Consolidation accounting: a worked group example

Consolidation accounting: the short answer

Consolidation accounting combines the financial statements of a parent and the entities it controls into one set of statements, presented as if the group were a single economic entity. Assets, liabilities, income and expenses are added line by line, then everything that happens inside the group is eliminated. It matters because a parent's own statements show only an investment, not the businesses it actually runs.

Under IFRS the rules sit in IFRS 10 Consolidated Financial Statements for control and consolidation procedures, IFRS 3 Business Combinations for goodwill and fair values at acquisition, IAS 21 for foreign subsidiaries, and IFRS 12 for disclosures. This guide sets out the control test, then consolidates a parent and an 80% subsidiary step by step, with every elimination entry and a balance sheet that balances.

Control: which entities are consolidated

IFRS 10 para 7 defines control through three elements that must all be present: power over the investee, meaning existing rights that give the current ability to direct its relevant activities; exposure, or rights, to variable returns from involvement with it; and the ability to use that power to affect the amount of those returns. Holding more than half of the voting rights usually gives control, but not always, and control can exist below 50%.

A 45% holder can control an investee when the other shares are widely dispersed and have never organised to outvote it, or when contractual arrangements give it the right to appoint the board. Substantive potential voting rights, such as currently exercisable options, also count. Conversely, a majority holder may lack control if another party holds substantive veto rights over the relevant activities. The type of relationship, not the percentage held alone, decides the accounting method.

• Subsidiary (control): full consolidation line by line, with non-controlling interest for the part not owned.
• Associate (significant influence, presumed at 20% or more of voting power): equity method under IAS 28, one line on the balance sheet.
• Joint venture (joint control, rights to net assets): equity method under IFRS 11 and IAS 28.
• Joint operation (joint control, rights to assets and obligations for liabilities): the investor's share of assets, liabilities, revenue and expenses under IFRS 11.
• Simple investment (no control or influence): financial asset under IFRS 9.

The consolidation procedure step by step

IFRS 10 Appendix B sets out the procedure. Every group, from two companies to two hundred, follows the same sequence, usually on a consolidation worksheet that starts from each entity's trial balance. Group accounting policies must be applied uniformly, and a subsidiary's reporting date may differ from the parent's by no more than three months, with adjustments for significant transactions in between.

• Align each entity's trial balance to group accounting policies and the group chart of accounts.
• Translate foreign subsidiaries into the presentation currency under IAS 21.
• Add assets, liabilities, income and expenses line by line.
• Eliminate the parent's investment against the subsidiary's equity at acquisition, recognising fair value adjustments and goodwill.
• Allocate post-acquisition profit and equity between the owners of the parent and the non-controlling interest.
• Eliminate intragroup balances, such as receivables and payables.
• Eliminate intragroup revenue, expenses and dividends.
• Eliminate unrealised profit on intragroup transfers of inventory and non-current assets.

Worked example: the facts

Parent acquires 80% of Subsidiary on 1 January 2026 for EUR 1,000,000. At that date Subsidiary's equity is share capital EUR 500,000 and retained earnings EUR 400,000, total EUR 900,000. The book values of its net assets equal fair value except land, which is worth EUR 100,000 more than its carrying amount, so identifiable net assets at fair value are EUR 1,000,000. The non-controlling interest is measured at its proportionate share of identifiable net assets. Deferred tax is ignored for simplicity.

During 2026 Subsidiary makes a profit of EUR 250,000, so its retained earnings rise to EUR 650,000. Parent sold goods to Subsidiary for EUR 200,000 that had cost Parent EUR 150,000, a profit of EUR 50,000; at 31 December 2026 Subsidiary still holds 40% of those goods. Parent's receivables include EUR 50,000 due from Subsidiary, and Subsidiary's payables include the same EUR 50,000.

• Parent balance sheet at 31 December 2026: Investment in Subsidiary 1,000,000; PPE 2,200,000; inventory 600,000; receivables 500,000; cash 300,000; total assets 4,600,000.
• Parent equity and liabilities: share capital 2,000,000; retained earnings 1,800,000; payables 800,000; total 4,600,000.
• Subsidiary balance sheet: PPE including land 1,100,000; inventory 400,000; receivables 250,000; cash 150,000; total assets 1,900,000.
• Subsidiary equity and liabilities: share capital 500,000; retained earnings 650,000; payables 750,000; total 1,900,000.

Goodwill and non-controlling interest at acquisition

The first elimination replaces the parent's investment with what it bought: the subsidiary's identifiable net assets at fair value, the goodwill, and the share owned by others. Non-controlling interest at acquisition is 20% x 1,000,000 = EUR 200,000. Goodwill is consideration plus non-controlling interest minus identifiable net assets: 1,000,000 + 200,000 - 1,000,000 = EUR 200,000.

Elimination 1, cancelling the investment: Dr Share capital (Subsidiary) 500,000 / Dr Retained earnings at acquisition (Subsidiary) 400,000 / Dr Land fair value uplift 100,000 / Dr Goodwill 200,000 / Cr Investment in Subsidiary 1,000,000 / Cr Non-controlling interest 200,000. Debits and credits both total EUR 1,200,000.

