Coles Group: Consolidation of Financial Statements Accounting Report

This report examines the technical aspects of financial statement consolidation, crucial for presenting a group's financial performance as a whole. It delves into the concepts of holding and subsidiary companies, emphasizing the statutory requirements for consolidated financial statements. The repo...Read More

Running head: COMPANY ACCOUNTING
Company Accounting
Name of the Student:
Name of the University:
Author’s Note:

1COMPANY ACCOUNTING
MEMORANDUM
To: The Board of Directors, Coles Group
From: [Name, Designation]
Date: 7 September 2019
Subject: Technical aspects of consolidation of financial statement
Introduction:
This memorandum is prepared to discuss and analysis various technical aspects of
consolidation of financial statement and the essentials of consolidated financial statement.
Consolidation of financial statement is the process of combining all the assets and liabilities of
the companies within a group and presenting the financial performance of the group as a whole.
There are certain statutory requirement for preparation and publication of the consolidated
financial statements. In this memorandum, some of such essentials of the consolidations of
financial statement and some technical aspects of the consolidation of the financial statement has
been analyzed and presents for the Coles group of companies.
Consolidation of financial statement:
Consolidation of financial statement is the presentation of financial performance and
financial position of the companies within a group as a whole. To understand the essence of
consolidation and consolidated financial statement, the concept of holding subsidiary and the
group of companies must be understood. When a company holds more than fifty percent voting
rights, the former company is called the holding company, the later company is called the

2COMPANY ACCOUNTING
subsidiary company, and all the companies within such a relationship is called a group of
companies. Therefore, a group of companies includes several individual companies and their
operating segments. To present the actual financial position of the company, consolidated
financial statement is prepared and presented. In this process, all the revenues earned by
individual companies are added together and all the expenses are added together. All those
additions are done on line item basis. It implies addition of incomes and expenses must be done
on line item basis.
Companies in a group are having their individual entity and they can prepare and publish
their income statement and balance sheet individually and separately, but as per the statutory
requirements of the accounting standards and reporting standards, every group of companies or
parent companies are required to prepare and publish consolidated financial statements.
Therefore, all the assets and liabilities of the companies within a group are required to be added
together keeping the line items of the balance sheet intact. It is the liability and responsibility of
the parent company to prepare and publish the consolidated financial statements at the end of the
fiscal year. Subsidiary companies may prepare their individual financial statement but the parent
company must consolidated all those individual financial statements and publish the consolidated
financial statement.
Technical aspects of consolidation of financial statements:
Consolidation of financial statements or preparation of consolidated financial statement is
the process of combining financial performance and financial position of the companies in a
group together. In consolidating such financial statements, various technical aspects should be
kept in mind. The most important technical aspect, which needs to be considered while preparing

3COMPANY ACCOUNTING
the consolidated financial statement, is the line items in the income statement and balance sheet.
All the figures from the individual income statement and individual balance sheet should be
summed up together according to the line items.
Holding subsidiary relationship might not be established in one acquisition transaction
only. It may so happen that before the holding subsidiary relationship establishes there might
some transactions involved within the companies and those transactions are called the
intercompany transactions at the post merger scenario. At the time of consolidation of financial
statement, all the effect of such intercompany company must be eliminated. Elimination of
effects of intercompany transactions is very important and essential for the consolidated financial
statement. If there are purchases and sales within the group or the purchases and sales
transactions were involved two or more companies within the group, then though there is a real
purchase and sales transaction, it does not make any sense to the external stakeholders, or it does
not show the actual revenue earned by the company from the external sources. Hence, such
intercompany purchases and sales must be excluded from the income statement to present the
actual income earned and actual expenses incurred by the group of company as a whole. If such
purchase and sale of inventory was made at a price higher than the cost price and the same
inventory are not sold fully to the outsider, the unrealized profit included in the inventory must
be eliminated from the books of accounts with a proper adjusting entry or a proper consolidation
entry.
On the other hand, if there is any such intercompany purchase and sale of fixed assets,
then the net gain or loss recorded by either of the companies on such a transaction must be
eliminated by a proper consolidation entry. If the consolidation of statement is made at the later
date than the acquisition date, then the effect of charging depreciation at a different rates and

