Steps in Preparation of Consolidated Financial Statements, Capital profit, Revenue profit as per Ind AS 10

Financial Statements are structured records that convey the financial activities and conditions of a business entity. They consist of the balance sheet (statement of financial position), which shows assets, liabilities, and equity at a specific point in time; the income statement (profit and loss account), which reports revenue, expenses, and profit or loss over a period; the cash flow statement, detailing cash inflows and outflows across operating, investing, and financing activities; and the statement of changes in equity, highlighting movements in owners’ equity. Together, these documents provide stakeholders with essential insights into the entity’s financial performance and health.

The preparation of consolidated financial statements under Indian Accounting Standards (Ind AS) 103, which deals with Business Combinations, involves several crucial steps to ensure that the financial statements reflect the true and fair view of the combined entity’s financial position and performance. While Ind AS 103 primarily addresses how to account for business combinations, the preparation of consolidated financial statements also involves other relevant standards such as Ind AS 110, Consolidated Financial Statements.

Steps involved in the preparation of consolidated financial statements, with considerations from Ind AS 103:

1. Identify the Acquirer

Determine which of the combining entities is the acquirer, the entity that obtains control over another entity (the acquiree).

2. Determine the Acquisition Date

The acquisition date is the date on which the acquirer obtains control over the acquiree.

3. Recognize and Measure Identifiable Assets Acquired, Liabilities Assumed, and Any Non-controlling Interest in the Acquiree

Identify and measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at their fair values at the acquisition date.

4. Recognize and Measure Goodwill or a Gain from a Bargain Purchase

Goodwill is recognized as the excess of (i) the aggregate of the consideration transferred, the amount of any non-controlling interest in the acquiree, and in a business combination achieved in stages, the fair value of the acquirer’s previously held equity interest in the acquiree over (ii) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.

If the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the aggregate of the consideration transferred, the amount of any non-controlling interest in the acquiree, and the fair value of the acquirer’s previously held interest in the acquiree (if any), a bargain purchase gain is recognized in profit or loss.

5. Account for the Consideration Transferred

Measure the consideration transferred for the acquiree at fair value, which may include assets transferred, liabilities incurred to the former owners of the acquiree, and equity interests issued by the acquirer.

6. Account for Acquisition-related Costs

Acquisition-related costs are expenses such as advisory, legal, accounting, valuation, and other professional or consulting fees. Under Ind AS 103, these costs are generally expensed as incurred, except for the costs to issue debt or equity securities, which are recognized in accordance with Ind AS 32 and Ind AS 109.

7. Consolidate the Financial Statements

After recognizing and measuring the above elements, consolidate the financial statements by combining the acquirer’s and acquiree’s financial statements. Eliminate intra-group balances, transactions, and unrealized profits or losses.

8. Disclosure

Provide disclosures that enable users of the financial statements to evaluate the nature and financial effect of the business combination, including detailed information about the acquisition, the amounts recognized for each class of assets and liabilities, goodwill, and the rationale for the transaction.

Capital profit

Steps in Recognizing a Gain from a Bargain Purchase (which could be conceptualized as “capital profit”):

1. Identify the Business Combination

Determine that a transaction or other event meets the definition of a business combination under Ind AS 103.

2. Determine the Acquisition Date

Identify the date on which the acquirer obtains control of the acquiree.

3. Measure the Total Consideration Transferred

Calculate the fair value of assets transferred, liabilities incurred, and equity interests issued by the acquirer.

4. Recognize and Measure the Identifiable Assets Acquired and Liabilities Assumed

Identify all the acquiree’s identifiable assets and liabilities and measure them at their acquisition-date fair values.

5. Measure Any Non-controlling Interest

Determine the fair value of the non-controlling interest in the acquiree, if any.

6. Calculate the Excess (Gain from a Bargain Purchase)

Subtract the aggregate of the consideration transferred, the amount of any non-controlling interest, and the fair value of any previously held equity interest in the acquiree from the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed.

If this calculation results in a positive number, it indicates a gain from a bargain purchase.

7. Review the Measurement

Before recognizing a gain, the acquirer must reassess whether it has correctly identified all of the acquiree’s assets and liabilities and accurately measured the consideration transferred and the assets and liabilities.

8. Recognize the Gain

If, after reassessment, the gain is confirmed, it is recognized in the profit or loss on the acquisition date.

Revenue profit:

To reflect the impact of a business combination on consolidated revenue and profit, you would follow the principles laid out in Ind AS 110, “Consolidated Financial Statements,” in addition to considering the effects of Ind AS 103 for any business combinations.

1. Identify the Reporting Date

Determine the financial reporting period for which the consolidated financial statements are being prepared.

2. Determine the Scope of Consolidation

Identify all subsidiaries, associates, and joint ventures that need to be included in the consolidated financial statements according to Ind AS 110 and other relevant standards.

3. Combine the Financial Statements

Add together the financial statements of the parent and its subsidiaries line by line, combining like items of assets, liabilities, equity, income, expenses, and cash flows.

4. Eliminate Intra-group Transactions and Balances

Remove all intra-group balances and transactions, including intra-group sales and profits, to ensure the consolidated revenue and profit figures represent only external transactions. This is crucial for accurately presenting consolidated revenue profit.

5. Adjust for Fair Value Adjustments

Make necessary adjustments to the carrying amounts of assets and liabilities in the acquiree’s financial statements to their fair values at the acquisition date. This may include adjustments to revenue-generating assets that could affect depreciation, amortization, and consequently, operational profit.

6. Account for Non-controlling Interests

Calculate and present the portion of equity and profit or loss attributable to non-controlling interests separately from the portion attributable to the owners of the parent.

7. Calculate Consolidated Revenue and Profit

After adjustments, calculate the total consolidated revenue by summing up the revenue figures from all group entities, post-elimination of intra-group transactions. Then, determine the consolidated profit by subtracting consolidated expenses from the consolidated revenue. This includes considering any impact from the acquisition, such as amortization of intangible assets identified at the acquisition date.

8. Report and Disclose

Prepare the consolidated income statement, presenting consolidated revenue, expenses, and profit. Include notes that disclose significant information about the business combination(s) under Ind AS 103, including its effect on the financial statements.