Elimination 2, sharing post-acquisition profit: Subsidiary's retained earnings grew by 650,000 - 400,000 = EUR 250,000 after acquisition. The non-controlling interest is entitled to 20%, so Dr Retained earnings (Subsidiary) 50,000 / Cr Non-controlling interest 50,000. The remaining 80%, EUR 200,000, belongs to the group's retained earnings. The non-controlling interest at year end is 200,000 + 50,000 = EUR 250,000, which equals 20% of Subsidiary's net assets at fair value (500,000 + 650,000 + 100,000 = 1,250,000).

Eliminating intragroup balances and unrealised profit

From the group's point of view, a sale from Parent to Subsidiary is stock moving between two warehouses. The group cannot owe itself money or earn profit by trading with itself, so both effects are removed.

Elimination 3, intragroup balances: Dr Payables 50,000 / Cr Receivables 50,000. Elimination 4, intragroup trading in the income statement: Dr Revenue 200,000 / Cr Cost of sales 200,000; the group's revenue and cost of sales fall by the same amount, so profit is unchanged by this entry alone.

Elimination 5, unrealised profit: Subsidiary still holds 40% of the goods, which carry 40% x 50,000 = EUR 20,000 of profit the group has not earned from an outside party. The entry is Dr Cost of sales (reducing group retained earnings) 20,000 / Cr Inventory 20,000, bringing the inventory back to its cost to the group. Because the seller was the parent (a downstream sale), the whole adjustment is charged to the owners of the parent. If the subsidiary had been the seller (upstream), the adjustment would be shared 80:20 with the non-controlling interest.

The consolidated balance sheet

Adding the two balance sheets and applying the five eliminations gives the consolidated statement of financial position at 31 December 2026. The parent's investment has disappeared, goodwill and the land uplift have appeared, intragroup balances are gone, and inventory is back at group cost. Total assets equal total equity and liabilities at EUR 5,730,000.

• Goodwill: 200,000.
• PPE: 2,200,000 + 1,100,000 + 100,000 land uplift = 3,400,000.
• Inventory: 600,000 + 400,000 - 20,000 unrealised profit = 980,000.
• Receivables: 500,000 + 250,000 - 50,000 intragroup = 700,000.
• Cash: 300,000 + 150,000 = 450,000. Total assets: 5,730,000.
• Share capital (Parent only): 2,000,000.
• Group retained earnings: 1,800,000 + (80% x 250,000) - 20,000 = 1,980,000; non-controlling interest: 250,000.
• Payables: 800,000 + 750,000 - 50,000 = 1,500,000. Total equity and liabilities: 2,000,000 + 1,980,000 + 250,000 + 1,500,000 = 5,730,000.

The consolidated income statement and later years

In the income statement, the group's profit is the sum of both entities' profits less the unrealised profit, after removing the intragroup sale from revenue and cost of sales. Profit for the year is then attributed between the owners of the parent and the non-controlling interest below the profit line, as IAS 1 requires (IFRS 18 carries the same requirement from 2027), and IFRS 10 para 22 requires the non-controlling interest to be presented within equity, separately from the equity of the owners of the parent. If Parent's own profit were EUR 600,000, group profit would be 600,000 + 250,000 - 20,000 = EUR 830,000, attributable EUR 50,000 to the non-controlling interest and EUR 780,000 to owners of the parent.

Consolidation adjustments are not posted in either company's books, so they must be repeated every period. In 2027, Elimination 1 is repeated unchanged, the opening unrealised profit of EUR 20,000 reverses into 2027 group profit when Subsidiary sells the goods, and new intragroup trading is eliminated again. If Parent buys more shares later without losing control, the change is an equity transaction between owners, with no new goodwill and no gain or loss in profit.

Common mistakes in consolidation

Consolidation errors are hard to spot because each entity's own books look correct. Most arise from intercompany data that does not agree, or from adjustments that were made once and forgotten in the next period.

• Intercompany balances that do not match, leaving a residual difference parked in a suspense line.
• Eliminating intragroup revenue but not the unrealised profit in closing inventory.
• Charging an upstream unrealised profit entirely to the parent instead of sharing it with the non-controlling interest.
• Using pre-acquisition retained earnings in group retained earnings.
• Forgetting to depreciate fair value uplifts on depreciable assets in later years.
• Different accounting policies or reporting dates across subsidiaries without adjustment.
• Treating a purchase of additional shares after control as a new acquisition with new goodwill.

Group consolidation in Skyline Nexus ERP

Skyline Nexus ERP has a Consolidation area in the Fiscal Authority menu, available to administrators with the manage consolidation permission. A business group is defined with a group code, base currency, fiscal year end, default method and an Auto Eliminate option. Member businesses are added as parent or subsidiaries with their ownership percentage and method, full, proportional, equity or cost, and intercompany accounts are mapped so balances between members can be eliminated. For each consolidation period the user runs the consolidation, which snapshots each member's trial balance translated into the group currency, eliminates intercompany balances and produces consolidated reports that can be approved, locked and printed.

Consolidation works across separate businesses on the platform, each with its own ledger. Branches of one business are handled differently: the Trial Balance, Profit and Loss and Balance Sheet can be filtered by location or shown for All Locations (Consolidated), which is a branch view within one legal entity rather than a group consolidation. Fair value adjustments, goodwill and unrealised profit judgements remain the accountant's responsibility and are recorded by journal.