Module 36.
3 - Consolidated Financial Statements (PFRS 10)
Consolidated Financial Statements
These are financial statements of an entity with
multiple divisions or subsidiaries.
Requirement to Prepare Consolidated Financial
Statements
A parent is required to present consolidated
financial statements, except if:
a. It meets all the following conditions:
● It is a subsidiary of another entity and all its
other owners, including those not otherwise
entitled to vote, have been informed about,
and do not object to, the parent not
presenting consolidated financial statements
● Its debt or equity instruments are not traded
in a public market
● It did not, nor is in the process of filing,
financial statements for the purpose of
issuing instruments to the public
● Its ultimate or any intermediate parent
produces IFRS compliant consolidated
financial statements available for
● public use.
b. It is a post or long term-employment benefit plan
to which IAS 19 Employee Benefits applies
c. It meets the criteria of an investment entity
Control Model
An investor determines whether it is a parent by
assessing whether it controls the investee. An investor is
required continuously to reassess whether it controls an
investee. An investor controls an investee if it has all of
the following:
a. Power over the investee
b. Exposure, or rights, to variable returns from its
involvement with the investee
c. The ability to use its power, to affect the amount
of the investor’s returns
Note: Generally, statements are to be
consolidated when a parent company owns over 50% of
the voting ordinary shares of another company thereby
having controlling interest.
Eliminating Entries
These are journal entries made on the
consolidation working papers to effect intercompany
adjustments and eliminations on the consolidated
financial statements. These appear only on the
consolidation working papers and are not recorded on the
books of either the parent or the subsidiary company.
Overview of Eliminating Entries
a. Eliminating entry #1 - To eliminate the investment
account from the parent company’s statement of
financial position against the stockholders’ equity
accounts in the statement of financial position of
the subsidiary.
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b. Eliminating entry #2 - To allocate excess by
adjusting the net assets to their fair values.
c. Eliminating entry #3 - To eliminate the Dividend
Income account and minority share of dividends
against the dividend declared by the subsidiary.
d. Eliminating entry #4 - To assign to the non-
controlling stockholders their share of the
increase in the subsidiary’s adjusted
undistributed earnings that occurred between the
acquisition date and the beginning of the current
period.
e. Eliminating entry #5 - To amortize the allocated
excess to identifiable assets.
f. Eliminating entry #6 - To eliminate the
intercompany sale of inventory.
g. Eliminating entry #7 - To eliminate the unrealized
inventory profit.
h. Eliminating entry #8 - To eliminate the realized
inventory profit.
i. Eliminating entry #9 - To eliminate the unrealized
gain on intercompany sale of fixed asset
j. Eliminating entry #10 - To eliminate excess
depreciation
k. Eliminating entry #11 - To recognize the NCI in
the subsidiary’s net income for the year.
Note:
a. Eliminating entry nos. 1 and 2 only for -
consolidated statement of financial position at
acquisition date
b. Eliminating entry no. 4 exists only for -
consolidated financial statements two reporting
dates after the date of acquisition and beyond
Consolidated Statement of Financial Position at
Acquisition Date
This financial statement is unique because it is
the first consolidated financial statement that can be
prepared. At the acquisition date, no other transactions
have occurred besides the business combination.
Measurement of Non-Controlling Interest
The following are the options provided by the
Standard in measuring the non-controlling interest, in the
order of priority:
a. At fair value (usually given); or
b. At the non-controlling interest’s proportionate
share of the acquiree’s identifiable net assets,
which is computed as follows:
= (Consideration given / Percentage
ownership of parent over subsidiary) * (1 -
Percentage ownership of parent over subsidiary
 Module 36.3 - Consolidated Financial Statements (PFRS 10)

