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Department of Accounting and Finance Slide * AFF 2491 Topic 10 Consolidation: An overview Consolidation Consolidation occurs when one entity (Parent) controls another (Subsidiary). Shareholders are interested in the financial performance and position of the entities as a group. The consolidation process involves measuring the Parent’s share of equity in the Subsidiary, then subsequently eliminating the investment in the Subsidiary along with any intra-group transactions. The acquisition analysis Compares the cost of acquisition to the fair value of identifiable net assets (FVINA) of the Subsidiary to determine if there is any goodwill on acquisition. Can involve fair value adjustments where the carrying amounts of Subsidiary’s assets or liabilities differ from their carrying amounts. Is more complex when there is a non-controlling interest (NCI) present. The consolidation process The consolidation entries are done in a consolidation journal and worksheet, but do not affect the individual records of the Subsidiary nor the Parent. Consequently, they must be repeated each balance day. The journal entries involve revaluation entries, pre-acquisition entry, intra-group eliminations and NCI entry. Revaluation entries If the assets/liabilities of the Subsidiary are not at fair value at the date of acquisition, the equity (A-L) measured at that date will be incorrect. Revaluation entries bring the relevant asset/liability accounts to fair value from their original carrying amounts (in the Group’s records), and show an ‘extra’ share of equity acquired by the Parent (revaluation surplus). When a revalued asset/liability is no longer on hand, its revaluation surplus balance is transferred to retained earnings. Pre-acquisition entries From a Group perspective, one company cannot acquire equity in itself, nor show an investment in itself. The pre-acquisition entry eliminates the equity the Parent owns in the Subsidiary for the purpose of consolidation. The entry