Where a Group Consolidation Starts: The Trial Balance, Not the Profit and Loss

This article assumes a group of Australian-domiciled entities reporting in AUD, with wholly owned subsidiaries, all on Xero. Foreign subsidiaries add AASB 121 foreign currency translation, and partly owned subsidiaries add non-controlling interests. Both are outside the scope of this article.

What AASB 10 asks you to combine

When an ASX or NSX junior explorer first needs group numbers for its head company and its tenement-holding subsidiary, the natural first move is to open the Profit and Loss report in each Xero organisation and add the two together. It starts in the wrong place.

AASB 10 defines consolidated financial statements, in Appendix A, as the financial statements of a group in which "the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity". Paragraph B86(a) then opens the consolidation procedures: combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent with those of its subsidiaries.

Of the first five items in that list, only two, income and expenses, appear on a Profit and Loss report. Assets, liabilities and equity sit on the balance sheet. A consolidation that starts from the Profit and Loss has started with two of the five.

Why this bites harder for an explorer

An explorer's accounting policy can widen that gap. AASB 6 paragraph 9 requires an entity to determine an accounting policy specifying which expenditures are recognised as exploration and evaluation assets. Where that policy capitalises drilling, assays and tenement costs, the spend goes to an asset on the balance sheet, not to the Profit and Loss, in the quarter it is spent.

Take a simple quarter, with illustrative round figures. The head company lends its subsidiary $400,000. The subsidiary spends $350,000 on exploration that its policy capitalises, spends $20,000 on administration, and still holds $30,000 in the bank at quarter end. The head company has no income or expense of its own in the quarter.

Add the two Profit and Loss reports together and the group view of that quarter is $20,000 of expense. The other $380,000, and the loan that funded all of it, is somewhere else.

What the trial balance gives you that a report does not

A trial balance lists the accounts in a ledger with the balance of each at a date: assets, liabilities, equity, income and expenses in one list. Three properties make it the right starting point.

It is complete

The five classes of item that paragraph B86(a) tells you to combine are all in the one list.

It carries its own check

In a double-entry ledger, total debits equal total credits, so each organisation's trial balance nets to zero. Two trial balances that each net to zero still net to zero when added together. Every elimination entry is itself a balanced journal, so the consolidated trial balance nets to zero as well. If it does not, something went wrong in the build, such as a dropped line, a line keyed twice or a flipped sign. A trial balance that balances does not prove every entry is right. One that does not balance proves something is wrong. That test needs all five classes of account. A Profit and Loss holds two of them.

It gives the mapping one list

Paragraph B86(a) says to combine "like items". Each Xero organisation has its own chart of accounts, so an account in one has to be matched to its like in the other before the two balances are added. The trial balance is the single list those matches are made against. We cover that mapping problem in Why a Standard Xero Organisation Can't Consolidate a Group, and What Xero Ultra Actually Changes.

The eliminations need both sides on the page

AASB 10 paragraph B86(b) requires the carrying amount of the parent's investment in each subsidiary to be offset against the parent's portion of equity of each subsidiary. Paragraph B86(c) requires intragroup assets and liabilities, equity, income, expenses and cash flows to be eliminated in full.

In the example, the $400,000 loan is a receivable in one trial balance and a payable in the other. Both are balance sheet accounts. So are the head company's investment in the subsidiary and the subsidiary's share capital. Start from the Profit and Loss and none of these four balances is on the page to be eliminated.

Three things to get right when you pull the trial balances

1. Same date. AASB 10 paragraph B92 requires the financial statements of the parent and its subsidiaries used in the consolidation to have the same reporting date. Where a subsidiary's reporting period ends on a different date, B92 has it prepare additional financial information as of the parent's date unless that is impracticable, and paragraph B93 caps the gap at three months. Run the Trial Balance report in each Xero organisation as at the same day. For revenue and expense accounts, the report's year-to-date columns run from the first day of each organisation's own financial year, so those columns only line up when both organisations share a financial year end.
2. Same policies. Paragraph 19 requires uniform accounting policies for like transactions and other events in similar circumstances. If the head company expenses a type of exploration cost that the subsidiary capitalises, paragraph B87 calls for an adjustment before the two are combined.
3. Keep the signs. Hold debits as positive and credits as negative in one column, or keep the two columns apart. The zero check only works if the direction of each balance survives the export.

Syed Samir Ahmad
Founder, Genius Accounting Solutions
CA ANZ | MBA | Salesforce Certified (4x) | Xero Partner