General Formula for Constructing Eliminating Entry it allows for the establishment of the Goodwill or Gain from
Nos. 1 and 2 Bargain Purchase account.
Entry: Dr. Identifiable accounts (J), Goodwill
(balancing figure or K); Cr. Investment in subsidiary (H),
Fair Parent NCI
Non-controlling interest (I), Gain from bargain purchase
Value >50% <50%
(balancing figure or K)
Fair value of subsidiary A B C
Consolidated Financial Statements - Subsequent to
- Book value of interest D E F Date of Acquisition
acquired These statements may be affected by the other
eliminating entries aside from nos. 1 and 2 since
= Excess G H I transactions have already been entered into between the
date of acquisition and such date after the acquisition.
- Adjustment of J Note: Whenever a parent consolidates
identifiable accounts statements, it has to use a different consolidation working
(e.g., Inventory, Land, paper and not just continue the previous one. Therefore,
Building, etc.) some entries will have to be repeated in order to effect
proper consolidation.
= Goodwill (Gain from K
bargain purchase) Eliminating Entry No. 3
The purpose of this eliminating entry is to
eliminate the effect of distribution of dividend by the
a. A = Consideration given / Percentage ownership acquiree since under the consolidated financial
of parent over subsidiary statements, the parent and subsidiary are considered as
b. B = Consideration given one entity.
c. C = Fair value of NCI or NCI’s proportionate share Entry: Dr. Dividend income (acquirer), Non-
of the acquiree’s identifiable net assets controlling interest (balancing figure); Cr. Dividends
d. D = Acquiree’s: Share capital + Share premium + declared - acquiree
Retained earnings + Other equity accounts
e. E = D * Percentage ownership of parent over Eliminating Entry No. 4
subsidiary This entry is only made if after the acquisition
f. F = E - D date, at least one reporting period has already passed
g. G = A - D before the current reporting period. Its purpose is quite
h. H = B - E similar to eliminating entry no. 11. The only difference is
i. I = C - F that in this entry, the earnings being referred to are those
j. J or Allocation of excess to adjust the net assets from prior periods.
to their fair value = Fair value of identifiable Formula:
account to be adjusted - Book value of identifiable Retained earnings - acquiree, beginning of
account current period
k. K = G - J - Retained earnings - acquiree, date of
acquisition
Eliminating Entry No. 1 = Increase in earnings - prior year
The purpose of this eliminating entry is to - Amortization of allocated excess in prior
eliminate the reciprocal accounts found in the books of the years
acquirer (Investment in Subsidiary) and acquiree (equity = Adjusted undistributed earnings
accounts). Also, it allows for the establishment of the * Percentage ownership of NCI over
initial balance of the Non-Controlling Interest account. Of subsidiary
course, if the acquiree is a wholly-owned subsidiary, there = Prior earnings assignable to NCI
will be no NCI.
Entry: Dr. Share capital - acquiree, Share Entry: Dr. Retained earnings - acquiree (prior
premium - acquiree, Retained earnings - acquiree; Cr. earnings assignable to NCI); Cr. NCI
Investment in subsidiary (E), Non-controlling interest (F)
Eliminating Entry No. 5
Eliminating Entry No. 2 Since the identifiable net assets are already
The purpose of this eliminating entry is to allocate adjusted to fair value, it is just right to adjust their
the excess of the fair value of the subsidiary over the book depreciation, amortization, effects on cost of goods sold,
value of interest acquired to identifiable accounts whose etc. because in such transactions, the acquiree is still
fair values exceed the corresponding book values. Also, using the book values.

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 Module 36.3 - Consolidated Financial Statements (PFRS 10)

Entries: i. I = G - H = G * Intercompany gross profit rate =

a. Inventory: Excess is amortized as the inventory
items are sold - Dr. Cost of goods sold; Cr.
Inventory
b. Depreciable PPE: Excess is amortized as the
property is depreciated - Dr. Operating expense;
Cr. PPE (net)
c. Any PPE (depreciable or non-depreciable):
Excess is amortized when the asset is sold or
disposed - Dr. Gain on sale of PPE; Cr. PPE
Downstream Intercompany Sales
These are those made from a parent company to
its subsidiaries.
Upstream Intercompany Sales
These are those sales made from subsidiaries to
the parent company.
Unrealized Gross Profit
It exists in the ending inventory of the
consolidated entity whenever there is an intercompany
sale of inventory during the current period but the
inventory was left unsold in the ending inventory of the
buyer. This gross profit will only be realized once the
involved inventory is sold.
Intercompany Sale Transaction Analysis
Selling Cost Gross Profit
Price
Beginning A B C
inventory
Unrealized gross profit at the end of the reporting
period
j. J=A+D-G
k. K=B+E-H
l. L=C+F-I
Eliminating Entry No. 6
Since, the parent and the subsidiary are treated
as one under the consolidated financial statements, the
transactions of the consolidated entity with itself will have
to be eliminated. The entry will be the same whether there
has been a downstream or an upstream intercompany
sale.
Entry: Dr. Sales (D); Cr. Cost of goods sold
Eliminating Entry No. 7
For example, the parent acquired a certain
amount of inventory from the subsidiary. The subsidiary
recognizes gross profit in its books arising from that sale;
but the inventory is still in the ownership of the
consolidated entity at the end of the reporting period.
Therefore, such gross profit is still unrealized and will
have to be eliminated.
Entry: Dr. Cost of goods sold (I); Cr. Inventory
Eliminating Entry No. 8
Continuing the example in eliminating entry no. 7,
the parent sold the involved inventory to outsiders during
the second year. It recognized gross profit on such sale
based on:
a. The selling price to the external parties; and
b. The cost when the inventory was sold to it by the
subsidiary (intercompany sale).

