Consolidated statement of profit or loss
Adding parent and subsidiary together, removing intra-group trading and unrealised profit, and splitting profit with the NCI.
ACCA exams this helps with: FR Financial Reporting SBR Strategic Business Reporting See the ACCA map
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What it is: A group’s statement of profit or loss. It shows the parent and its subsidiaries as one business.
What you do: (1) Add the income and expenses of all the companies together, line by line. (2) Remove sales and purchases between companies in the same group. (3) Remove any profit on goods sold inside the group that are still in stock. (4) Split the profit for the year between the parent’s shareholders and the non-controlling interest.
Why: A sale inside the group is not a sale to the outside world, so the group has not earned it.
Example. A parent sells goods to its subsidiary for £40,000. Remove £40,000 from group revenue and £40,000 from group cost of sales. If the subsidiary still has goods with £2,000 of profit in them, reduce group profit by £2,000.
Key words
- Consolidation
- Combining the accounts of a parent company and the companies it controls (subsidiaries) into one set of accounts, as if they were one business.Example: The group accounts add 100% of each subsidiary’s assets to the parent’s, then remove any trading between them.
- Intra-group
- Between companies in the same group, such as a parent selling goods to its subsidiary.Example: The parent sells £40,000 of goods to its subsidiary. That is an intra-group sale.
- Unrealised profit (PURP)
- Profit made on a sale between two group companies, where the goods are still held inside the group at the year end. It is removed in the group accounts because nobody outside the group has bought the goods yet.Example: The parent sells goods to its subsidiary at a £8,000 profit, and a quarter are still in stock. £2,000 is unrealised profit.
- Profit attributable to NCI
- The part of the group’s profit for the year that belongs to the outside shareholders of the subsidiaries.Example: A subsidiary makes £38,000 profit and outsiders own 20%, so £7,600 is attributable to the non-controlling interest.
- Time-apportion
- To include only the part of a yearly amount that relates to a certain number of months.Example: A subsidiary bought on 1 April: include 9/12 of its annual revenue in the group accounts.
Learn
The consolidated statement of profit or loss shows the group’s results as if the parent and its subsidiaries were one business.
Steps
- Add together 100% of each line for the parent and the subsidiary. If the subsidiary was bought during the year, only include its results after the date it was bought. Split the year by months if needed.
- Remove sales inside the group. Take the amount out of both revenue and cost of sales.
- Remove unrealised profit. This is profit on goods sold inside the group that are still in stock at the year end. Add it to cost of sales.
- Add other group adjustments, such as goodwill impairment, or extra depreciation because assets were revalued when the subsidiary was bought.
- Remove dividends and interest paid inside the group, such as a dividend the subsidiary paid to the parent.
- Split the profit between the owners of the parent and the non-controlling interest (NCI).
Who made the sale matters
If the parent sold the goods, the unrealised profit belongs to the parent. The NCI share does not change. If the subsidiary sold the goods, take the unrealised profit off the subsidiary’s profit first, then work out the NCI share.
Working out unrealised profit
If goods are sold at a mark-up of m% on cost: profit = sales × m ÷ (100 + m). Only the part still in stock is unrealised.
Example: The parent sells goods to its subsidiary for £20,000 at a 25% mark-up. Total profit = £20,000 × 25 ÷ 125 = £4,000. One quarter of the goods are still in stock. Unrealised profit = £4,000 × ¼ = £1,000. Remove £20,000 from revenue and cost of sales, then add £1,000 to cost of sales.
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Worked example
P owns 80% of S. During the year P sold goods to S for £40,000 at a 25% mark-up, and a quarter of them are still in S’s inventory. Unrealised profit = 40,000 × 25/125 × ¼ = £2,000.
| P £000 | S £000 | Adjustments £000 | Group £000 | |
|---|---|---|---|---|
| Revenue | 500 | 200 | (40) | 660 |
| Cost of sales | (300) | (120) | 40 − 2 | (382) |
| Gross profit | 278 | |||
| Operating expenses | (80) | (30) | (110) | |
| Tax | (25) | (12) | (37) | |
| Profit for the year | 131 |
| Profit attributable to | £000 |
|---|---|
| NCI: 20% × S’s profit of 38 (200 − 120 − 30 − 12) | 7.6 |
| Owners of the parent (131 − 7.6) | 123.4 |
P made the sale, so the unrealised profit doesn’t affect the NCI.
Practice questions
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