (b) below:
(a) the aggregate of:
(i) the consideration transferred measured in accordance with this Standard, which generally requires
acquisition-date fair value (see paragraph 37);
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 CHAPTER 25: Accounting for group structures 967

(ii) the amount of any non-controlling interest in the acquiree measured in accordance with this Standard;
and
(iii) in a business combination achieved in stages (see paragraphs 41 and 42), the acquisition-date fair
value of the acquirer’s previously held equity interest in the acquiree.
(b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured
in accordance with this Standard. (AASB 3)

This can be simplified as follows:

FAIR VALUE OF CONSIDERATION TRANSFERRED XXX

plus Amount of non-controlling interest XXX
plus Fair value of any previously held equity interest in the acquiree XXX
XXX
less Fair value of identifiable assets acquired and liabilities assumed (XXX)
GOODWILL ON ACQUISITION DATE XXX

Calculated in the manner shown above, the net figure for goodwill will be a positive number. If the number is
negative, then rather than it being considered as goodwill, the amount would be considered as a ‘gain on bargain
purchase’.
According to the Basis for Conclusions in IAS 36 Impairment of Assets, paragraph BC134, goodwill acquired in
a business combination represents:

a payment made by the acquirer in anticipation of future economic benefits from assets that are not capable of
being individually identified and separately recognised. Goodwill does not generate cash flows independently of
other assets or groups of assets and therefore cannot be measured directly. Instead, it is measured as a residual
amount, being the excess of the cost of a business combination over the acquirer’s interest in the net fair value of
the acquiree’s identifiable assets, liabilities and contingent liabilities. Moreover, goodwill acquired in a business
combination and goodwill generated after that business combination cannot be separately identified, because they
contribute jointly to the same cash flows.

In determining goodwill, the fair value of both the assets acquired and the liabilities assumed, and the purchase
consideration given in exchange must be considered.

Consideration transferred
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In a business combination, the consideration transferred is measured at fair value. AASB 3, paragraph 37, expands on
this requirement. Paragraph 37 states that the fair value of consideration transferred is calculated as:

the sum of the acquisition-date fair values of the assets transferred by the acquirer, the liabilities incurred by the
acquirer to former owners of the acquiree and the equity interests issued by the acquirer. (AASB 3)

The calculation of goodwill in line with the requirements of AASB 3, paragraph 32, is detailed in Worked Example 25.2.

WORKED EXAMPLE 25.2: Calculation of goodwill on acquisition

On 1 July 2023, Ying Ltd acquired for cash all of the issued share capital of Yang Ltd for an amount of $650 000.
On the date of the acquisition, the assets, liabilities and contingent liabilities of Yang Ltd are as follows:

Carrying amount Fair value

($) ($)
Cash 15 000 15 000
Accounts receivable 68 000 68 000
Inventory 112 000 131 000
Land 360 000 420 000

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 968 PART 8: Accounting for equity interests in other entities

WORKED EXAMPLE 25.2 continued

Plant 220 000 240 000

Loans payable (170 000) (170 000)
Accounts payable (58 000) (58 000)
Contingent liabilities – (46 000)

REQUIRED Calculate the goodwill on acquisition. Ignore any deferred tax considerations.

SOLUTION The difference between the fair value of the identifiable assets acquired and the liabilities assumed,
and the consideration transferred is the goodwill. From the information provided, the goodwill on acquisition date is
calculated as follows:

$ $
Fair value of consideration transferred 650 000
less Fair value of identifiable assets acquired and
liabilities assumed
Cash 15 000
Accounts receivable 68 000
Inventory 131 000
Land 420 000
Plant 240 000
Loans payable (170 000)
Accounts payable (58 000)
Contingent liabilities (46 000)
Total fair value of net assets acquired 600 000
Goodwill on acquisition date 50 000
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As Ying Ltd paid cash for the equity interest in Yang Ltd, the fair value of the purchase consideration is easily
determined as the amount of cash given in exchange. Based on the fair value of the assets of Yang Ltd, the
goodwill acquired by Ying Ltd would be $50 000.

Consistent with the requirements of paragraph 48 of AASB 138 that internally generated goodwill not
be recognised as an asset, no goodwill would be brought to account by Yang Ltd (the acquiree) in Worked
Example 25.2 as only ‘purchased goodwill’, and not internally generated goodwill, is recognised for accounting
purposes. The purchased goodwill may be brought to account by Ying Ltd as part of the consolidation process.
The view taken is that although the acquiree might not be able to reliably measure the value of internally generated
goodwill, another entity that acquires the entity (the acquirer) is able to attribute reliably a value to goodwill being
acquired. In the above example, Ying (the acquirer) was able to attribute a cost of $50 000 to the goodwill.
Unlike internally generated goodwill, which may not be brought to account in the separate financial statements
of a reporting entity or in the consolidated financial statements, purchased goodwill is to be brought to account in the
consolidation process. The goodwill acquired in a business combination is not subsequently amortised. Rather, after its
initial recognition, goodwill should be measured at cost less any accumulated impairment losses. Impairment testing
should be conducted at least annually, but can be performed more frequently if events or changes in circumstances
indicate that the goodwill might be impaired.
Unlike many other assets, goodwill shall not be revalued. Therefore, impairment losses must be recognised
immediately in profit and loss. AASB 136 Impairment of Assets, paragraphs 80 to 99, provides further guidance on
impairment testing of goodwill.
According to AASB 3, only the goodwill acquired by the parent entity is recognised on consolidation. Where the
parent acquires all of the shares of the subsidiary, all of the goodwill of the subsidiary is shown in the consolidated
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 CHAPTER 25: Accounting for group structures 969

financial statements. However, where the parent does not acquire all of the shares—that is, there is a non-controlling
interest in the subsidiary (perhaps the parent entity acquired 80 per cent of the issued capital of the subsidiary meaning
that the non-controlling interest is 20 per cent)—then AASB 3 permits a parent to recognise either its share of the
goodwill only, or to recognise the total goodwill in the consolidated financial statements. That is, a parent has a choice
as to whether to disclose goodwill attributable to non-controlling interests. This matter will be considered more fully
in Chapter 27, which focuses on various aspects of accounting for non-controlling interests. At this point it should
simply be appreciated that parent entities have a choice in how to account for goodwill on acquisition.
While very sophisticated accounting packages exist that allow us to prepare consolidated financial statements, we
will demonstrate, in this chapter and the following chapters, how a manual accounting system can be used to perform
consolidations. This allows us to explain how consolidated financial statements are prepared and what they represent.
The way we shall be performing consolidation adjustments is consistent with how various computerised accounting
information systems would do it—it just takes us a lot longer to do it manually. In a real-life situation, and given the
fact that thousands of consolidation adjustments and eliminations would potentially need to be made every year, a
manual accounting system would be severely impractical.
To undertake the consolidation of the parent and subsidiaries’ financial statements, a worksheet is typically used
(as will be shown here). It is usual to set up the worksheet so that the entities to be consolidated are arranged side by
side in the left-hand columns. To the right there are debit and credit columns for the consolidation adjustment entries.
A final column on the right-hand side of the worksheet will provide the consolidated figures to then be used to compile
the consolidated financial statements.
What should also be noted is that the individual account balances included in the ledgers of the separate legal entities are
not adjusted as a result of consolidating the financial statements of the various entities within the group. The consolidation
entries are made outside of their individual ledgers. The consolidation journal entries are written into a consolidation journal
and are then typically posted to a consolidation worksheet. A new worksheet is prepared each time consolidated financial
statements are required. As indicated above, the consolidation worksheet provides the numbers that are used directly to
construct the consolidated financial statements. This is a VERY IMPORTANT point to remember.

Group members to use consistent accounting policies

When consolidated financial statements are being prepared, they are required to be prepared on the basis that all
entities within the group are adopting the same accounting policies. Where separate entities do not apply the same
accounting methods, adjustments are necessary on consolidation to remove the impact of different accounting policies.
The ends of the reporting periods of all the entities in the group are also expected to be the same. Where this is not
possible, adjustments will be required on consolidation. However, adjustments are possible only if the different ends
of reporting periods are reasonably close together; for example, no more than three months apart.
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Eliminating parent’s investment in subsidiary

The first step in the consolidation process is substituting the assets and liabilities of the subsidiary for the investment
account that currently exists within the financial statement of the parent company. Where the fair value of the net
assets (inclusive of an amount attributed to contingent liabilities) does not equal the fair value of the investment, this
will lead to a difference on consolidation. This difference will either be ‘goodwill’, or a ‘bargain gain on purchase’. (In
Worked Example 25.3, it will lead to a difference of $20 000, this being the goodwill acquired.)
The investment account that is shown in the balance sheet of the parent entity will be eliminated in full against
the pre-acquisition equity of the subsidiary. This will avoid double counting of the assets, liabilities and equity of
Subsidiary Ltd. AASB 10 details a number of the procedures required in preparing consolidated financial statements
(some, but not all, of which will be considered in this chapter). Paragraphs B86–B99 set out guidance for the preparation
of consolidated financial statements. Some of these paragraphs, to the extent they are relevant to the material covered
in this chapter, are reproduced below:
B86 Consolidated financial statements:
(a) 
combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent with those
of its subsidiaries.
(b) 
offset (eliminate) the carrying amount of the parent’s investment in each subsidiary and the parent’s
portion of equity of each subsidiary (AASB 3 explains how to account for any related goodwill).
(c) 
eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating
to transactions between entities of the group (profits or losses resulting from intragroup transactions
that are recognised in assets, such as inventory and fixed assets, are eliminated in full). Intragroup
losses may indicate an impairment that requires recognition in the consolidated financial statements.
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 970 PART 8: Accounting for equity interests in other entities

AASB 112 Income Taxes applies to temporary differences that arise from the elimination of profits and
losses resulting from intragroup transactions.
B88 
An entity includes the income and expenses of a subsidiary in the consolidated financial statements from the
date it gains control until the date when the entity ceases to control the subsidiary. Income and expenses of
the subsidiary are based on the amounts of the assets and liabilities recognised in the consolidated financial
statements at the acquisition date. For example, depreciation expense recognised in the consolidated statement
of profit or loss and other comprehensive income after the acquisition date is based on the fair values of the
related depreciable assets recognised in the consolidated financial statements at the acquisition date. (AASB 10)
We start our consolidation illustrations with a simple case in which one company acquires a 100 per cent interest
in another company, and the consolidation is undertaken immediately subsequent to the share acquisition. This is
shown in Worked Example 25.3.

WORKED EXAMPLE 25.3: A simple consolidation

Parent Ltd acquires all of the issued capital of Subsidiary Ltd for a cash payment of $500 000 on 30 June 2023.
The statements of financial position of both entities immediately following the purchase are:

Parent Ltd Subsidiary Ltd

($000) ($000)
Current assets
Cash 10 5
Accounts receivable 150 55
Non-current assets
Plant 800 500
Land 200 100
Investment in Subsidiary Ltd 500 –
1 660 660

Parent Ltd Subsidiary Ltd

($000) ($000)
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Current liabilities
Accounts payable 60 30
Non-current liabilities
Loans 400 150
Shareholders’ equity
Share capital 1 000 200
Retained earnings 200 280
1 660 660

REQUIRED Provide the consolidated statement of financial position for Parent Ltd and Subsidiary Ltd as at
30 June 2023.
SOLUTION We will provide the answers in the text that follows as we explain associated consolidation processes.