+ Sales D E F The difference between the original cost of the

inventory and the intercompany selling price is not yet
- Ending G H I recognized as gross profit. Therefore, an eliminating entry
inventory has to be made for the realized gross profit.
Entry:
= Cost of J K L a. Downstream sale - Dr. Retained earnings, Jan. 1
goods sold - acquirer (C); Cr. Cost of goods sold
b. Upstream sale - Dr. Retained earnings, Jan. 1 -
acquirer (C * percentage ownership of parent
a. A = Intercompany selling price of beginning over subsidiary), Non-controlling interest
inventory (balancing figure); Cr. Cost of goods sold (C)
b. B = Cost of beginning inventory before
intercompany sale Eliminating Entry No. 9
c. C = A - B = A * Intercompany gross profit rate = This is with regard to the intercompany sale of
Gross profit realized during the current period PPE. Since the parent and the subsidiary are considered
considering FIFO method is used as one under the consolidated financial statements, any
d. D = Intercompany sales during the current period gain or loss they earn or incur from intercompany sale of
e. E = Cost of inventory (subject of intercompany PPE will have to be eliminated. Such gain or loss is
sale) from outsiders considered unrealized until the said PPE is sold to an
f. F = D - E = F * Intercompany gross profit rate external party or as the asset is being depreciated.
g. G = Intercompany selling price of ending Entry: Dr. PPE (balancing figure), Gain on sale of
inventory PPE (unrealized); Cr. Accumulated depreciation (balance
h. H = Cost of ending inventory before intercompany that would have been show had the PPE not been sold)
sale
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 Module 36.3 - Consolidated Financial Statements (PFRS 10)

Eliminating Entry No. 10 Consolidated Retained Earnings

For example, the PPE was sold by the Parent to Retained earnings, reporting date - acquirer
its subsidiary at a gain. The subsidiary is now depreciating + Acquirer’s share in the adjusted
the PPE based on the cost when the latter was sold by undistributed earnings of the acquiree
the parent to the former which is higher than the original = Consolidated retained earnings, reporting
historical cost of the PPE. Therefore, there is excess date
depreciation that will have to be eliminated,
Entry: Dr. Accumulated depreciation (excess or
depreciation); Cr. Depreciation
Retained earnings, beginning of reporting
Eliminating Entry No. 11 period
Its purpose is to recognize the share of the non- + Consolidated comprehensive income
controlling interest in the comprehensive income of the attributable to the acquirer
acquiree. - Dividends paid - acquirer
Formula: = Consolidated retained earnings, reporting
Comprehensive income from own date
operations - acquiree
- Amortization of excess
+ Realized intercompany profit in the
beginning inventory from upstream
sale
- Unrealized profit in the ending inventory
from upstream sale
- Unrealized gain in the upstream sale of PPE
+ Excess depreciation on PPE acquired
through a downstream sale
= Realized comprehensive income from own
operations - acquiree
* Non-controlling interest’s percentage
ownership over the subsidiary
= Realized comprehensive income
attributable to NCI

Entry: Dr. NCI in CI of subsidiary; Cr. Non-

controlling interest

Consolidated Comprehensive Income Attributable to

the Acquirer
Comprehensive income from own
operations - acquirer
- Dividend income - acquirer.
+ Realized intercompany profit in the
beginning inventory from
downstream sale
- Unrealized profit in the ending inventory
from downstream sale
- Unrealized gain in the downstream sale of
PPE
+ Excess depreciation on PPE acquired
through an upstream sale
= Realized comprehensive income from own
operations - acquirer
+ Realized comprehensive income from own
operations - acquiree
- Non-controlling interest’s percentage
ownership over the subsidiary
= Consolidated comprehensive income
attributable to the acquirer

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