Study Surgery

A. The consolidated balance sheet is a complicated area and there are no real shortcuts. You should develop a clear, step-by-step technique, which you can follow every time. You do not have to remember how to set out the balance sheet as a pro forma will be given to you in the exam. I would suggest that you always follow these steps:

1. Draw a diagram of the group structure:
• This will ensure that you know the percentage ownership in the subsidiary company and, as a consequence, you will also know the percentage minority interest.

2. Calculate the goodwill:
• This is the difference between the price paid for the shares and the fair value of the assets acquired (at the date of acquisition). You may have to revalue the fixed assets to get the fair value of the assets acquired.

3. Calculate the minority interest:
• This is the minority interest percentage multiplied by the net assets of the subsidiary company (as at the date of consolidation).

4. Calculate the retained reserves:
• This is the retained reserves of the parent company plus their share of the increase in reserves of the subsidiary company since the date of purchase of the shares.

5. Now add the two balance sheets line by line. However, you must exclude:
• the investment in the subsidiary company;
• any inter-company balances; and
• the share capital and reserves of the subsidiary company.

And remember to include:
• the goodwill that you have calculated in (2), above;
• the minority interest that you have calculated in (3), above; and
• the retained reserves that you have calculated in (4), above.
There was a question on this in Section 1 of the June 2006 exam paper that I suggest you look at in detail. This is available on the AAT website, along with the pro forma (so you know what this looks like) and the answer, so you can go through it in detail.