Determination of goodwill
Paragraph 52 of AASB 3 states that:
Goodwill acquired in a business combination represents a payment made by the acquirer in anticipation of future
economic benefits from assets that are not capable of being individually identified and separately recognised. (AASB 3)
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 CHAPTER 25: Accounting for group structures 971

As this is a simple consolidation at the date of acquisition, and as the parent has acquired 100 per cent of the
subsidiary, there is no need to consider the amount of the non-controlling interest and the fair value of any previously
held equity interest in the acquiree. These issues will be considered in the chapters that follow.
In determining the amount of goodwill acquired, as indicated above, consideration needs to be given to the fair
value of the assets acquired. Chapter 4 provides extensive discussion of various issues associated with determining
and accounting for the fair value of assets. Hence, this will not be repeated here. Fair value is defined in AASB 13 Fair
Value Measurement, and therefore also within other relevant accounting standards (including AASB 3), as:

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. (AASB 13)

We must consider the fair value of both the assets acquired, and the purchase consideration given in exchange. For
example, as Parent Ltd pays cash for the equity interest in Subsidiary Ltd, the fair value of the purchase consideration
is easily determined as the amount of cash given in exchange. If we assume that the assets in Subsidiary Ltd are fairly
valued, and there are no contingent liabilities to consider, then goodwill acquired by Parent Ltd would be determined as:

Fair value of purchase consideration $500 000

less Fair value of identifiable assets acquired and liabilities assumed $480 000
Goodwill on acquisition $   20 000

As we know from previous discussions in this chapter and in Chapter 8, goodwill cannot be
purchased goodwill
brought to account by Subsidiary Ltd, as only purchased goodwill and not internally generated Goodwill that has been
goodwill is permitted to be recognised for accounting purposes. However, it may be brought to acquired through a
account by Parent Ltd as part of the consolidation process. That is, the consolidated statement of transaction with an
external party, as
financial position will show goodwill of $20 000. opposed to goodwill
As already noted, to undertake the consolidation of the parent and subsidiaries’ financial that is generated by the
statements, a worksheet is typically used. We call this a consolidation worksheet. It is usual to reporting entity itself.
In Australia, purchased
set up the worksheet so that the entities to be consolidated are arranged side by side in the left- goodwill must be shown
hand columns. To the right we have debit and credit columns for the consolidation adjustment as an asset of the
entries. reporting entity.

It should be noted once again—and this is a VERY IMPORTANT point—that we ARE NOT
altering the account balances in the ledgers of the separate legal entities. The consolidation entries internally generated
are made outside of the individual ledgers of the respective entities. The consolidation journal goodwill
entries are written into a consolidation journal and are then typically posted to a consolidation Goodwill that is generated
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by the reporting entity

worksheet, which is prepared each time consolidated financial statements are required. The itself, not purchased from
consolidation worksheet provides the numbers that are used directly to construct the consolidated an external entity.
financial statements.
The consolidation entry to eliminate the investment in Subsidiary Ltd would be:
Dr Share capital 200 000
Dr Retained earnings 280 000
Dr Goodwill 20 000
Cr Investment in Subsidiary Ltd 500 000
(to eliminate the investment in Subsidiary Ltd and to recognise the goodwill on acquisition)

The above entry would be posted to the consolidation worksheet and the final column of the worksheet would
provide the information to present the consolidated statement of financial position. The above entry is not made in
the journal of either Parent Ltd or Subsidiary Ltd but rather in a separate consolidation journal, which is then posted
to the consolidation worksheet. A review of the consolidation worksheet below reveals the following points about the
worksheet:
∙ The first column provides the names of the accounts that will be recognised in the consolidation process.
∙ The second and third columns represent the account balances of the individual legal entities. There are only two
columns here because there are only two entities involved in the group. Additional columns would be required for
each additional subsidiary in the group.
∙ The following two columns are then provided for the consolidation eliminations and adjustments. These
adjustments will be in journal entry form, with the journal entries often being made in a separate consolidation
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 972 PART 8: Accounting for equity interests in other entities

journal. Remember that these consolidation entries are not made in the accounts of the separate entities and the
consolidation eliminations and adjustments do not impact on the amounts shown in the ledger accounts of the
separate entities making up the group. Because the adjustments are not recorded in the accounts of the individual
entities, where consolidated financial statements are prepared over a number of periods there will be a need every
year to repeat certain consolidation adjustments and eliminations such as the entry that eliminates pre-acquisition
share capital and reserves of the subsidiaries.
∙ The final column on the right-hand side of the worksheet represents the information that will be used directly to
construct the consolidated financial statements. The numbers are derived by working across the worksheet and
taking account of the various eliminations and adjustments.
Again, it should be emphasised that the consolidated financial statements are drawn up from the worksheet. There
is no ledger as there would be for the separate entities in the group.

Consolidation worksheet for Parent Ltd and its controlled entity for the period ending 30 June 2023

Eliminations and
adjustments

Consolidated
Parent Ltd Subsidiary Ltd Dr Cr statement
($000) ($000) ($000) ($000) ($000)
Current assets
Cash 10 5 15
Accounts receivable 150 55 205
Non-current assets
Plant 800 500 1 300
Land 200 100 300
Investment in Subsidiary Ltd 500 – 500 –
Goodwill on acquisition      –      – 20       20
1 660 660 1 840
Current liabilities
Accounts payable 60 30 90
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Non-current liabilities
Loans 400 150 550
Shareholders’ equity
Share capital 1 000 200 200 1 000
Retained earnings 200 280 280 200
1 660 660 500 500 1 840

A review of the data to be included in the consolidated statement of financial position (the right-hand column)
provides some useful information. It reveals that the economic entity controls assets with a total value of $1.84 million
and that it has liabilities to parties external to the group totalling $640 000. The consolidated statement of financial
position would appear as follows:

Consolidated statement of financial position for Parent Ltd and its controlled entity as at 30 June 2023

Parent entity Group

($000) ($000)
Current assets
Cash 10 15
Accounts receivable 150 205
160 220

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 CHAPTER 25: Accounting for group structures 973

Parent entity Group

($000) ($000)
Non-current assets
Plant 800 1 300
Land 200 300
Investment in Subsidiary Ltd 500 –
Goodwill – 20
1 500 1 620
Total assets 1 660 1 840
Current liabilities
Accounts payable 60 90
Non-current liabilities
Loans 400 550
Total liabilities 460 640
Net assets 1 200 1 200
Represented by:
Shareholders’ equity
Share capital 1 000 1 000
Retained earnings 200 200
1 200 1 200

Because the consolidated statement of financial position is prepared immediately after the acquisition, it does not
include any share capital or reserves of the subsidiary given that all pre-acquisition share capital and reserves were
eliminated on consolidation. Only the parent’s pre-acquisition share capital and reserves will be shown. In subsequent
periods the consolidated retained earnings will include the post-acquisition earnings of the subsidiary.

WHY DO I NEED TO KNOW WHAT GOODWILL REPRESENTS, AND HOW IT SHALL

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BE ACCOUNTED FOR?
The goodwill acquired in a business acquisition, and presented within the consolidated balance sheet, can
sometimes amount to many millions, or even billions, of dollars. Therefore, it can be a very material asset and
it is thus important to understand what it represents, and how it is calculated. To understand ‘goodwill’, it is also
important to understand that only purchased goodwill can be recognised, and to understand the requirements
in relation to ongoing impairment testing of goodwill.

25.8 Gain on bargain purchase

LO 25.8
Although not common, it is possible for a company to gain control of an entity for an amount less than the fair
value of the proportional share of the identifiable assets acquired and the liabilities assumed. Bargain purchases
are considered to be anomalous transactions because business entities and their owners generally do not knowingly,
and willingly, sell assets or businesses at prices below their fair values. However, a number of circumstances exist
where bargain purchases occur. These include a forced liquidation or distress sale (for example, after the death of
a founder or key manager) in which owners need to sell a business quickly, which may result in a price less than
fair value.
A gain arising from a bargain purchase occurs when the acquisition-date fair values of the identifiable assets
acquired and liabilities assumed exceeds the acquisition-date fair value of the consideration transferred plus the
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 974 PART 8: Accounting for equity interests in other entities

amount of any non-controlling interest in the acquiree plus the acquisition-date fair value of the acquirer’s previously
held equity interest in the acquiree. When a bargain purchase occurs, the acquirer recognises a gain in the profit or loss
on the acquisition date.
Before a gain on a bargain purchase is recognised, AASB 3, paragraph 36, requires that:
the acquirer shall reassess whether it has correctly identified all of the assets acquired and all of the liabilities
assumed and shall recognise any additional assets or liabilities that are identified in that review. The acquirer shall
then review the procedures used to measure the amounts this Standard requires to be recognised at the acquisition
date for all of the following:
(a) the identifiable assets acquired and liabilities assumed;
(b) the non-controlling interest in the acquiree, if any;
(c) for a business combination achieved in stages, the acquirer’s previously held equity interest in the acquiree; and
(d) the consideration transferred.
 he objective of the review is to ensure that the measurements appropriately reflect consideration of all
T
available information as of the acquisition date. (AASB 3)
An example of a gain on bargain purchase is provided in Worked Example 25.4.

WORKED EXAMPLE 25.4: Acquisition of a subsidiary at a discount

Assume the same information as in Worked Example 25.3, except that this time Parent Ltd acquires Subsidiary
Ltd for $400 000.

Fair value of purchase consideration $400 000

Fair value of net assets acquired $480 000
Gain on bargain purchase $80 000

REQUIRED Provide the consolidation worksheet for Parent Ltd and its controlled entity for the year ending
30 June 2023.
SOLUTION As stated above, and in accordance with AASB 3, to the extent that a reassessment of the
identification and measurement of the acquiree’s identifiable assets, liabilities and contingent liabilities
and measurement of the cost of the combination indicates that the values attributable to the acquisition are
reasonable, any excess is to be treated as a gain on bargain purchase, and included in the profit or loss for the
Copyright © 2019. McGraw-Hill Education (Australia) Pty Limited. All rights reserved.

reporting period.
Where Parent Ltd has acquired Subsidiary Ltd for $400 000, the elimination of the investment in Subsidiary
Ltd would be recorded as:

Dr Share capital 200 000

Dr Retained earnings 280 000
Cr Gain on bargain purchase 80 000
Cr Investment in Subsidiary Ltd 400 000
(to eliminate the investment in Subsidiary Ltd and to recognise the bargain
purchase on acquisition)

Consolidation worksheet for Parent Ltd and its controlled entity for the year ending 30 June 2023

Eliminations and
adjustments
Consolidated
Parent Ltd Subsidiary Ltd Dr Cr statement
($000) ($000) ($000) ($000) ($000)
Current assets
Cash 110 5 115

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 CHAPTER 25: Accounting for group structures 975

Eliminations and
adjustments
Parent Ltd Subsidiary Ltd Dr Cr Consolidated
($000) ($000) ($000) ($000) statement
($000)
Accounts receivable 150 55 205
Non-current assets
Plant 800 500 1 300
Land 200 100 300
Investment in
Subsidiary Ltd 400 – 400       –
1 660 660 1 920
Current liabilities
Accounts payable 60 30 90
Non-current liabilities
Loans 400 150 550
Shareholders’ equity
Share capital 1 000 200 200 1 000
Retained earnings 200 280 280 80    280
1 660 660 480 480 1 920

