Pre - Acquisition and Post – Acquisition Profits - Wholly owned Subsidiary

Pre – acquisition profit is the profit of the subsidiary before it is acquired. Such pre-acquisition profit belongs to the shareholders of the subsidiary before it is being acquired by the Parent company. It forms part of the net assets of the subsidiary at acquisition. Pre – acquisition profit includes:

                       i.        Retained earnings

                      ii.        Share premium

                    iii.        Revaluation surplus

                  iv.        Other capital reserves

Post – Acquisition Profit

This is the increase in the reserves (retained earnings) of the subsidiary after it has been acquired by the Parent company. In other words, it is the difference between the profit or loss account at acquisition and the profit or loss account at the date of consolidation.

Wholly-owned Subsidiary (100% ownership)

House Plc. acquired the entire equity shares of Room Plc. on 1^st January, 20x1 when the reserves of Room Plc. were $25m.

Their respective statements of financial position as at 31^st December, 20x1 are as follows: 

Required

Prepare the statement of financial position for House Plc. Group as at 31^st December, 20x1

Suggested Solution

We shall work it through step by step as follows.

Step 1 - Consolidation Schedule

The first step will be to prepare the consolidation schedule wherein all the equity items of the subsidiary company will be analyzed. The essence of this being to determine

     1.    if there is any accumulated (post-acquisition) reserves that the parent company can consolidate (add to)

     2.    the net assets acquired as shown below

Step 2 - Reserves to be consolidated

The second step will be to determine the amount of reserves to be reported for the Group. To get this, the Parent’s share of the post-acquisition reserves will be added to the Parent’s reserves stated in the question to get the total reserves to be consolidated. This is done as shown below.

reserves for consolidation

As shown in step2 above, the entire post-acquisition reserves are added or consolidated for the parent company. The simple reason is that the Parent company owns the subsidiary 100%.

Step 3 - Goodwill

The third step will be to determine the Goodwill, if any, on acquisition. 

Goodwill computation

Having done this, the fourth step is to prepare the consolidation whereby corresponding figures of the Parent (House Plc.) are added to those of the Subsidiary (Room Plc.) as shown below in the next step

Aggregation of like items

Having made all these working papers (the steps above), we now draft the actual statement of financial position as required. See below

Consolidated statements of financial position for House Plc Group