Financial Reporting Course Week - 10: Consolidation of Financial Statements

14.04.
2020
Financial Reporting
Course
Week – 10
Consolidation of Financial Statements
Objective
• Information about
•resources under the control of the group
(assets) and
•claims against those resources
assists users to better assess the prospects for future net
cash inflows to the group which is useful in making
decisions about providing resources to the group.
• The global financial crisis highlighted the importance of
enhancing disclosure requirements, in particular for special
purpose or structured entities.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 2
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14.04.2020
3
Definition of control
An investor controls an investee when the investor is exposed, or has
rights, to variable returns from its involvement with the investee and has
the ability to affect those returns through its power over the investee.
• Single consolidation model for all entities, including structured

entities
• Consolidation based on control – ‘power so as to benefit’ model
• Investor must have some exposure to risks and rewards
• Exposure is an indicator of control but not control of itself
• Power arises from rights—voting rights, potential voting rights,
other contractual arrangements, or a combination thereof.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
4
Assessing control of an investee
• Consider the purpose and design

• Identify the activities of the investee that significantly affect
the returns of the investee (relevant activities)
• Identify how decisions about relevant activities are made
• Determine whether the rights of the investor give it the
ability to direct the relevant activities (see next slide)
• Determine whether the investor is exposed, or has rights, to
the variability associated with the returns of the investee
• Determine whether the investor has the ability to use its
power over the investee to affect its own returns
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Example:
Control 5
In the absence of evidence to the contrary, in each scenario

below, does A control Z?
i. A owns 100% of Z.
ii. A owns 51% of Z.
iii. A owns 50% of Z.
iv. A owns 50% of Z and holds currently exercisable ‘in the
money’ options to acquire another 100 shares in Z.
v. Same as (iv) except B owns the options.
Example:
Structured entity 6
A pharmaceutical manufacturer (entity A) established a viral

research centre (RC) at a university.
• A determined sole & unalterable purpose of RC = research &
develop immunisation & cures for viruses that cause human
suffering.
• RC is owned and staffed by the university.
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Example:
Structured entity continued 7
• All costs of establishing & running RC are paid by the

university from the proceeds of a grant from A.
• the budget for the research centre is approved by A
yearly in advance.
• A benefits from the research centre:
• by association with the university; and
• through exclusive right to patent any immunisations and
cures developed.
8
De facto control
• Entity can control with less than 50% of voting rights.

• Factors to consider include:
• size of the holding relative to the size and dispersion of
other vote holders
• potential voting rights
• other contractual rights
• If the above not conclusive consider additional facts and
circumstances that provide evidence of power (eg voting
patterns at previous board meeting, etc)
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14.04.2020
Example: 9
de facto control
• Entity A owns 45 per cent of the ordinary shares of Entity B

to which voting rights are attached.
• Entity A is the largest shareholder of Entity B.
• It also has the right to appoint the majority of the members
of the Board of Directors (the management board) of Entity
B in accordance with special rights given to Entity A in the
founding document of the entity.
Example:
Assessing power • Entity A and B each have 50%
ownership interest in the trust.
• Entity A appointed as manager of
trust.
• Manager: manages the assets of
the trust, identifies development
opportunities, manages
development activity and
manages leasing activity. Cannot
be removed without cause.
• Relevant activities?
• Who directs?
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Example:
Delegated rights
Responsible Other Responsible entity:

entity investors
• Broad decision making powers
• Removal by simple majority
Investment
• Remunerated via market-based
trust fee - 1% of assets under
management and 20% of profits
over a hurdle
Investment • Equity interest of 20%
portfolio
12
Potential voting rights
• Substantive potential voting rights (PVR) can give the holder
power
• Consider the terms and conditions, including:
• Whether there are any barriers that prevent the
holder from exercising
• Whether exercise of the rights would be beneficial to
the holder
• Whether the rights are exercisable when decisions
need to be made
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13
Agency relationships
• Consider all of the following factors:

• scope of the decision-making authority
• rights held by other parties (ie kick-out rights)
• remuneration of the decision-maker
• other interests that the decision maker holds in the
investee
Judgements and estimates
• Determining whether an investor controls an investee

involves assessing whether the investor:
• has power over the investee
• exposure, or rights, to variable returns from its
involvement with the investee
• the ability to use its power over the investee to affect
the amount of the investor’s returns.
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14.04.2020
Judgements and estimates continued
• Factors to consider when assessing whether control exists

include, for example:
• assessing the purpose and design of the investee (eg are
voting rights or contractual arrangements the dominant
factor?)
• identifying relevant activities and how decisions about
those activities are made
• assessing current ability to direct (practical ability to
direct the relevant activities unilaterally?)
16
Introduction
• IFRS 10 establishes principles for the presentation and

preparation of consolidated financial statements when an
entity controls one or more other entities.
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Who presents consolidated financial

statements?
• An entity that has one or more subsidiaries (a parent) must

present consolidated financial statements.
• Two exceptions:
• a parent if:
• its owners have been informed and do not object,
• its securities are not publicly traded or in the process of
becoming publicly traded, and
• its parent publishes IFRS-compliant financial statements
that are available to the public.
• Post-employment plans or other long-term employee
benefit plans to which IAS 19 applies
Group of Companies
B C
D E F
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Principle
• Consolidated financial statements present the parent and all

its subsidiaries as financial statements of a single economic
entity
• uniform accounting policies
• same reporting periods
• eliminate intragroup transactions and balances
• non-controlling interest (the equity in a subsidiary that is
not attributable, directly or indirectly, to the parent) is
presented within equity, separately from the parent
shareholders’ equity.
Example:
Consolidation procedures 20
• On 1/1/20X1 entity A acquires 100% of entity B for CU1,000

when B’s share capital & reserves = CU700 (net FV of B’s assets
& liabilities = CU800).
• B has no contingent liabilities. The CU100 difference between
CA & FV is i.r.o. a machine with 5 yrs remaining useful life and
nil residual value.
• B’s profit for the year ended 31/12/20X1 = CU400.
• In 20X1 A sold inventory which cost it 100 to B for 150. At
31/12/20X1 B’s inventory included CU60 inventory bought
from A.
• Ignore taxation effects.
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14.04.2020
Example:
Consolidation procedures continued 21
• The proforma journal entry at acquisition to eliminate A’s

investment in B; recognise goodwill; & eliminate B’s share
capital & reserves accumulated before it became part of the
group.
Property, plant & equipment 100
B’s at-acquisition share capital &
700
reserves
Goodwill (asset) 200
A’s investment in B 1,000
Example:
• Proforma journal entry to increase depreciation to group

values (remaining estimated useful life = 5 years):
Profit or loss 20
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14.04.2020
Example:
• Proforma journal entry to eliminate intragroup sale of

inventory and the unrealise profit in inventories (ignoring
tax effects):
Profit or loss (revenue) 150
Profit or loss (COS) 150
Inventory (asset) 20
Non-controlling interest (NCI) 24
• Non-controlling interest (NCI) in net assets consists of:

• the amount of the NCI recognised in accounting for Bus
Com at date of acquisition; plus
• the NCI’s share of recognised changes in equity (ie
recognised changes in Sub’s net assets) since the date
of the combination.
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14.04.2020
Example:
NCI 25
• On 1/1/20X1 entity A acquires 75% of entity B for CU1,000

when B’s share capital & reserves = CU700 (net FV of B’s
assets & liabilities = CU800).
• B has no contingent liabilities. The CU100 difference
between CA & FV is i.r.o. a machine with 5 yrs remaining
useful life and nil residual value.
• Ignore taxation effects. B’s profit for the year ended
31/12/20X1 = CU400.
• In 20X1 A sold inventory which cost it 100 to B for 150. At
31/12/20X1 B’s inventory included CU60 inventory bought
from A.
Example:
NCI continued 26
Eliminate Investment
• Proforma journal entry at acquisition is:
Property, plant & equip. 100

B’s at-acquisition share capital & 700
reserves
Goodwill 400
Non-controlling interest 200
A’s investment in B 1,000
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Example:
NCI continued 27
Adjust consolidated depreciation