Note 1: When completing a consolidation worksheet, the aggregate of the debits in the eliminations and
adjustments columns should equal the aggregate of the credits.
Note 2: In this Worked Example, the gain has been taken directly to retained earnings in the absence of a
consolidated statement of profit or loss and other comprehensive income. The gain would be included in the
period’s profits.
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25.9 Subsidiary’s assets not recorded at fair values

LO 25.9
As has been established, on acquisition date, goodwill is measured as the acquisition-date fair value of the
consideration transferred plus the amount of any non-controlling interest in the acquiree plus the acquisition-
date fair value of the acquiree’s previously held equity interest in the acquiree less the acquisition-date fair values of
the identifiable assets acquired and liabilities assumed.
Frequently, a subsidiary’s assets are not recorded at fair value (perhaps the subsidiary uses the cost model to
account for its property, plant and equipment, or if revaluations are used, they might not be up-to-date), hence
adjustments will be required so that a reliable figure for goodwill (or the bargain on a purchase) can be calculated.
As AASB 3 indicates, if at the date of acquisition the subsidiary’s assets are not recorded at fair value we can
either revalue the identifiable assets in the accounting records of the subsidiary before consolidation, or we can
recognise the necessary adjustments on consolidation. In undertaking the revaluations we would need to consider
the requirements pertaining to revaluations as stipulated in AASB 116 and AASB 138. As we know from Chapter 8,
there are some major restrictions in relation to upward revaluations of intangible assets.
A further consideration is that where non-current assets are revalued upwards, an adjustment for deferred tax
should also be made in accordance with AASB 112 Income Taxes. Further details in respect of this can be found in
Chapter 18.
With the first approach, all of the non-current assets of the subsidiary would be revalued to their fair values in
the accounting records of the subsidiary in accordance with AASB 116 and AASB 138 before we subsequently use
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 976 PART 8: Accounting for equity interests in other entities

consolidation journal entries to eliminate the parent entity’s investment in the subsidiary against the pre-acquisition
share capital and reserves of the subsidiary. This would require the following entry to be made in the accounting records
of the subsidiary (which would need some cooperation from the subsidiary, which might not always be forthcoming
prior to acquisition):
Dr Non-current assets XX
Cr Gain on revaluation (on OCI) XX
(revaluing assets to their fair value and recognising the gain in other comprehensive
income in compliance with AASB 116)

Dr Income tax expense (in OCI) XX

Cr Deferred tax liability XX
(recognising the deferred tax consequences of the revaluation in accordance with
AASB 112, as we explained in Chapter 18)

Dr Gain on revaluation (in OCI) XX

Cr Income tax expense (in OCI) XX
Cr Revaluation surplus XX
(transferring the net gain on revaluation to the revaluation surplus at the end of the
accounting period in accordance with AASB 116)

With the second approach—where we recognise the increment in the value of the assets in the consolidation
process rather than in the accounts of the subsidiary—the above entries would be made in the consolidation worksheet.
Following the entries to recognise the fair value of the non-current assets (either in the books of the subsidiary
or in the consolidation worksheet), a consolidation entry would be processed to eliminate the investment and the
corresponding equity in the subsidiary. The equity in the subsidiary would include the revaluation surplus, that is,
it would be treated the same as other pre-acquisition capital and reserve accounts. This might require the following
entries on consolidation:
Dr Share capital XX
Dr Retained earnings XX
Dr Revaluation surplus XX
Dr Goodwill XX
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Cr Investment in subsidiary XX
(eliminating the investment in subsidiary, as well as the revaluation surplus created
in the previous entry)

Worked Example 25.5 provides the entries necessary to account for the assets of a subsidiary when those assets
are not recorded at fair value at the date of acquisition.

WORKED EXAMPLE 25.5: Consolidation where subsidiary’s assets are not recorded at fair value
Assume the same information as provided in Worked Example 25.3, except this time Parent Ltd acquires
Subsidiary Ltd for $550 000. At this date, all assets were fairly valued except for land, which had a fair value of
$130 000. The tax rate is 30 per cent.
REQUIRED Provide the journal entries necessary to consolidate Parent Ltd and its controlled entity for the
year ended 30 June 2023, assuming:
(a) Subsidiary Ltd revalued its land
(b) Subsidiary Ltd did not revalue its land.

SOLUTION
(a) As we explained in Chapter 18, an entity revaluing its non-current assets creates a tax effect,
which needs to be recognised in accordance with AASB 112 (you may need to go back and read
Chapter 18 if you have forgotten the requirements of tax-effect accounting). The revaluation creates a
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 CHAPTER 25: Accounting for group structures 977

difference between the carrying amount and the tax base of the asset, which in turn creates a deferred tax
difference.
If Subsidiary Ltd revalued its land at the date of its acquisition by Parent Ltd, and with a tax rate of 30 per
cent, the journal entry in the books of Subsidiary Ltd would have been:
30 June 2023
Dr Land 30 000
Cr Gain on revaluation (in OCI) 30 000
(to revalue the asset to fair value and recognise the associated
gain in other comprehensive income)
Dr Income tax expense (in OCI) 9 000
Cr Deferred tax liability 9 000
(to recognise the deferred tax effect associated with the revaluation)
Dr Gain on revaluation (in OCI) 30 000
Cr Income tax expense (in OCI) 9 000
Cr Revaluation surplus 21 000
(closing entry at the end of the accounting period to transfer the net
gain on revaluation to the revaluation surplus account, which is part
of equity)
As the revaluation surplus is part of pre-acquisition reserves of the subsidiary (because the revaluation
relates to increases in fair value up until the point in time when the parent entity acquires the interest in the
subsidiary), it needs to be taken into account when calculating goodwill. Goodwill is calculated to be $49
000, determined as follows:

Share capital $200 000

Retained earnings $280 000
Revaluation surplus $ 21 000
Total pre-acquisition capital and reserves $501 000
Fair value of consideration $550 000
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Goodwill $ 49 000

From the above workings, the consolidation entry to eliminate the investment in Subsidiary Ltd would be:
30 June 2023
Dr Share capital 200 000
Dr Retained earnings 280 000
Dr Revaluation surplus 21 000
Dr Goodwill 49 000
Cr Investment in Subsidiary Ltd 550 000
(to eliminate the investment in the subsidiary against the
subsidiary’s pre-acquisition share capital and reserves)
It should be noted that when a consolidation adjustment is made to depreciable assets, a consolidation
journal entry is required to adjust future depreciation expenses. This is considered in more detail in
Chapter 26.
(b) Had Subsidiary Ltd chosen not to revalue its land when it was acquired by Parent Ltd, Parent Ltd would still
have needed to make an adjustment to recognise the actual value of land purchased by it when the equity
was acquired. It would have been necessary for the revaluation to have been made as a consolidation
adjustment prior to the elimination of the pre-acquisition share capital and reserves of Subsidiary Ltd.
This would create a revaluation surplus in the consolidation worksheet, which would be treated as a pre-
acquisition reserve of the subsidiary.
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 978 PART 8: Accounting for equity interests in other entities

Subsidiary’s assets not recorded at fair value at date of acquisition together with a
gain on bargain purchase
It is possible, even if the assets of the subsidiary are recognised at their fair value at the date of acquisition, for a gain
to result on acquisition. Where there is a gain on bargain purchase, this shall be recognised as a gain in the statement
of profit or loss and other comprehensive income in the period in which the acquisition occurred.
Any depreciable non-monetary assets should be depreciated at their cost to the economic entity. A comparison
of the depreciation charge in the books of the subsidiary with the amount required in the consolidated financial
statements will provide the amount of the adjustment.
In Worked Example 25.6 we consider the joint situation where a gain on bargain purchase is calculated following
a fair value adjustment being undertaken in relation to a subsidiary’s assets.

WORKED EXAMPLE 25.6: Revaluation to fair value with a resulting gain on bargain purchase
On 30 June 2023 Kite Ltd acquired 100 per cent of the issued capital of Surfer Ltd for $3 920 000. At that date,
the statement of financial position of Surfer Ltd showed share capital and reserves of:

Share capital $2 500 000

Retained earnings $ 900 000
Total share capital and reserves $3 400 000

At the date of acquisition, the statements of financial position of Kite Ltd and Surfer Ltd were as follows:

Kite Ltd Surfer Ltd

($000) ($000)
Current assets
Cash 15 6
Accounts receivable 175 64
190 70
Non-current assets
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Land 2 890 2 700

Plant and equipment 1 905 900
Investment in Surfer Ltd 3 920 –
8 715 3 600
Total assets 8 905 3 670
Current liabilities
Accounts payable 140 55
Non-current liabilities
Loans 1 145 215
Total liabilities 1 285 270
Net assets 7 620 3 400
Shareholders’ equity
Share capital 5 500 2 500
Retained earnings 2 120 900
7 620 3 400

Additional information
• At the date of acquisition, all of the assets acquired and the liabilities assumed were valued at fair value except
certain non-monetary assets that have the following fair values:
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 CHAPTER 25: Accounting for group structures 979

Carrying amount Fair value

Land 2 700 000 3 200 000
Plant at cost 3 700 000 1 300 000
Accumulated depreciation (2 800 000)
900 000

• The plant and equipment of Surfer Ltd is expected to have a remaining useful life of four years and no residual value.
• The tax rate is 30 per cent.
REQUIRED
(i) Prepare the consolidation journal entries necessary to consolidate Kite Ltd and Surfer Ltd at 30 June
2023, assuming that Surfer Ltd did not revalue its non-monetary assets in its own financial statements
as at the date of the acquisition. Prepare the consolidated statement of financial position.
(ii) Assuming that the plant will be depreciated on the straight-line basis over its remaining useful life of four
years, prepare the consolidation journal entries at 30 June 2024 to account for the depreciation.
SOLUTION
(i) Consolidation journal entries
30 June 2023
(a) Dr Land 500 000
Cr Revaluation surplus recognised on consolidation 350 000
Cr Deferred tax liability 150 000
(to revalue the land held by the subsidiary)
(b) Dr Accumulated depreciation 2 800 000
Cr Plant 2 800 000
(to eliminate the accumulated depreciation at the
date of revaluation)
(c) Dr Plant 400 000
Cr Revaluation surplus recognised on consolidation 280 000
Cr Deferred tax liability 120 000
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(to revalue the plant held by the subsidiary)

Having revalued the assets, and therefore having restated the pre-acquisition reserves of the
subsidiary, we can determine the goodwill or gain on bargain purchase as follows:
Share capital 2 500 000
Retained earnings 900 000
Revaluation surplus recognised on consolidation 630 000
Total pre-acquisition capital and reserves 4 030 000
Cost of investment in Surfer Ltd 3 920 000
Gain on bargain purchase 110 000

(d) Dr Share capital 2 500 000

Dr Retained earnings 900 000
Dr Revaluation surplus recognised on consolidation 630 000
Cr Gain on bargain purchase of Surfer Ltd 110 000
Cr Investment in Surfer Ltd 3 920 000
(to eliminate the investment in the subsidiary
against the subsidiary’s pre-acquisition share
capital and reserves)

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 980 PART 8: Accounting for equity interests in other entities

