Final answer:
The Consolidated Statement of Financial Position combines the financial statements of a parent company with its subsidiaries, with adjustments for elimination of intercompany transactions, asset and liability value adjustments, goodwill or bargain purchase gains, non-controlling interests, and consolidation of equity.
Step-by-step explanation:
Basic Adjustments to the Consolidated Statement of Financial Position (SOFP)
The process of preparing a Consolidated Statement of Financial Position (SOFP) involves combining the financial statements of a parent company with its subsidiaries. The goal is to represent the total assets and liabilities of the economic entity as if it were a single company. There are several basic adjustments that must be made during consolidation:
Elimination of Intercompany Transactions: Profits, revenues, expenses, and dividends that occur between the companies of the consolidated group are eliminated to prevent double counting.
Adjustment of Asset and Liability Values: The book values of the subsidiary's assets and liabilities are adjusted to their fair values as of the acquisition date.
Goodwill or Gain from Bargain Purchase: Any excess of the purchase consideration over the fair value of the net identifiable assets acquired is recorded as goodwill. If the fair value exceeds the consideration paid, a gain on bargain purchase is recognized.
Non-controlling Interest (NCI): This represents the equity in a subsidiary not attributable to the parent company. NCI is reported separately within the equity section of the consolidated SOFP.
Consolidation of Equity: The parent's investment in the subsidiary is replaced with the assets and liabilities of the subsidiary. Additionally, the equity of the subsidiary is not carried forward but rather, the parent's equity is adjusted to reflect the business combination.
By making these adjustments, the consolidated SOFP can accurately depict the financial position of the entire group of companies. It is important to conduct these adjustments to ensure that financial statements do not overstate or understate the group's assets, liabilities, or equity.