Question 1. Explain the purposes and advantages and disadvantages in preparing consolidated financial statements for the parent company’s shareholders.

Solution:

Purpose: the objective of preparing consolidated financial statement is to reflect the underlying economic reality:

•    That the assets of the subsidiary companies are under the control of the shareholders of the parent, acting through their board of directors.

•   As much as the assets directly owned by the parent company.

This is even the case when the parent company does not own all shares of the subsidiaries.

Advantages: Consolidated financial statements are an example where accounting tends to put content before form. That is to say, it tries to reflect economic reality before the strict legal position in an        attempt to provide more useful information.

Disadvantages: someone reading the group financial statements may think that trading with any   member of the group would be the same as trading with the group as a whole. However, this is not true. Creditors of a group member only have available the assets owned by that particular group    member. This links with the limited liability of individual group members.

Question 2. Ice Plc. acquired 60% of the equity shares of Fire Ltd. on 31st December 20X1 and     gained control. At 31st December 20X1, the statements of financial position for the two companies were as follows:

Required:

1)   Prepare a consolidated statement of financial position for ICE plc on 31st December 20X1 (using the proportionate method).

2)   Calculate the Goodwill and Non-controlling interests (using the Full Method) for the         consolidated statement of financial position for ICE Plc. on 31st December 20X1 if the fair value of the non-controlling interest at the date of acquisition was £92,000.

Note: The fair values of the identifiable net assets of Fire at the date of acquisition were the same as their book values.

Solution:

1)

*Goodwill is calculated as 141 – 0.6x220 = 9

**Non-controlling interests are calculated as 0.4x220 = 88

Fair value of non-controlling interests =92

40% of net assets = 0.4x220 = 88