WORKED EXAMPLE 25.6 continued

As we can see from the above journal entries, the entire fair value adjustment on consolidation that was
created in entries (a) and (c) above is then eliminated in entry (d). The fair value adjustment is therefore effectively
being used so that we can attribute appropriate valuations (fair value) to the identifiable assets (in this case, plant
and land), as well as to goodwill. We have used the account ‘Revaluation surplus recognised on consolidation’
to highlight that this is a revaluation undertaken as part of the consolidation process, which will subsequently be
eliminated when determining goodwill.
Consolidation worksheet for Kite Ltd and its controlled entity for the period ending 30 June 2023
Eliminations and
adjustments
Consolidated
statement
of financial
Kite Ltd Surfer Ltd Dr Cr position
($000) ($000) ($000) ($000) ($000)
Retained earnings 2 120 900 900(d) 110(d) 2 230
Share capital 5 500 2 500 2 500(d) 5 500
Revaluation surplus
recognised on consolidation 630(d) 350(a), 280(c) –
Current liabilities
Accounts payable 140 55 195
Non-current liabilities
Deferred tax liability 150(a), 120(c) 270
Loans 1 145    215 1 360
8 905 3 670 9 555
Current assets
Cash 15 6 21
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Accounts receivable 175 64 239

Non-current assets
Plant 4 000 3 700 400(c) 2 800(b) 5 300
Accumulated depreciation (2 095) (2 800) 2 800(b) (2 095)
Land 2 890 2 700 500(a) 6 090
Investment in Surfer Ltd 3 920     – 3 920(d) –
8 905 3 670 7 730 7 730 9 555

(ii) Additional depreciation expense adjustment at 30 June 2024 (one year later)
While the carrying amount of the asset in the accounts of Surfer Ltd was $900 000 (with remaining
depreciation of $225 000 per year), the asset is measured at its fair value of $1 300 000 in the
consolidated financial statements (which means a related depreciation of $325 000 per year). Hence,
from the group’s perspective we need to increase depreciation by $100 000 per year.
Fair value of plant acquired $1 300 000
Carrying amount of plant in accounting records of Surfer Ltd    $900 000
Additional depreciation to be recognised in total over next 4 years $400 000
Additional depreciation per year ($400 000 ÷ 4) $100 000

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 CHAPTER 25: Accounting for group structures 981

30 June 2024—consolidation journal entries to recognise additional depreciation expense

Dr Depreciation expense 100 000

Cr Accumulated depreciation—plant 100 000
Dr Deferred tax liability 30 000
Cr Income tax expense 30 000
(to recognise the increased depreciation expense and
related tax effects)

The additional depreciation charge results from the additional amount paid by Kite Ltd for the item of
plant. As the value of the asset is recovered through use, the deferred tax liability recognised at the date of
acquisition, 30 June 2023, which was $120 000, is reversed. At the end of four years, the remaining useful
life of the item of plant, the balance of the deferred tax liability, will be $nil (it will be reduced by $30 000
each year). It should also be noted that the consolidation journal entries performed in 2023 would also need
to be repeated in 2024.

25.10 Previously unrecognised identifiable intangible assets

LO 25.10
In the above examples we assumed that the subsidiary did not have any other assets that existed at acquisition
but were precluded from being recognised in the subsidiary’s financial statements. As we know, many
internally generated intangible assets are not permitted to be recognised by the entity creating the asset by virtue of
AASB 138. For example, if an organisation had expended considerable resources developing a particular publishing
title, for example, a leading novel, then while the title would be considered an identifiable intangible asset, because it
had been internally developed it could not be recognised as an asset for financial statement purposes. This is consistent
with paragraph 63 of AASB 138, which states:

Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall not be
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recognised as intangible assets. (AASB 138)

However, if another entity acquired the entity with the unrecognised identifiable intangible assets, on consolidation
the publishing title would be recognised at fair value. This is consistent with the general recognition criteria within
AASB 3 (paragraph 10), which states:

As of the acquisition date, the acquirer shall recognise, separately from goodwill, the identifiable assets acquired,
the liabilities assumed and any non-controlling interest in the acquiree. Recognition of identifiable assets acquired
and liabilities assumed is subject to the conditions specified in paragraphs 11 and 12. (AASB 3)

As we also know, and in accordance with paragraph 18 of AASB 3, the acquirer shall measure the identifiable
assets acquired at their acquisition-date fair values. Paragraph 24 also notes that the acquirer shall recognise a
deferred tax liability, or asset, arising from assets acquired in a business combination when those assets were
not recognised in the financial statements of the acquiree. A deferred tax liability will arise on recognition of the
previously unrecognised identifiable intangible asset because the carrying amount of the asset will change, while
the tax base will not change, which leads to an increase in taxable temporary differences in the form of a deferred
tax liability.
Once fair values have been attributed to all identifiable assets acquired in a business combination—including
those intangible assets that had previously been unrecognised within the financial statements of the subsidiary—any
excess of the fair value of the purchase consideration over the fair value of the net assets acquired would then be
considered to be of the nature of goodwill. Consider Worked Example 25.7.

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 982 PART 8: Accounting for equity interests in other entities

WORKED EXAMPLE 25.7: Recognition on consolidation of previously unrecognised identifiable

intangible assets

On 30 June 2023 Larry Ltd acquired 100 per cent of the issued capital of Blair Ltd for $4 000 000. At that date,
the statement of financial position of Blair Ltd showed share capital and reserves of:
Share capital $3 000 000
Retained earnings $400 000
Total share capital and reserves $3 400 000

At the date of acquisition, the statements of financial position of Larry Ltd and Blair Ltd were as follows:
Larry Ltd Blair Ltd
($000) ($000)
Current assets
Cash 100 25
Accounts receivable 200 45
300    70
Non-current assets
Land 3 500 3 000
Plant and equipment 1 700 600
Investment in Blair Ltd 4 000      –
9 200 3 600
Total assets 9 500 3 670
Current liabilities
Accounts payable 100    50
Non-current liabilities
Loans 1 400 220
Total liabilities 1 500 270
Net assets 8 000 3 400
Shareholders’ equity
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Share capital 5 500 3 000

Retained earnings 2 500 400
8 000 3 400

Additional information
• At the date of acquisition, all of the assets acquired and the liabilities assumed were valued at fair value.
• Blair Ltd had a successful publishing title that had a fair value of $400 000 at 30 June 2023, but which had
been internally developed and therefore was not recognised in its statement of financial position.
• The tax rate is 30 per cent.

REQUIRED Prepare the consolidation journal entries necessary to consolidate Larry Ltd and Blair Ltd at
30 June 2023. Prepare the consolidated statement of financial position.
SOLUTION Determination of goodwill
Share capital 3 000 000
Retained earnings 400 000
Total pre-acquisition capital and reserves 3 400 000
Cost of investment in Surfer Ltd 4 000 000
600 000
less Fair value of publishing title (net of associated deferred tax liability 280 000
of $120 000, which equals $400 000 × 0.30)
Goodwill
Deegan, C. (2019). Financial accounting. McGraw-Hill Education (Australia) Pty Limited.
320 000
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 CHAPTER 25: Accounting for group structures 983

Consolidation journal entries

(a) to recognise the previously unrecognised publishing title
Dr Publishing title 400 000
Cr Deferred tax liability 120 000
Cr Revaluation surplus recognised on consolidation 280 000
(to recognise previously unrecognised publishing title)

(b) elimination of investment in subsidiary

Dr Share capital 3 000 000
Dr Retained earnings 400 000
Dr Revaluation surplus recognised on consolidation 280 000
Dr Goodwill 320 000
Cr Investment in Blair Ltd 4 000 000
(to eliminate the investment in the subsidiary against the
subsidiary’s pre-acquisition capital and reserves)

Consolidation worksheet for Larry Ltd and its controlled entity for the period ending 30 June 2023

Eliminations and
adjustments
Consolidated statement
Larry Ltd Blair Ltd Dr Cr of financial position
($000) ($000) ($000) ($000) ($000)
Retained earnings 2 500 400 400(b) 2 500
Share capital 5 500 3 000 3 000(b) 5 500
Revaluation surplus
recognised on
consolidation 280(b) 280(a) –
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Current liabilities
Accounts payable 100 50 150
Non-current liabilities
Deferred tax liability 120(a) 120
Loans 1 400 220 1 620
9 500 3 670 9 890
Current assets
Cash 100 25 125
Accounts receivable 200 45 245
Non-current assets
Plant 1 700 600 2 300
Land 3 500 3 000 6 500
Publishing title 400(a) 400
Goodwill 320(b) 320
Investment in Surfer Ltd 4 000    – 4 000(b) –
9 500 3 670 4 400 4 400 9 890
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 984 PART 8: Accounting for equity interests in other entities

25.11 Consolidation after date of acquisition

LO 25.11
As we have noted, the pre-acquisition shareholders’ funds of the subsidiary are eliminated on consolidation
(against the investment in the subsidiary). This then typically provides goodwill on consolidation (which is,
in effect, a balancing item). Occasionally it will result in a gain on bargain purchase.
pre-acquisition In the period following acquisition, the subsidiary will generate profits or losses. To the extent
shareholders’ funds that these results have been generated in the period after acquisition, and therefore reflect, in part,
Shareholders’ funds that the efforts of the management team of the parent entity, they should be reflected in the results
were in existence in
an organisation before
of the economic entity. That is, unlike pre-acquisition earnings, post-acquisition earnings of the
an entity acquired an subsidiary are considered to be part of the earnings of the economic entity (the group of entities)
ownership interest in that and are not eliminated on consolidation. Accounting post-acquisition is examined more closely in
organisation.
Worked Example 25.8.

WORKED EXAMPLE 25.8: Consolidation in a period subsequent to the acquisition of the subsidiary
Assume the same facts as in Worked Example 25.3, in which Parent Ltd acquires all the shares in Subsidiary Ltd
for $500 000 on 30 June 2023, leading to goodwill of $20 000 being recognised. We will assume that there is
no tax to be paid.
The accounts for Parent Ltd and Subsidiary Ltd at 30 June 2024 (one year after acquisition) are provided here.
Reconciliation of opening and closing retained earnings

Parent Ltd Subsidiary Ltd

($000) ($000)
Sales revenue 300 100
Cost of goods sold (100) (40)
Other expenses   (60) (30)
Profit 140 30
Retained earnings opening balance 200 280
Retained earnings—30 June 2024 340 310
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Statements of financial position as at 30 June 2024

Parent Ltd Subsidiary Ltd

($000) ($000)
Shareholders’ equity
Retained earnings 340 310
Share capital 1 000 200
Current liabilities
Accounts payable 60 40
Non-current liabilities
Loans 600 250
2 000 800
Current assets
Cash 50 25
Accounts receivable 250 75

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 CHAPTER 25: Accounting for group structures 985

Non-current assets
Land 200 100
Plant 1 000 600
Investment in Subsidiary Ltd 500 –
2 000 800

Additional information
Directors have determined that goodwill acquired in 2023 has been impaired by $5000, so that its value at 30
June 2024 is $15 000. There are no intragroup transactions.
REQUIRED Prepare the consolidation worksheet for Parent Ltd and its controlled entity as at 30 June 2024.
SOLUTION There are three parts to preparing the consolidation worksheet for Parent Ltd and Subsidiary Ltd.
(a) Elimination of investment
We need to perform the same entry to eliminate the investment as we did in the previous year. This is an
IMPORTANT point to remember. As we are performing the consolidation in a worksheet and as we DO NOT
adjust the ledger accounts of the individual legal entities making up the economic entity, the effects of past
consolidation adjustments and eliminations ARE NOT incorporated in any opening balances and therefore
need to be replicated across successive years.