• Proforma journal entry to increase depreciation to group
values (remaining estimated useful life = 5 years):
Profit or loss 20
Example:
NCI continued 28
Allocate profit
• Proforma journal entry allocating the NCI their share of B’s
profit for the year:
NCI profit allocation 95

NCI (equity) 95
Calculation:
Profit 400
Depreciation adjust (20)
380
25% attributable to NCI 95
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14.04.2020
Example:
NCI continued 29
• Proforma journal entry to eliminate downstream intragroup

sale of inventory and the unrealised profit in inventories
(ignoring tax effects):
Profit or loss (revenue) 150

Inventory (asset) 20
Example:
NCI upstream sale 30
• Same as previous example except upstream sale of

inventory (ie from B to A)
• Same proforma journal entries as in previous example and
an additional journal entry (below) to eliminate from NCI
their share of the unrealised profit:
NCI (equity) 5
NCI profit allocation 5
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14.04.2020
Loss of control
• If a parent no longer controls a subsidiary, the parent:

• Derecognises the assets and liabilities of the former
subsidiary.
• Recognises any retained investment at fair value when
control is lost. This investment is subsequently
accounted for as a financial instrument or, if
appropriate as an associate or joint venture.
• Recognises a gain or loss associated with loss of control.
Comparison with the IFRS for SMEs
• Section 19 Business Combinations and Goodwill of the IFRS

for SMEs differs from full IFRSs—in Section 19:
• goodwill is amortised over its estimated useful life (or
10 years if a reliable estimate cannot be made)
• non-controlling interest must be measured using the
proportionate share method
• there is no specified maximum allowable difference
between the reporting periods of the parent and the
subsidiary.
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14.04.2020
Exercises
B C
D E F
Exercise
A A
Consolidated
Cash 100 Capital 100
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14.04.2020
Exercise
A A
Consolidated
Subsidiary 100
B
Exercise
A A
Consolidated
Subsidiary 100 Cash 100 Capital 100
B

Subsidiary 100
C
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14.04.2020
Treasury Stocks
A A
Consolidated
Subsidiary 100
B
Treasury Stocks
A A
Consolidated
Cash 100 Capital 100 Cash 40 Capital 100
Subsidiary 100 Investment 60
B
Cash 40 Capital 100
Investment 60
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14.04.2020
Treasury Stocks
A A
Consolidated
Cash 100 Capital 100 Cash 40 Capital 100
Subsidiary 100 Investment 60 Treasury S (60)
B Total 40 Total 40
Cash 40 Capital 100
Investment 60
If a subsidary purchases the shares of its parent company,

these shares are reported in Owners’ Equity of Consolidated
Balance Sheet as Treasury Stock at negative value.
A Customer
100 400
A B C Customer
100 120 350 400
A B C Consolidated
Sales 120 350 400 870 400
CGS 100 120 350 100
Gross Profit 20 230 50 300
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CONSOLIDATION
On January 1, 2020 Company A acquires 90 % of the oustanding commonstock of
Company B for cash price of TL 245,000. The balance sheets of the both companies
immediately after the acquisition on January 1, 2020 are presented below:
Balance Sheets
(January 1, 2020)
A Company B Company
Assets:
Investment in B Company 245,000 0
Other Assets 500,000 300,000
Total Assets 745,000 300,000
Libilities + Stockholders’ Equity

Liabilities 145,000 50,000
Stockholders’ Equity
Capital 200,000 150,000
Retained Earnings 400,000 100,000
Total Libilities and Equity 745,000 300,000
Goodwill:
Investment in B Company 245,000
Less: 90% of B Company’s common stockholders’ equity 225,000
(250,000 * %90)
Goodwill 20,000
Minority Interest in Company B:

Total Stockholders’ Equity (Company B) 250,000
Less: 90% of B Company’s common stockholders’ equity 225,000
Minority Interest 25,000
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14.04.2020
Company A and B
Consolidated Balance Sheet
January 1, 2020
Assets:
Goodwill 20,000
Other Assets 800,000
Total Assets 820,000
Liabilities + Stockholders’ Equity:

Liabilities 195,000
Capital 200,000
Retained Earnings 400,000
Minority interest in Company B 25,000
Total Liabilities and Equity 820,000
Income Statements
(2020)
Company A Company B
Net Sales 1,350,000 600,000

Cost of Goods Sold 800,000 400,000
Gross Profit 550,000 200,000
Other Expenses 380,000 130,000
Net Income 170,000 70,000
Additional Information:
 In 2020, Company A sold merchandise inventory to Company B for
₺100,000. The cost of merchandise sold was ₺70,000. Company B sold these
merchandise inventories to third parties for ₺110,000.
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14.04.2020
Balance Sheets
(December 31, 2020)
Company A Company B
Assets:
Investment in Company B 245,000 0
Other Assets 670,000 370,000
Total Assets 915,000 370,000
Liabilities + Stockholders’ Equity

Liabilities 145,000 50,000
Capital 200,000 150,000
Retained Earnings 570,000 170,000
Total Liabilities and Equity 915,000 370,000
Companies A and B Consolidated

Income Statement
(2020)
Net Sales (1,350,000 + 600,000 – 100,000) 1,850,000
Cost of Goods Sold (800,000 + 400,000 – 100,000) 1,100,000
Gross Profit 750,000
Other Expenses a (380,000 + 130,000) 510,000
Net Income (before minority interest) 240,000
Minus: Net Income to minority interest
(70,000 * %10 = 7,000) 7,000
Net Income 233,000
a
) If Goodwill is amortized, amortization expense will be reported as
2,000 (= 20,000 / 10 years).
IFRS for SMEs requires to amortize goodwill, however
amortization of goodwill is not allowed under IFRS, Nonetheless,
IFRS requires goodwill to be tested for impairment at least annually,
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14.04.2020
Companies A and B
Consolidated Balance Sheet
December 31, 2020
Assets:
Goodwill* 20,000
Other Assets (670,000 + 370,000) 1,040,000
Total Assets 1,060,000
Liabilities + Stockholders’ Equity:

Liabilities 195,000
Capital 200,000
Retained Earnings (400,000 + 233,000) 633,000
Rights of minority interest in Company B (25,000 + 7,000) 32,000
Total Liabilities and Equity 1,060,000
* IFRS SMEs requires to amortize goodwill and this amount will be ₺18,000 under IFRS for
SMEs. On the other hand, goodwill amortization is not allowed under IFRS. Thus, if there is
no impairment of goodwill this amount will be ₺20,000 under IFRS.
24

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14.04.

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 2

• Single consolidation model for all entities, including structured

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

• Consider the purpose and design

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

In the absence of evidence to the contrary, in each scenario

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

A pharmaceutical manufacturer (entity A) established a viral

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

• All costs of establishing & running RC are paid by the

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

• Entity can control with less than 50% of voting rights.

• Entity A owns 45 per cent of the ordinary shares of Entity B

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 10

Responsible Other Responsible entity:

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 11

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

• Consider all of the following factors:

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Judgements and estimates

• Determining whether an investor controls an investee

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 14

Judgements and estimates continued

• Factors to consider when assessing whether control exists

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 15

• IFRS 10 establishes principles for the presentation and

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Who presents consolidated financial

• An entity that has one or more subsidiaries (a parent) must

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 17

• Consolidated financial statements present the parent and all

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 19

• On 1/1/20X1 entity A acquires 100% of entity B for CU1,000

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

• The proforma journal entry at acquisition to eliminate A’s

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

• Proforma journal entry to increase depreciation to group

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

• Proforma journal entry to eliminate intragroup sale of

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Non-controlling interest (NCI) 24

• Non-controlling interest (NCI) in net assets consists of:

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

• On 1/1/20X1 entity A acquires 75% of entity B for CU1,000

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Property, plant & equip. 100

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Adjust consolidated depreciation

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

NCI profit allocation 95

• Proforma journal entry to eliminate downstream intragroup

Profit or loss (revenue) 150

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

• Same as previous example except upstream sale of

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

• If a parent no longer controls a subsidiary, the parent:

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 31

Comparison with the IFRS for SMEs

• Section 19 Business Combinations and Goodwill of the IFRS

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 32

Cash 100 Capital 100