Chapter 14 COO OIC ELT Renton mea ane er ye esti ee Date of Acquisition (IFRS 10) The preceding chapter discussed business combinations that are accomplished by net asset acquisitions. The fair values of the net assets of an entire company are acquired and recorded directly on the books of the acquirer. ‘Consolidation of the two companies is automatic because all subsequent transactions are recorded ina single set of books of the acquirer. Business combination may also be achieved when a company acquires a large enough interest.in another company's voting common stock to obtain control of operat ions. The company owning the controlling interest is called the parent, while the controlled company is termed the subsidiary. Generally, a controlling interest is achieved by ownership of 50% or more of the subsidiary's voting stock. Any remaining interest in the controlled company is referred to as the non-controlling interest (formerly called minority interest) The parent company records the acquisition of stock by debiting an Investment in Subsidiary account in its accounting records, The subsidiary retains its legal identity and continues to prepare its own financial statements. However, accounting principle provides that when one company has effective control over another, consolidated statements must be prepared for the companies under common control. 61 Scanned with CamScanneri f 62 NATURE OF CONSOLIDATED STATEMENTS TERS 10 requires that an entity that i t present consolidated financial an entity that is a parent must p! ‘ons to this Statements that include all subsidiaries of the parent. Only three exceptions Tule: 4 are available and these are: (1). a parent need not present consolidated financial statements ifall the following criteria are met: ‘ di: iti artially-owned itself is a wholly-owned subsidiary or it is a ps 3 2 ett of ‘another entity and all of its owners, including those not normally entitled to vote, have been informed about, ae do not object to, the parent not presenting consolidated financial statements; | : (b) Its debt and uit instruments are not traded ina public’ market; a at (c)_Itdidnotfile, nor isitin the process: ee filing, its financial statement a securities exchange commission; an . , (d) _Itsultimate or intermediate parent produces consolidated financial statements that are available for public use and comply with IFRS. a lans to which 2) st-employment benefit plans or other long-term employee benefits p! @ TAs 10, Employee Benefits, apply are excluded from the scope of IFRS 10. (3) Aninvestment entity need not present consolidated financial statements if it is required to measure those subsidiaries at fair value through profit or loss in accordance with IFRS 9, Financial instruments (or IAS 39, Financial Instruments: Recognition and Measurement until IFRS 9 comes into effect). The consolidated statements present the financial statements of the parent and its subsidiary as those of a single economic entity. Consolidation working papers are prepared to facilitate the consolidation of the separate statements of the parent and its subsidiary(s) into a single set of consolidated statements. This chapter will discuss onl i I ly the procedures necessary to prepare Consolidated anes of f inancial Position on the day that the controlling investment is consolidating ee ctiver oiiins cone of the acquiree. The procedures for inChapter1¢ th Periods subsequent to the acquisition date will be discussed. Such as intencoments’ 1 Operating pees aa between the parent and its sub: ‘diaries, 4 any dividend: Fi pare i Si 2 discussed in Chant y dividends, merchandise sales, and fixed asset i Chapter 13,isused in then 17 The principle sence sha the of acquisition a i r i su nso ‘ccounting, presented in cet zon ofaparent aie * fact, the consolidated siatlfent of ‘with that ofthe net assets being acquiea after acquisition looks Scanned with CamScannerConsolidated Statement of Finacial Position— Date of Acquistion 2 CONDITIONS FOR CONSOLIDATED STATEMENTS Generally, statements are to be consolidated when a parent company owns over 50% of the voting common stock of another company thereby having a controlling interest. However, control may be achieved even with less than 51% of the voting common stock is owned by the parent. In such case, the consolidated statements. may be prepared in view of the unified managerial control. CONTROL IFRS 10 introduces a new single control model to identify a parent-subsidiary relationship by specifying that "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". In this new control model, an, investor controls an investee if and only if the investor has all of the following three elements: (a) power over the investee (the Power); é (b) exposure, or rights, to variable returns from its involvement with the investee (the Returns); and © : (c) ‘the ability to use its power over the investee to effect the amount: ‘of the investor's returns (the Link between Power and Returns): 7 In this single control model, power is not defined as legal or contractual right to direct relevant activities but is based on the ability.to direct relevant activities unilaterally. The consolidation model is not a quantitative model (based on risks and rewards) but a qualitative model (based on power, returns and a link between the two elements). The control model is built on the principles (of three elements) rather than on bright lines. As such, the application of this model will require judgment ‘by considering the relevant facts-and circumstances in making consolidation decisions. This consolidation model will more accurately reflect the economic. substance of relationships with other entities. ‘ ; Scanned with CamScannerO4 Chapter 14 i TECHNIQUES OF CONSOLIDATED STATEMENT OF FINANCIAL ~ POSITION On the date of acquisition, when the acquirer obtains control of the acquiree, a consolidated