Dr Share capital 200 000

Dr Retained earnings 280 000
Dr Goodwill 20 000
Cr Investment in Subsidiary Ltd 500 000
(to eliminate the investment in Subsidiary Ltd against the subsidiary’s pre-
acquisition capital and reserve, and to recognise the goodwill on acquisition)
(b) Impairment of goodwill
AASB 136 requires us to consider whether goodwill acquired is subsequently impaired. In this illustration
we have assumed that goodwill is the subject of an impairment loss, hence the adjusting entries for goodwill
are:
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Dr Impairment loss—goodwill 5000

Cr Accumulated impairment—goodwill 5000
(to recognise the impairment loss for 2024)
(c) Preparation of worksheet
Consolidation worksheet for Parent Ltd and its controlled entity for the period ending 30 June 2024

Eliminations and
adjustments
Consolidated
Parent Ltd Subsidiary Ltd Dr Cr statement
($000) ($000) ($000) ($000) ($000)
Reconciliation of opening and
closing retained earnings
Sales revenue 300 100 400
Cost of goods sold (100) (40) (140)
Other expenses     (60)    (30) 5(b)   (95)
Profit 140 30 165

continued
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 986 PART 8: Accounting for equity interests in other entities

WORKED EXAMPLE 25.8 continued

Eliminations and
adjustments
Consolidated
Parent Ltd Subsidiary Ltd Dr Cr statement
($000) ($000) ($000) ($000) ($000)
Retained earnings opening balance 200 280 280(a) 200
Retained earnings closing balance 340 310 365
Statements of financial position
Retained earnings—30 June 2024 340 310 365
Share capital 1 000 200 200(a) 1 000
Current liabilities
Accounts payable 60 40 100
Non-current liabilities
Loans 600     250 850
2 000   800 2 315
Current assets
Cash 50 25 75
Accounts receivable 250 75 325
Non-current assets
Plant 1 000 600 1 600
Land 200 100 300
Investment in Subsidiary Ltd 500 – 500(a) –
Goodwill on acquisition – – 20(a) 20
Accum. impairment—goodwill     – –    – 5(b) (5)
2 000 800 505 505 2 315

As can be seen from the above worksheet, the consolidated retained earnings balance at the end of the
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2024 financial year will equal the parent entity’s retained earnings, plus the post-acquisition earnings of the
controlled entity. You will notice the letter markers next to the adjusting entries. These allow us to trace the journal
entries back to the consolidation journal. The above worksheet then provides the data necessary to produce
the required consolidated financial statements in accordance with AASB 3, AASB 10, AASB 112 and AASB 101.

In Worked Example 25.9 we consider a further consolidation example. In this illustration, we consider a situation
where the subsidiary’s assets are not recorded at fair value, and the consolidation is undertaken in the year subsequent
to initial acquisition.

WORKED EXAMPLE 25.9: Consolidation in the year subsequent to acquisition, and with a fair value
adjustment

Stubbs Ltd acquires all of the shares in Billa Ltd on 30 June 2022. The financial statements for Stubbs Ltd and
Billa Ltd at 30 June 2023 (one year after acquisition) are provided below.
Reconciliation of opening and closing retained earnings
Stubbs Ltd Billa Ltd
($000) ($000)
Sales revenue 2 000 610
Cost of goods sold (800) (240)

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 CHAPTER 25: Accounting for group structures 987

Stubbs Ltd Billa Ltd

($000) ($000)
Other expenses (300) (70)
Profit 900 300
Retained earnings opening balance 1 100 500
Retained earnings at 30 June 2023 2 000 800

Statements of financial position

Stubbs Ltd Billa Ltd
($000) ($000)
Shareholders’ equity
Retained earnings 2 000 800
Share capital 1 100 350
Current liabilities
Accounts payable 700 150
Non-current liabilities
Loans 1 100 700
4 900 2 000
Current assets
Cash 150 200
Accounts receivable 450 250
Non-current assets
Land 1 200 750
Plant 2 600 1 000
Accumulated depreciation—plant (600) (200)
Investment in Billa Ltd 1 100 –
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4 900 2 000

Additional information
1. Stubbs Ltd acquires Billa Ltd on 30 June 2022 for $1.1 million in cash.
2. The directors of Stubbs Ltd consider that in the year to 30 June 2023 the value of goodwill has been
impaired by an amount of $20 000.
3. There are no intragroup transactions.
4. Billa Ltd did not issue any shares during 2023.
5. The tax rate is 30 per cent.
6. On the date at which Stubbs Ltd acquires Billa Ltd, the carrying amount and fair value of the assets of Billa Ltd are:
Carrying amount Fair value
($000) ($000)
Cash 150 150
Accounts receivable 200 200
Land 750 800
Plant (cost of $1 000 000, accumulated depreciation of $200 000) 800 900
1 900 2 050

continued
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 988 PART 8: Accounting for equity interests in other entities

WORKED EXAMPLE 25.9 continued

7. No revaluations are undertaken in Billa Ltd’s accounts before consolidation.

8. At the date of acquisition of Billa Ltd, Billa Ltd’s liabilities amount to $1.050 million and there are no contingent
liabilities.
9. The plant in Billa Ltd is expected to have a remaining useful life of 10 years from 30 June 2022, and no
residual value.
REQUIRED Provide the consolidated accounts of Stubbs Ltd and Billa Ltd as at 30 June 2023.
SOLUTION We need to determine goodwill (the difference between the fair value of the net assets acquired
and the fair value of the purchase consideration).
Fair value of purchase consideration $1 100 000
Carrying amount of net assets acquired:
Carrying amount of assets $1 900 000
Carrying amount of liabilities $1 050 000 $850 000
Fair value adjustment:
Excess of fair value of land over carrying amount $50 000
Excess of fair value of plant over carrying amount $100 000
$150 000
Tax effect of revaluation (deferred tax liability)
$150 000 × 0.30 ($45 000) $105 000
Fair value of net assets acquired $955 000
Goodwill acquired $145 000

The consolidation journal entries would be as follows.

(a) To revalue the assets of Billa Ltd so that goodwill can subsequently be accounted for
Dr Land 50 000
Cr Revaluation surplus recognised on consolidation 35 000
Cr Deferred tax liability 15 000
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(to recognise the fair value adjustment of land and the consequent
deferred tax liability)
Dr Accumulated depreciation 200 000
Cr Plant 200 000
(to eliminate the existing accumulated depreciation of the plant
as part of the fair value adjustment of plant)
Dr Plant 100 000
Cr Revaluation surplus recognised on consolidation 70 000
Cr Deferred tax liability 30 000
(to recognise the fair value adjustment of plant and the consequent
deferred tax liability)
(b) To eliminate the investment in Billa Ltd and the pre-acquisition capital and reserves of Billa Ltd
Dr Share capital 350 000
Dr Retained earnings 500 000
Dr Revaluation surplus recognised on consolidation 105 000
Dr Goodwill 145 000
Cr Investment in Billa Ltd 1 100 000
(to eliminate the pre-acquisition share capital and reserves of Billa Ltd)

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 CHAPTER 25: Accounting for group structures 989

(c) To recognise impairment of goodwill

In this illustration there is a $20 000 impairment of goodwill and hence the adjusting entry required is:

Dr Impairment loss—goodwill 20 000

Cr Accumulated impairment—goodwill 20 000
(to recognise the subsequent impairment of goodwill)

(d) Additional depreciation

From the perspective of the group, the plant in Billa Ltd has a carrying amount of $900 000, which
needs to be depreciated over its useful life. To recognise the depreciation of the fair value adjustment of
$100 000 over the remaining useful life of 10 years, the following adjusting entry is necessary:

Dr Depreciation 10 000
Cr Accumulated depreciation 10 000
Dr Deferred tax liability 3000
Cr Income tax expense 3000
(to adjust depreciation due to the fair value adjustment on consolidation)

Consolidation worksheet for Stubbs Ltd and its controlled entity for the period ending 30 June 2023

Eliminations and
adjustments
Consolidated
Stubbs Ltd Billa Ltd Dr Cr statement
($000) ($000) ($000) ($000) ($000)
Reconciliation of opening and
closing retained earnings
Sales revenue 2 000 610 2 610
Cost of goods sold (800) (240) (1 040)
Other expenses (300) (70) 10(d), 20(c) 3(d) (397)
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Profit 900 300 1 173

Retained earnings—30 June 2022 1 100 500 500(b) – 1 100
Retained earnings—30 June 2023 2 000 800 2 273
Statements of financial position
Shareholders’ equity
Retained earnings 2 000 800 2 273
Share capital 1 100 350 350(b) 1 100
Revaluation surplus recognised – – 105(b) 70(a), 35(a) –
on consolidation
Current liabilities
Accounts payable 700 150 850
Non-current liabilities
Loans 1 100 700 1 800
Deferred tax liability 3(d) 15(a), 30(b) 42
4 900 2 000 6 065

continued
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 990 PART 8: Accounting for equity interests in other entities

WORKED EXAMPLE 25.9 continued

Eliminations and
adjustments
Consolidated
Stubbs Ltd Billa Ltd Dr Cr statement
($000) ($000) ($000) ($000) ($000)
Current assets
Cash 150 200 350
Accounts receivable 450 250 700
Non-current assets
Land 1 200 750 50(a) 2000
Plant 2 600 1 000 100(a) 200(a) 3 500
Accumulated depreciation (600) (200) 200(a) 10(d) (610)
Goodwill 145(b) 145
Accumulated impairment— 20(c) (20)
goodwill
Investment in Billa Ltd 1 100 – 1 100(b) –
4 900 2 000 1 483 1 483 6 065

The consolidated statement of financial position of the Stubbs group can now be provided as follows.
 onsolidated statement of financial position for Stubbs Ltd and its controlled entity as at
C
30 June 2023
Stubbs Ltd Group
($000) ($000)
Current assets
Cash 150 350
Accounts receivable    450        700
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   600 1 050
Non-current assets
Land 1 200 2 000
Plant 2 600 3 500
Accumulated depreciation (600) (610)
Goodwill – 145
Accumulated impairment—goodwill – (20)
Investment in Billa Ltd 1 100    –
4 300 5 015
Total assets 4 900 6 065
Current liabilities
Accounts payable 700 850
Non-current liabilities
Loans 1 100 1 800
Deferred tax liability – 42
1 100 1 842

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 CHAPTER 25: Accounting for group structures 991

Stubbs Ltd Group

($000) ($000)
Total liabilities 1 800 2 692
Net assets 3 100 3 373
Represented by:
Shareholders’ equity
Retained earnings 2 000 2 273
Share capital 1 100 1 100
3 100 3 373

25.12 Disclosure requirements

LO 25.12
While AASB 10 stipulates the accounting procedures to be adopted in consolidating the financial statements
of a parent and its subsidiaries, and AASB 3 stipulates various recognition and measurement requirements
relating to the assets, liabilities and non-controlling interests arising from business combinations, we also need to look
to AASB 12 Disclosure of Interests in Other Entities for the disclosures required in relation to interests in subsidiaries
(and other entities). Paragraphs 10, 11 and 12 of this standard require the following disclosures:
Interests in subsidiaries
10. An entity shall disclose information that enables users of its consolidated financial statements
(a) to understand:
(i) the composition of the group; and
(ii) the interest that non-controlling interests have in the group’s activities and cash flows (paragraph 12); and
(b) to evaluate:
(i) the nature and extent of significant restrictions on its ability to access or use assets, and settle
liabilities, of the group (paragraph 13);
(ii) the nature of, and changes in, the risks associated with its interests in consolidated structured
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entities (paragraphs 14–17);

(iii) the consequences of changes in its ownership interest in a subsidiary that do not result in a loss
of control (paragraph 18); and
(iv) the consequences of losing control of a subsidiary during the reporting period (paragraph 19).
11. When the financial statements of a subsidiary used in the preparation of consolidated financial statements are
as of a date or for a period that is different from that of the consolidated financial statements (see paragraphs
B92 and B93 of AASB 10), an entity shall disclose:
(a) the date of the end of the reporting period of the financial statements of that subsidiary; and
(b) the reason for using a different date or period.
The interest that non-controlling interests have in the group’s activities and cash flows
12. An entity shall disclose for each of its subsidiaries that have non-controlling interests that are material to the
reporting entity:
(a) the name of the subsidiary.
(b) the principal place of business (and country of incorporation if different from the principal place of
business) of the subsidiary.
(c) the proportion of ownership interests held by non-controlling interests.
(d) the proportion of voting rights held by non-controlling interests, if different from the proportion of
ownership interests held.
(e) the profit or loss allocated to non-controlling interests of the subsidiary during the reporting period.
(f) accumulated non-controlling interests of the subsidiary at the end of the reporting period.
(g) summarised financial information about the subsidiary (see paragraph B10). (AASB 12)
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 992 PART 8: Accounting for equity interests in other entities

AASB 12 also stipulates a number of disclosure requirements in relation to:

∙ the nature and extent of significant restrictions on management’s ability to access or use the assets and settle the
liabilities of the group (see paragraph 13)
∙ the nature of the risks associated with an entity’s interests in consolidated structured entities (see paragraphs
14–17)
∙ the consequences of changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control
(see paragraph 18)
∙ the consequences of losing control of a subsidiary during the reporting period (paragraph 19).

