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Consolidated financial statements are the "financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent company and its subsidiaries are presented as those of a single economic entity", according to International Accounting Standard 27 "Consolidated and separate financial statements", and International Financial Reporting Standard 10 "Consolidated financial statements".
While preparing a consolidated financial statement, there are two basic procedures that need to be followed: first, cancel out all the items that are accounted as an asset in one company and a liability in another, and then add together all uncancelled items.
There are two main type of items that cancel each other out from the consolidated statement of financial position.
Goodwill is treated as an intangible asset in the consolidated statement of financial position. It arises in cases, where the cost of purchase of shares is not equal to their par value. For example, if a company buys shares of another company worth $40,000 for $60,000, we conclude that there is a goodwill worth or $20,000.
Proforma for calculating goodwill is as follows:
Fair value of consideration transferred
Plus fair value of non-controlled interest at acquisition
Less ordinary share capital of subsidiary company
Less share premium of subsidiary company
Less retained earnings of subsidiary company at acquisition date
Less fair value adjustments at acquisition date
If the parent company does not buy 100% of shares of the subsidiary company, there is a proportion of the net assets that is owned by the external company. This proportion that is related to outside investors is called the non-controlling interest (NCI).
The proforma for calculating the NCI is as follows:
Fair value of NCI at acquisition date
Plus NCI's share of post-acquisition retained earnings or other reserves
In a group of companies, they can have trade relations with each other. For example, company A buys goods for one price and sells them to another company inside the group for another price. Thus, company A has earned some revenue from selling, but the group as a whole didn't make any profit out of that transaction. Until those goods are sold to an outsider company, the group has unrealised profit.