FA: Consolidations

Answer: A. IFRS 10 defines control based on three elements: power (ability to direct relevant activities), exposure to variable returns (the investor is affected by the investee's performance), and linkage (ability to use power to affect returns). Majority shareholding (B) is the most common indicator of control but not the only route — control can exist with less than majority ownership in certain circumstances. A contractual arrangement alone (C) may give power but control requires all three elements. Board appointment (D) alone is insufficient.

Answer: B. Goodwill (full goodwill method) = Consideration + NCI fair value − Net assets acquired = £320,000 + £75,000 − £300,000 = £95,000. The full goodwill method includes NCI's share of goodwill. Under the proportionate NCI method: Goodwill = £320,000 − (80% × £300,000) = £320,000 − £240,000 = £80,000. The question specifies NCI at fair value (full goodwill) = £95,000. Option A uses the proportionate method. Option C is wrong. Option D uses consideration minus cash only.

Answer: C. IFRS 10 requires NCI to be presented within equity on the consolidated SFP — but separately from the equity attributable to the parent's shareholders. This reflects that NCI represents a legitimate ownership interest in the subsidiary. It is not a liability (A) — presenting it as a liability would misrepresent the capital structure. It is not a deduction from parent equity (B). It must appear on the face of the SFP (D is wrong).

Answer: D. Mark-up of 25% on cost means: Transfer price = Cost × 1.25. Unrealised profit in inventory = Transfer price × (25/125) = £30,000 × (25/125) = £30,000 × 0.20 = £6,000. The £6,000 is eliminated from group inventory and from retained earnings (reducing group profit). The full transfer price (B) is eliminated from revenue and cost of sales in the income statement — but only the unrealised profit (£6,000) is eliminated from inventory. Option A applies 25% to the transfer price rather than 25/125.

Answer: A. Post-acquisition retained earnings of Subsidiary = £65,000 − £40,000 = £25,000. Group share = 75% × £25,000 = £18,750. This is the amount added to the parent's own retained earnings in the consolidated SFP. NCI's share = 25% × £25,000 = £6,250 (added to NCI in consolidated equity). Option B is the total post-acquisition earnings (not the group's share). Option C is 75% of total retained earnings (including pre-acquisition). Option D is the total balance.

Answer: B. The consolidated income statement combines 100% of both entities' income and expenses — this is full consolidation, not proportionate consolidation. However, a critical caveat applies (option B): if the subsidiary was acquired mid-year, only its results from the acquisition date are included, time-apportioned to the period of control. The examiner notes that students incorrectly use proportionate consolidation — the answer to 'how are results combined' is 100% (option A), but option B highlights the important acquisition-date caveat that the examiner also tests. For a full-year subsidiary: answer A. For mid-year acquisition: answer B. The question asks generally — B captures the most precise complete answer.

Answer: C. NCI's share of subsidiary profit = 30% × £60,000 = £18,000. Profit attributable to parent's owners = £240,000 − £18,000 = £222,000. The group profit of £240,000 is split between the two ownership interests. NCI (30% of subsidiary) gets 30% of subsidiary's profit. The parent gets the rest. Option A splits incorrectly. Option B gives all profit to parent (ignores NCI). Option D gives NCI the full subsidiary profit (wrong percentage).

Answer: D. IAS 36 requires impairment losses on a cash-generating unit to be allocated first to goodwill (reducing its carrying amount to zero if needed), and then to other assets pro-rata based on carrying amounts. Goodwill is written down first because it is the most intangible — there is no reliable way to determine its precise value independently. Equal allocation (A) ignores the priority of goodwill. Goodwill is explicitly subject to annual impairment review (B is wrong). Impairment goes to profit or loss, not revaluation surplus (C).

Answer: B. Equity method (IAS 28): Investor recognises its share of the associate's profit in the income statement = 35% × £80,000 = £28,000. Dividends received are a return of investment (not income) and reduce the carrying amount. Carrying amount change = Share of profit − Share of dividends = £28,000 − (35% × £20,000) = £28,000 − £7,000 = £21,000 net increase. Option A only recognises dividends (old cost method). Option C ignores the dividend reduction to carrying amount. Option D applies full consolidation — associates are not consolidated, they use the equity method.

Answer: D. On consolidation, subsidiary assets are recognised at fair value at acquisition. Inventory is uplifted by £12,000. When the inventory is sold, the cost of sales in the consolidated IS is based on the fair value (£62,000), not the subsidiary's book cost (£50,000). This reduces consolidated profit by £12,000 compared to what the subsidiary's own accounts show. This is a common consolidation adjustment. Options A, B, C all misapply the treatment.

Answer: A. At acquisition, the parent pays for the subsidiary's net assets — including its retained earnings at that date. These pre-acquisition earnings are reflected in the purchase price and goodwill calculation. They cannot then be claimed as group profits (that would amount to double-counting). Only post-acquisition earnings (earned while the subsidiary was part of the group) are included in consolidated retained earnings. Pre-acquisition profits are not illegal (B). They are not restated to zero (C). They form part of the net assets used in the goodwill calculation, not NCI earnings (D).

Answer: B. Intragroup trading must be eliminated regardless of whether inventory remains at year end. The intragroup sale of £90,000 inflates group revenue (parent records the sale) and group cost of sales (subsidiary includes the purchase cost). Both are eliminated: Dr Revenue £90,000, Cr COS £90,000. Since all goods are sold to external customers, there is no unrealised profit in closing inventory — no inventory adjustment. The profit has been realised through external sale. Option A only eliminates profit. Option C ignores the revenue/COS gross-up. Option D only removes the profit element.

Answer: D. The subsidiary's results are included only from the acquisition date (1 October) — 3 months out of 12. Subsidiary revenue to include = £240,000 × 3/12 = £60,000. Consolidated revenue = £800,000 + £60,000 = £860,000. Option A includes the full year of subsidiary. Option B includes only the parent. Option C uses 6 months of subsidiary. The time-apportionment rule is highlighted by the examiner as a key FA topic.