25.13 Control, joint control and significant influence

LO 25.13
An investor can have various degrees of influence over an investee. For example, an investor might control an
investee, in which case the investee would be considered to be a subsidiary. Alternatively it might have joint
control, or significant influence over an investee. Lastly, its level of influence might fall short of significant influence.
The degree of influence, or power, over an investee has direct implications for how the investor shall account for the
investment.
As we know from reading this chapter, if an investor controls an investee then it must consolidate the investee
in accordance with AASB 10. It must also make disclosures in accordance with AASB 12. This is reflected in
Figure 25.7. We have also learned in this chapter that if an organisation is jointly controlled then the accounts of that
jointly controlled organisation are not to be incorporated in the consolidated financial statements.
Other chapters of this book describe how to account for an investment when the investor has ‘joint control’ or
‘significant influence’ over an investee. A summarised overview of how the degree of influence or power over an
investee influences how an investor accounts for an equity investment is provided in Figure 25.7. As Figure 25.7
indicates, if there is deemed to be joint control then such a situation would be referred to as a ‘joint arrangement’. Joint
arrangements are addressed in Chapter 29 of this book. As Chapter 29 explains, joint arrangements are classified as

Figure 25.7
Accounting for
investments in Does the investor control the investee?
which the investee
has control, Yes No
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joint control,
or significant Consolidate the investee in
Is there joint control?
accordance with AASB 10
influence over the Consolidated Financial
investee Statements and make
disclosures in accordance Yes No
with AASB 12 Disclosure of
Interests in Other Entities

Define type of joint Is there significant

arrangement in accordance influence?
with AASB 11 Joint
Arrangements
Yes No
Joint operation Joint venture

Account for assets, liabilities, Account for an investment in Apply AASB 9

revenues and expenses. accordance with AASB 128 Financial
Disclose in accordance with Investments in Associates and Instruments
AASB 12 Disclosure of Joint Ventures and provide
Interests in Other Entities disclosures in accordance with
AASB 12

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 CHAPTER 25: Accounting for group structures 993

either ‘joint operations’ or ‘joint ventures’. The classification depends upon the rights and obligations of the parties to
the arrangement. A joint operation is defined at paragraph 15 of AASB 11 as:

a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and
obligations for the liabilities, relating to the arrangement. Those parties are called joint operators. (AASB 11)

By contrast, a joint venture is defined at paragraph 16 as:

a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of
the arrangement. Those parties are called joint venturers. (AASB 11)

The classification as a ‘joint operation’ or ‘joint venture’ in turn impacts how the investor accounts for its
interest in the investee. If the investment is deemed to be a joint operation then the investor’s interest in the respective
assets, liabilities, expenses and revenues will be recognised in the investor’s financial statements and also in the
consolidated financial statements. By contrast, if the investment is deemed to be a joint venture then the equity method
of accounting—which is explained in Chapter 29—is to be used to account for the investment. As paragraphs 21 and
24 respectively require:
21. A joint operator shall account for the assets, liabilities, revenues and expenses relating to its interest in a
joint operation in accordance with the Standards applicable to the particular assets, liabilities, revenues and
expenses.
24. A joint venturer shall recognise its interest in a joint venture as an investment and shall account for that
investment using the equity method in accordance with AASB 128 Investments in Associates and Joint Ventures
unless the entity is exempted from applying the equity method as specified in that Standard. (AASB 11)
If an investee is not controlled, or subject to joint control, but is significantly influenced (which is defined in
AASB 128 Investments in Associates and Joint Ventures as influence that falls short of control, or joint control, but
is the power to participate in the financial and operating policy decisions of the investee), then the investee would
be classified as an ‘associate’ and the equity method of accounting is to be employed to account for the investment.
Accounting for investments in associates is addressed within Chapter 29 of this book.
Where an investor does not have control, joint control or significant influence over an investee—and therefore
does not even have the power to participate in the financial and operating policy decisions of the investee—then
the interest in the investee is to be accounted for in accordance with AASB 9. AASB 9 is considered in depth in
Chapter 14.
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SUMMARY
This chapter introduces the four chapters in this book that address consolidation issues. Consolidated financial statements
are described as statements that present aggregated information about the financial performance and financial positions
of various separate legal entities. Consolidated financial statements provide a single set of financial statements that are
prepared to represent the financial position and performance of the group as if it were operating as a single economic
entity. In determining which organisations should be included in the consolidation process, control is the determining
factor. The group itself comprises the parent entity and its subsidiaries (controlled entities).
The chapter looked at the history of consolidation accounting. Before the introduction of AASB 1024, and subsequently
AASB 127 and now AASB 10, various forms of business entities other than companies—such as partnerships and trusts—
were used to circumvent the requirement to include respective entities in the consolidation process. AASB 1024 closed
this loophole (as does AASB 10) and required all controlled entities to be included in the consolidation process, regardless
of their legal form and their field of activities.
In performing the consolidation of different entities’ financial statements, the investment in a subsidiary must be
eliminated, on consolidation, against the pre-acquisition capital and reserves of the subsidiary. Any required adjustment
has to be made first to reflect the fair value of the subsidiaries’ identifiable assets as at the date of acquisition, and
any difference between the fair value of the net identifiable assets and contingent liabilities acquired and the purchase
consideration will be of the nature of either goodwill, or gain on bargain purchase. If the balance represents goodwill, the
goodwill must be periodically reviewed for any impairment losses in accordance with AASB 136. If a bargain on purchase
is calculated on consolidation, the bargain is to be accounted for as a gain in the consolidated financial statements.

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 994 PART 8: Accounting for equity interests in other entities

Following consolidation, the consolidated retained earnings balance represents the parent entity’s retained earnings,
plus the economic entity’s share of the post-acquisition earnings of the controlled entities (subsidiaries). The balance in the
various consolidated reserve accounts will represent the balance of the parent entity’s reserve accounts, plus the parent
entity’s share of the post-acquisition movements of the subsidiaries’ reserve accounts.
This chapter also stresses that consolidation entries are to be performed in a separate consolidation worksheet or
journal, rather than in the journals of any of the entities within the group.

KEY TERMS
consolidated entity 954 consolidation 949 pre-acquisition shareholders’
consolidated statement of financial controlled entity 962 funds 984
position 951 control over an investee 950 purchased goodwill 971
consolidated statement of profit or group 949
loss and other comprehensive internally generated goodwill 971
income 951

ANSWERS TO OPENING QUESTIONS

At the beginning of this chapter we asked the following six questions. As a result of reading this chapter, you should now
be able to provide informed answers to these questions—ours are shown below.
1. What is a ‘parent entity’, and what is a ‘subsidiary’? LO 25.1, 25.7
A parent entity is an entity that controls one or more entities, and a subsidiary is an entity that is controlled by another
entity.
2. What are ‘consolidated financial statements’? LO 25.1
Consolidated financial statements are the financial statements of a group presented as those of a single economic
entity. Consolidated financial statements combine like items of assets, liabilities, equity, income, expenses and cash
flows of the parent with those of its subsidiaries.
3. What does ‘control’ mean in the context of consolidation accounting, and of what relevance is ‘control’ to the
decision to include, or exclude, the financial accounts of an entity within the consolidated financial statements?
LO 25.5
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An investor (parent entity) shall consolidate the accounts of those entities that it controls (subsidiaries). In this context,
control is deemed to exist when the investor is exposed, or has rights, to variable returns from its involvement with
the investee and has the ability to affect those returns through its power over the investee.
4. What is ‘goodwill’, and how is it determined? LO 25.7
Goodwill is an asset representing the future economic benefits arising from assets acquired in a business combination
that are not individually identified and separately recognised. Goodwill effectively reflects the fair value of the
consideration paid to acquire a business less the fair value of the net assets acquired in the acquisition.
5. If some intangible assets were not recognised by a subsidiary because they were internally developed, can
those same intangible assets be recognised in the consolidated financial statements? LO 25.10
Yes, they can be recognised. As part of the consolidation process it is a requirement that all of the identifiable assets
of a subsidiary are identified and recognised at fair value as part of the initial consolidation journal entries. A failure
to recognise identifiable intangible assets would lead to an overstatement of the purchased goodwill.
6. Will the retained earnings and equity reserves of a subsidiary be included within the consolidated financial
statements? LO 25.7
Only the post-acquisition movements in the retained earnings and equity reserves of a subsidiary shall be included
within the consolidated financial statements. As part of the process of compiling consolidated financial statements,
we shall eliminate the parent entity’s investment in each subsidiary against the parent entity’s interest in the pre-
acquisition share capital and reserves of the subsidiary.

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 CHAPTER 25: Accounting for group structures 995

REVIEW QUESTIONS (KEY: Easy • Medium •• Hard •••)

1. What is the role of consolidated financial statements? LO 25.1 •

2. In a newspaper article entitled ‘Pay for big four bosses in the shade of an even bigger one’ that appeared in
The Sydney Morning Herald on 4 May 2019 it was reported that the Chief Executive Officer (CEO) of Macquarie
Group received $17 million in remuneration at the time when the Macquarie Group reported a profit of $2.99 billion.
In another newspaper article entitled ‘Coca-Cola’s top pay loses its fizz’ that appeared in The Financial Review on
11 April 2019 it was reported that the CEO of Coca-Cola Amatil received $4.1 million in remuneration at the time
when Coca-Cola Amatil reported a profit of $401 million.