4COMPANY ACCOUNTING
methods must be adjusted in the books of accounts. It helps in restating the fixed assets at their
original carrying amount as it was shown by the subsidiary company.
Therefore, complications are there in relation to the figures of incomes and expenses and
balance sheet items of the subsidiary company and all those figures must be added up with due
care and with proper accounting treatment. In preparation of such consolidated financial
statement respective accounting standards must be followed and the statement must be presented
as per the guidelines of the respective accounting standards.
Consolidation made by the Coles Group:
Coles Group was acquired by the Wesfarmers; hence, the Wesfarmers has prepared the
consolidated financial statement taking all the incomes, expenses, assets and liabilities of the
Coles group as well as other subsidiaries together. From the 2018 annual report of the post
merger group, it can be observed that, there is a total goodwill of $13,491 million in the balance
sheet. Form the notes to the financial statement it can be found that, there is a total goodwill
recorded on the acquisition of the Coles group by the Wesfarmers. In addition, an addition of $2
million in goodwill can be observed in the year 2018, which is arising from acquisition of
another subsidiary company. The company needs to value the amount of goodwill gain of
acquisition at the time of acquisition of any target company; otherwise, the consolidated financial
statements might not be showing the true financial position of the company. Subsequently, such
goodwill must be subjected to impairment testing for proper valuation and presentation of the
financial position of the group as a whole. Therefore, these are the few technical aspects that
must be considered with a due care for proper and accurate disclosure of actual financial
performance and position of the company.

5COMPANY ACCOUNTING
Conclusion:
From the above discussion, it can be concluded that, consolidation of the financial
statement is an essential requirement for the parent companies as per the accounting and
reporting standards, and they need to follow all the guidelines of the respective accounting
standards for accurately consolidating the financial performance and position of the group as a
whole.

6COMPANY ACCOUNTING
Bibliography:
Berger, P.G., Minnis, M. and Sutherland, A., 2017. Commercial lending concentration and bank
expertise: Evidence from borrower financial statements. Journal of Accounting and
Economics, 64(2-3), pp.253-277.
Bergmann, A., Grossi, G., Rauskala, I. and Fuchs, S., 2016. Consolidation in the public sector:
methods and approaches in Organisation for Economic Co-operation and Development
countries. International Review of Administrative Sciences, 82(4), pp.763-783.
Biaek-Jaworska, A. and Matusiewicz, A., 2015. Determinants of the level of information
disclosure in financial statements prepared in accordance with IFRS. Accounting and
Management Information Systems, 14(3), p.453.
Bidabad, B., Amirostovar, A. and Sherafati, M., 2017. Financial transparency, corporate
governance and information disclosure of the entrepreneur’s corporation in Rastin
banking. International Journal of Law and Management, 59(5), pp.636-651.
Cortesi, A., Tettamanzi, P., Scaccabarozzi, U., Spertini, I. and Castoldi, S., 2015. Advanced
Financial Accounting: Financial Statement Analysis–Accounting Issues–Group Accounts. EGEA
spa.
Hadi, K.T., 2015. Consolidated financial statements.
Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.

7COMPANY ACCOUNTING
Kovács, Z.I., 2015. Immaterial Assets in the Hungarian Accounting System and Financial
Statements. Public Finance Quarterly, 60(2), p.226.
Lopes, A.I. and Lopes, M., 2019. Effects of adopting IFRS 10 and IFRS 11 on consolidated
financial statements: An exploratory research. Meditari Accountancy Research, 27(1), pp.91-
124.
Randolph, A., 2016. ACCT 431-01 Advanced Financial Accounting.
Wesfarmers Annual Report. 2018. [ebook] Available at:
https://www.wesfarmers.com.au/docs/default-source/reports/wes18-044-2018-annual-report.pdf?
sfvrsn=4 [Accessed 7 Sep. 2019].