REQUIRED
Would the profits referred to above relate to the profit derived by the parent entity (company) or by the group of
companies in the respective group? LO 25.1, 25.7 ••

3. When we are preparing consolidated financial statements:

(a) Do we make consolidation adjustments and eliminations directly to the parent entity’s and/or the subsidiaries’
accounts? Why?
(b) Will the financial statements of the parent entity, or the subsidiary companies, as at the beginning of the financial
period reflect prior period consolidation adjustments? Why?
(c) Will we have to eliminate the parent entity’s investment in the subsidiaries each year as part of our consolidation
entries, or will we have to do the elimination only in the first year following acquisition, but not thereafter? Why?
(d) While there is a general requirement that all parent entities must consolidate the financial statements of
subsidiaries over which they have the capacity to control, there is an exception for ‘investment entities’. What is
the basis of this exception, and do you think it is a justified exception? LO 25.1, 25.3, 25.7 ••

4. The consolidated statement of financial position will show the total assets controlled by the economic entity (group)
and the total liabilities owed to parties outside the economic entity. As such, will liabilities owing to, and amounts
receivable from, organisations within the group (that is, within the economic entity) be eliminated in the consolidation
process, and not be shown in the consolidated statement of financial position? Why? LO 25.1, 25.7 •

5. There is one asset that appears in the consolidated statement of financial position, but probably does not appear in
the parent entity’s or subsidiaries’ separate accounts, and there is also one asset that will appear in the statement
of financial position of the parent entity, but will not appear in the consolidated financial statements. Which accounts
would these be? LO 25.7 •
Copyright © 2019. McGraw-Hill Education (Australia) Pty Limited. All rights reserved.

6. Define:
(a) a legal entity
(b) an economic entity
(c) a parent entity
(d) a subsidiary. LO 25.1 •

7. On consolidation, how is the goodwill on acquisition or the bargain gain on purchase determined? LO 25.7, 25.8 ••

8. Collapse Ltd has severe financial problems and has agreed with its creditors that its activities will be placed in the
hands of XYZ Chartered Accountants, which has been appointed to govern the financial and operating policies of
the organisation. Explain whether XYZ Chartered Accountants needs to prepare consolidated financial statements
which include those of Collapse Ltd. LO 25.2, 25.7 ••

9. What is ‘fair value’ and why is it relevant to consolidation accounting? LO 25.7, 25.8 •

10. Briefly explain the differences between the entity, proprietary and parent-entity consolidation concepts and identify
which concept is to be applied in Australia. LO 25.4 •

11. If a parent entity acquires a controlling interest in a subsidiary, and the subsidiary’s assets are not measured at fair
value, there is a requirement to make an adjusting entry to record the assets at fair value. Why do we need to do this
adjusting entry? What would be the implications if we do not do the adjusting entry? LO 25.7, 25.8, 25.9 ••

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 996 PART 8: Accounting for equity interests in other entities

12. Can a subsidiary be controlled by two different entities? LO 25.13 •

13. Do we consolidate an entity over which we have joint control? LO 25.13 •

14. What is a non-controlling interest, and what disclosures about the non-controlling interests in the group shall be
made pursuant to AASB 12? LO 25.12 ••

15. On consolidation we need to eliminate the investments in controlled entities. Against which accounts do we eliminate
these investments? LO 25.7 •

16. What is the primary criterion for determining whether or not to consolidate an entity? LO 25.1, 25.5 •

17. What are ‘potential voting rights’ and what part do they play in determining whether an entity is under the control of
another entity? LO 25.5 •

18. If Rip Ltd controls Curl Ltd, but is acting as an agent for Quik Ltd in relation to its dealings with Curl Ltd, would Rip Ltd
be required to include Curl Ltd’s accounts within its consolidated financial statements? LO 25.5 •

19. If there are non-controlling interests, will all of the goodwill of the subsidiary be recognised in the consolidated
statements of financial position? LO 25.5, 25.7 ••

20. Would it be possible for an organisation to be required to consolidate another entity in which it has no equity
interest? Explain why. LO 25.5 ••

21. What is the rationale for including the post-acquisition movements in retained earnings and other reserves of a
subsidiary in the consolidated financial statements? LO 25.7, 25.11 ••

22. The management of one of your clients has told you that they intend not to consolidate the financial statements
of one of their subsidiaries because it is involved in mining, whereas all of the other organisations in the group are
involved in service industries. How would you respond to this position? LO 25.1, 25.2, 25.4, 25.5 ••

23. What forms of entities may be consolidated (for example, partnerships, trusts, companies)? Has this requirement
changed across the years? LO 25.2 •

24. When we are preparing consolidated financial statements, why don’t we make any of the consolidation adjustments
in the ledger accounts of the subsidiaries or the parent entity? LO 25.1, 25.7 ••

25. According to AASB 3, how should a bargain gain on purchase arising on consolidation be treated? LO 25.8 •
Copyright © 2019. McGraw-Hill Education (Australia) Pty Limited. All rights reserved.

26. This chapter refers to the work of Sullivan (1985). He investigated how organisations such as CSR Ltd used interposed
unit trusts so that certain controlled entities were omitted from the consolidation process.

REQUIRED
(a) Could this practice be employed today and, if not, why not?
(b) Before the revisions to The Corporations Law, if an organisation such as CSR had elected not to consolidate the
accounts of trusts and the trusts’ controlled entities, do you think that the resulting financial statements would
have been considered true and fair? Explain your answer. LO 25.1, 25.2 ••

27. Biggin Ltd acquires 100 per cent of the shares of Smallin Ltd on 1 July 2022 for a consideration of $730 000. The
share capital and reserves of Smallin Ltd at the date of acquisition are:

Share capital $200 000

Retained earnings $100 000

Revaluation surplus $150 000

$450 000

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 CHAPTER 25: Accounting for group structures 997

There are no transactions between the entities and all assets are fairly valued at the date of acquisition. The
financial statements of Biggin Ltd and Smallin Ltd at 30 June 2023 (one year after acquisition) are:
Biggin Ltd Smallin Ltd
($000) ($000)
Reconciliation of opening and closing retained earnings
Profit before tax 300 100
Tax (100)    (30)
Profit after tax 200 70
Retained earnings—1 July 2022 200 100
Retained earnings—30 June 2023 400 170
Statements of financial position
Shareholders’ equity
Retained earnings 400 170
Share capital 1 000 200
Revaluation surplus 300 200
Current liabilities
Accounts payable 60 40
Non-current liabilities
Loans        600 250
2 360 860
Current assets
Cash 80 45
Accounts receivable 350 95
Non-current assets
Land 200 120
Plant 1 000 600
Investment in Smallin Ltd      730 –
2 360 860
Copyright © 2019. McGraw-Hill Education (Australia) Pty Limited. All rights reserved.

REQUIRED Prepare the consolidated financial statements for Biggin Ltd and Smallin Ltd as at 30 June 2023.
LO 25.7 ••

28. Michael Ltd acquires all of the issued capital of Petersen Ltd for a cash payment of $600 000 on 30 June 2023. The
statements of financial position of both entities immediately following the purchase are:
Michael Ltd Petersen Ltd
($000) ($000)
Current assets
Cash 10 5
Accounts receivable 150 55
Non-current assets
Plant 700 500
Land 200 100
Investment in Petersen Ltd 600 –
1 660 660

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 998 PART 8: Accounting for equity interests in other entities

Michael Ltd Petersen Ltd

($000) ($000)
Current liabilities
Accounts payable 60 30
Non-current liabilities
Loans 400 150
Shareholders’ equity
Share capital 1 000 200
Retained earnings    200 280
1 660 660

Additional information
• All assets of Petersen appearing in the 30 June 2023 statement of financial position are fairly valued.
• At 30 June 2023 Petersen had two internally developed identifiable intangible assets with the following fair
values:

Fair value ($000)

Patent 100
Publishing title 25

REQUIRED Provide the consolidated statement of financial position for Michael Ltd and Petersen Ltd as at 30
June 2023. LO 25.7, 25.10 •••
29. Largey Ltd acquires 100 per cent of the shares of Smalley Ltd on 1 July 2022 for a consideration of $650 000. The
share capital and reserves of Smalley Ltd at the date of acquisition are:

Share capital $300 000

Retained earnings $150 000
Revaluation surplus $150 000
$600 000
Copyright © 2019. McGraw-Hill Education (Australia) Pty Limited. All rights reserved.

The directors consider that any goodwill acquired has not been the subject of an impairment loss. There are no
transactions between the entities and all assets are fairly valued at the date of acquisition. The financial statements
of Largey Ltd and Smalley Ltd at 30 June 2023 (one year after acquisition) are:

Largey Ltd Smalley Ltd

($000) ($000)
Reconciliation of opening and closing retained earnings
Profit before tax 300 150
Tax (100)    (50)
Profit after tax 200 100
Retained earnings—1 July 2022 400 150
Retained earnings—30 June 2023 600 250
Statements of financial position
Shareholders’ equity
Retained earnings 600 250
Share capital 1 200 300
Revaluation surplus 300 200
Current liabilities
Accounts payable 100 100
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 CHAPTER 25: Accounting for group structures 999

Largey Ltd Smalley Ltd

($000) ($000)
Non-current liabilities
Loans 600 250
2 800 1 100
Current assets
Cash 100 145
Accounts receivable 350 155
Non-current assets
Land 700 200
Plant 1 000 600
Investment in Smalley Ltd 650 –
2 800 1 100

REQUIRED Prepare the consolidated accounts for Largey Ltd and Smalley Ltd at 30 June 2023. LO 25.7,
25.8 ••
30. Whopper Ltd acquires 100 per cent of the shares of Weenie Ltd on 1 July 2022 for a consideration of $1.25 million.
The share capital and reserves of Weenie Ltd at the date of acquisition are:

Share capital $750 000

Retained earnings $375 000
Revaluation surplus $375 000
$1 500 000

Additional information
There are no transactions between the entities and all assets are fairly valued at the date of acquisition. No land or
plant is acquired or sold by Weenie Ltd in the year to 30 June 2023. The financial statements of Whopper Ltd and
Weenie Ltd at 30 June 2023 (one year after acquisition) are:
Whopper Ltd Weenie Ltd
Copyright © 2019. McGraw-Hill Education (Australia) Pty Limited. All rights reserved.

($000) ($000)
Reconciliation of opening and closing retained earnings
Profit before tax 750 375
Tax (250) (125)
Profit after tax 500 250
Retained earnings at 30 June 2022 1 000 375
Retained earnings at 30 June 2023 1 500 625
Statements of financial position
Shareholders’ equity
Retained earnings 1 500 625
Share capital 3 000 750
Revaluation surplus 750 500
Current liabilities
Accounts payable 250 250
Non-current liabilities
Loans 1 500 625
7 000 2 750

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 1000 PART 8: Accounting for equity interests in other entities

Whopper Ltd Weenie Ltd

($000) ($000)
Current assets
Cash 250 200
Accounts receivable 875 300
Non-current assets
Land 1 750 750
Plant 2 875 1 500
Investment in Weenie Ltd 1 250 –
7 000 2 750

REQUIRED Prepare the consolidated accounts for Whopper Ltd and Weenie Ltd as at 30 June 2023. LO 25.7,
25.11 ••

CHALLENGING QUESTIONS
31. P Ltd is a public company that is listed on the Australian Securities Exchange. P Ltd has numerous small shareholders.
P Ltd owns 35 per cent of the issued ordinary shares of B Ltd. The remaining shares of B Ltd are widely distributed
among numerous small shareholders, none of which owns more than 4 per cent of B Ltd. B Ltd’s constitution provides
that at general meetings of the company, ordinary shareholders are entitled to vote on resolutions and elect directors,
on the basis of one vote per ordinary share.
At general meetings of B Ltd, resolutions proposed by P Ltd are invariably passed, and candidates for
directorships nominated by P Ltd are invariably elected, because many small shareholders in B Ltd do not exercise
their right to attend general meetings and vote.
P Ltd does not own any investments in other entities.

REQUIRED Advise P Ltd whether it is required to produce consolidated financial statements. Give reasons for
your answer. LO 25.4, 25.7
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32. FXL Pty Ltd (FXL) is a private company with many strategic investments. The finance director is concerned that
he might be required to consolidate some of these investments, pursuant to AASB 10. Details of the investment
relationships are as follows:

(a) FXL has a 25 per cent interest in the share capital of LBX Pty Limited (LBX), which is a company involved in the
same industry as FXL. The remaining 75 per cent of the share capital is owned by LBX’s founders, Mr and Mrs T.
Mr and Mrs T are unfamiliar with the industry and so have given FXL three out of the five seats available on the
board of directors. FXL takes the lead on all decisions, but the business is closely monitored by Mr and Mrs T,
who hold the other two board positions.
(b) FXL has a substantial loan receivable from BBT Pty Ltd (BBT). BBT, as a result of the current economic climate,
has experienced significant trading problems. BBT has failed to make its regular payments under the loan
agreement. FXL has become concerned about the recoverability of the loan and has reached an agreement
with the management of BBT that FXL executives will take control of the company’s finances for a period of five
years. An executive of FXL has been given control of BBT’s cheque book and makes all payments. FXL has not
gained any seats on BBT’s board of directors, which is still dominated by BBT shareholders.
(c) FXL owns 50 per cent of A Pty Ltd (A), with the other 50 per cent being owned by B Pty Ltd (B). Both companies
have equal voting rights and an equal share of seats on the board of directors. Under an agreement with B, FXL
supplies the finance to the company on normal commercial terms. The loan is fully secured against the assets
of the company. B provides the management and entrepreneurial flair to A. Under the agreement forged, B will
receive a management fee in respect of the net profits of A after allowing for interest payments on the FXL loan.
In times of no profits, the interest payments will still be met, but B will not receive any remuneration.

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 CHAPTER 25: Accounting for group structures 1001

(d) FXL operates as the trustee company for the FXL trading trust. The trust is a discretionary trust with the nominated
beneficiaries being the directors of FXL. These directors are Mr F, Mrs X and Mr L. Over the years, the trust has
distributed its income in the following proportions:

Mr F 70
Mrs X 20
Mr L 10

Under the terms of the trust deed, FXL has complete control over the operating and financing decisions of
the trust.
(e) FXL holds a 75 per cent interest in JIB Pty Ltd (JIB). The interest was created when FXL converted a substantial loan
it made to JIB into equity at the invitation of JIB when JIB began to trade poorly and recovery of the loan seemed
uncertain. JIB has a large deficiency in net assets and has been consolidated for many years. FXL is a passive
investor, having no seats on the board of directors and no say in the financing or operating decisions of JIB.

REQUIRED Advise the finance director of FXL of the requirements of AASB 10 in respect of the control criterion.
For each of the above investments, indicate where the control rests and whether or not consolidation will be required.
LO 25.6, 25.7
33. The following are independent situations:
(a) SPG Ltd, a supplier of sailing equipment, was incorporated 10 years ago and is 60 per cent owned by GPS Ltd.
SPG has been a very successful business, averaging annual profits of $500 000. However, during the past two
years the company has run into financial difficulties and has defaulted on its loan with its bank. Consequently, the
bank has used the powers in the loan agreement to monitor the company’s activities closely in order to obtain
repayment of its debt. The company must now obtain the bank’s authorisation for any expenditure over $5000
and no changes in operations of the company are permitted without the bank’s approval.
(b) ZYX Pty Ltd is a family-run book publisher that has purposely refrained from using high-technology equipment
over the past five years as the directors (the L family) considered it to be a ‘fad’ and a waste of the company’s
resources. As a result, the company’s antiquated equipment has failed to produce quality material and has
been very inefficient compared with ZYX’s competitors. During the current year, the company’s bankers took
possession of the company’s assets, converted all the debt into equity and two directors of the bank were
appointed to ZYX’s board, which now totals four people. The bank is undecided on whether it should sell the
company’s assets, which have little recoverable value, or inject further equity into the company, purchase more
advanced equipment and attempt to trade on and sell the business as a going concern.
(c) M Ltd is a 30 per cent shareholder of Investment Co. Pty Ltd. The other shareholders have smaller shareholdings
Copyright © 2019. McGraw-Hill Education (Australia) Pty Limited. All rights reserved.

(around 8 to 12 per cent) and are always too busy to attend annual general meetings. M Ltd has two non-
executive seats on the board and the remaining three are held by other shareholders—one chief executive
officer who is a shareholder and two non-executives—who do make an attempt to attend board meetings.
(d) S Ltd is owned 50 per cent by B1 Ltd and 50 per cent by B2 Ltd (the founding shareholders). Each has two seats
on the board, with no party having a casting vote, although B1 Ltd appoints the managing director. Profits are
split 50–50 after the provision of the managing director’s salary. B2 Ltd has agreed that it will pay a management
fee to B1 Ltd, equivalent to 50 per cent of the results for the year. B1 Ltd is the holder of 10 options, which are
exercisable at any time at a 10 per cent discount to the fair value of the shares as at the exercise date.
(e) B Ltd is a 51 per cent shareholder in C Ltd and currently has two out of five board seats. R Ltd is the remaining
49 per cent shareholder and currently has the other three seats. B Ltd is a passive shareholder as it is happy
with the way R Ltd has been running the company.
(f) J Ltd, P Ltd and G Ltd are each 33.3 per cent shareholders of GH Pty Ltd, a small proprietary company that is
involved in the music industry. J Ltd and G Ltd are passive shareholders with one board seat each out of a total
of three. P Ltd has one board seat and is also involved in the day-to-day running of the business.

REQUIRED For each of the above independent situations, determine whether or not control exists and, if so, by
which party (pursuant to AASB 10). Discuss the reasons for your answers. LO 25.6, 25.7
34. On 30 June 2022, Bells Ltd acquired all of the issued capital of Winkipop Ltd for a cost of $950 000. At the date of
acquisition the acquired shares had the right to share in a dividend that had been declared on 30 June, the total
amount of the dividend being $200 000. Bells Ltd will not recognise the dividend until it is received. It was ultimately
received on 1 August 2022. The statement of financial position of Winkipop at 30 June 2022 was as follows:

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 1002 PART 8: Accounting for equity interests in other entities

Balance sheet of Winkipop Ltd as at 30 June 2022

$000
Current assets
Cash 50
Accounts receivable 40
Inventory 110
Non-current assets
Plant and equipment 720
Accumulated depreciation—plant and equipment (120)
Land 800
1 600
Current liabilities
Accounts payable 100
Non-current liabilities
Loan 500
600
Share capital and reserves
Share capital 700
Retained earnings 200
Revaluation surplus 100
1 000

Additional information
• The plant and equipment of Winkipop Ltd has a fair value of $750 000. All other assets were recorded at fair
value.
• The tax rate is 30 per cent.
Copyright © 2019. McGraw-Hill Education (Australia) Pty Limited. All rights reserved.

REQUIRED Prepare the consolidation worksheet journal entries immediately after the above acquisition.
LO 25.5, 25.8, 25.10
35. On 30 June 2022 Anglesea Ltd acquired 100 per cent of the shares in Lorne Ltd for a cost of $500 000. The account
balances of the two entities at the date of acquisition were:

Anglesea Ltd Lorne Ltd

($000) ($000)
Cash 100 50
Accounts receivable 130 90
Inventory 200 110
Property, plant and equipment 400 350
Accumulated depreciation (120) (90)
Land 300 100
Investment in Lorne Ltd 500 –
Accounts payable 110 70
Loans 200 190
Share capital 900 200
Retained earnings 300 150
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 CHAPTER 25: Accounting for group structures 1003

Additional information
• All assets of Lorne Ltd were fairly valued at acquisition except the land, which had a fair value of $140 000.
• The tax rate is 30 per cent.

REQUIRED Prepare the consolidation journal entries, consolidation worksheet and consolidated statement of
financial position for the above entities. LO 25.4, 25.5, 25.8, 25.10
36. Slowsilver Ltd is listed on the Australian Securities Exchange and has a large number of shareholders, each with
relatively small parcels of shares. Slowsilver holds shares in one other entity, this being Quickgold Ltd. Slowsilver
owns 30 per cent of the issued ordinary shares of Quickgold Ltd. The remaining 70 per cent of shares in Quickgold
Ltd are dispersed among a large number of shareholders none of whom has an ownership interest of more than 3
per cent of Quickgold Ltd. Each share in Quickgold Ltd and Slowsilver Ltd entitles the shareholder to one vote at
annual general meetings.
REQUIRED Determine whether Slowsilver Ltd would be required to prepare consolidated financial statements.
LO 25.6, 25.7
37. Sandy Ltd acquired 100 per cent of the issued capital of Beach Ltd on 30 June 2022 for $900 000, when the
statement of financial position of Beach Ltd was as follows:
Statement of financial position of Beach Ltd as at 30 June 2022

$000 $000
Assets Liabilities
Accounts receivable 70 Loan 300
Inventory 100
Land 400 Shareholders’ equity
Property, plant and equip. 700 Share capital 500
Accumulated depreciation (270) Retained earnings 200
1 000 1 000

Additional information
• The tax rate is 30 per cent.
• As at the date of acquisition, all assets of Beach Ltd were at fair value, other than the property, plant and equipment,
which had a fair value of $530 000. Beach Ltd adopts the cost model for measuring its property, plant and equipment.
Copyright © 2019. McGraw-Hill Education (Australia) Pty Limited. All rights reserved.

The property, plant and equipment is expected to have a remaining useful life of 10 years, and no residual value.
• One year following acquisition it was considered that Beach Ltd’s goodwill had a recoverable amount of $60 000.
• Beach Ltd declared a dividend of $40 000 on 10 July 2022, with the dividends being paid from pre-acquisition
retained earnings.
• The statements of financial position and details of opening and closing retained earnings of Sandy Ltd and Beach
Ltd one year after acquisition are as follows:
Statements of financial position of Sandy Ltd and Beach Ltd as at 30 June 2023

Sandy Ltd Beach Ltd

($000) ($000)
Assets
Cash 80 40
Accounts receivable 50 50
Inventory 140 123
Land 600 400
Property, plant and equipment 900 700
Accumulated depreciation (300) (313)
Investment in Beach Ltd   900    –
Total assets 2 370 1 000

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 1004 PART 8: Accounting for equity interests in other entities

Sandy Ltd Beach Ltd

($000) ($000)
Liabilities
Accounts payable 100 10
Dividends payable 100 50
Loan 670 140
Shareholders’ equity
Share capital 1 000 500
Retained earnings 500 300
2 370 1 000
Reconciliation of opening and closing retained earnings
Profit after tax 400 190
Retained earnings—30 June 2022 300 200
Interim dividend (90) (40)
Final dividend (110) (50)
Retained earnings—30 June 2023 500 300

REQUIRED Prepare the consolidated statement of financial position for the above entities as at 30 June 2023.
LO 25.4, 25.5, 25.8, 25.10

REFERENCES
Australian Accounting Standards Board, 2019, Conceptual Sullivan, G., 1985, ‘Accounting and Legal Implications of the
Framework for Financial Reporting, AASB, Melbourne, Interposed Unit Trust Agreement’, Abacus, vol. 21, no. 2,
May. pp. 174–96.
Copyright © 2019. McGraw-Hill Education (Australia) Pty Limited. All rights reserved.

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