statement of financial position is the only statement that is prepared to determine the initial financial position of the economic entity. This. chapter will illustrate the techniques used to consolidate the separate statement of ‘financial position of the parent and its subsidiary immediately on the date of acquisition. The basic procedure to consolidate the statement of financial position, isto eliminate the Investment account on the parent company’s statement of financial position against the stockholder's equity accounts in the statement of financial position of the subsidiary company. After this, the remaining assets and liabilities of the parent company are then combined with the specific assets and liabilities ofthe subsidiary company. Intercompany adjustments and eliminations are made on the consolidation working papers in the form of journal entries, These entries do not alter the individual statements of the parent and the subsidairy companies. Elimination entries appear only on the consolidation working papers, they are not recorded on the books of either the parent or subsidiary company. Procedural explanations for the preparation of consolidated statement of financial position on the date of acquisition are illustrated in the pages that follow. ACQUISITION OF ASSETS AND STOCK ACQUISITION COMPARED In Chapter 13 the two methods of achieving control over the assets of another: company are discussed. Acompany may directly acquire the assets of another company, or it may acquire a controlling interest in the other company's voting stock. In an asset acquistion, the company whose assets were acquired is dissolved. The assets acquired are recorded in the books of the acquirer and consolidation of statement of financial Position amounts is automatic. On the other hand, under stock acquisition, the acquired company (the subsidiary) remains as a separate legal entity with its own financial alsa the initial accounting for the two types of acquisitions differs significantly, stateiventist een and an asset acquisition produce the same consolidated stock acquisitinn a een after acquisition. There is, however, a difference if the less 100%. Then, there willbea non-controlling interest in the consolidated stat i iti suisiions ‘ment of financial position. This is not possible under assets Scanned with CamScannerConsolidated Statement of Financial Position — Date of Aequisition 65 | ASSET ACQUISITION ~A Brief Review ‘The following illustration will review an asset: uisition for cash. Part 1 presents the statement of financial Paes eee rior to the acquisition. Part 2 shows the entry of P Company to record the payment of 100,000 in cash for the net assets of S Company. The book values of the assets and liabilities of S Company are assumed to be equal to their fair values, and no goodwill. exists. Part3 shows the statement of financial Position for the combined company. Note that the combined statement of financial position is produced automatically, and no consolidation process is necessary, ‘i IMustration 14-1 ~ Part I Company and S Company statement of Financial Position December 1,2017 P Company. S Company Assets ji c Cash y 230,000; P.. 0- Accounts receivable f "4 thes 40,000 ° 32,000 Inventory a 50,000, 20,000 Equipment (net) . 1 : 180,000 158,000 Total P500,000 ‘210,000 Liabilities and Equity 2 Accounts payable P280,000 P110,000 Common stock 100,000: - 50,000 Additional paid in capital 80,000»: 30,000 Retained earnings 40,000. 20,000 Total P500,000 P210,000 Part 2 eo entry on P Company's books to record acquisition of S company's net assets. Accounts receivable « _ 32,000 Inventory : 20,000 % Equipment 2 ‘ 158,000 ich Accounts payable ‘ : ‘Y -110,000 Cash 100,000 Scanned with CamScanner66 Chapter 14 Part 3 P Company 5 Statement of Financial Position Subsequent to Net Asset Acquisition December 1, 2017 Assets. Current assets : .P 130,000 Cash 72,000 Accounts receivable j 70,000 Inventory S f aa AA 272,000 Total current assets Non-current assets 338,000 Baupment : 610,000 Total z iabilities and Equity Current liabilities Psononn Accounts payable Stockholders' Equity ‘ ; Common stock ! Piao Additional paid in capital , Retained earnings : 40,000 Total liabilities and equity STOCK ACQUISITION Assuming the same facts as those in Illustration 14-1,except that P Company will acquire all of the outstanding stock of S Company from its stockholders (usually thrua stock broker) forP 100,000. P Company records the acquisition on its books with the following entry on the date of acquisition: Investment in S Company 100,000 - Cash ¥ 100,000 Procedural explanations for the ion of consoli en / ie vet preparation of consolidated statement of fina: Position on the date of. ‘acqui. ae ci sition are illustrated in the pages that follow: Scanned with CamScannerConsolidated Statement of Financial Position — Date o J of Acquisition 67 ONSOLIDATED STATE} cequisition ‘MENT OF FINANCIAL POSITION — Date of acquisition may be at book value or at other than book value. ACQUISITION OFA WHOLLY OWNED SUBSIDIARY - (100% Interest) A subsidiary is said to be a wholly owned subsidi mpany acqui s oie iary when the parent co! uires all ofits ones common stock from the present shareholders. To illustrate the preparation of consolidated'statement of financial position under this case, the statement ocean position of P Company and S Company in Part 1 of Illustration 14-1 will be Case 1: Acquisition at Book Value The acquisition of: asubsidiary is said to be at book value when the consideration given (price paid) for the investment in the subsidiary is equal to the book value of interest acquired from the subsidiary (subsidiary's stockholders equity x parent company's ownership interest). a, Inthis case, P Company acquires all of S Company's outstanding common stock for P100,000 cash. The consideration given (price paid) of P100,000 is equal to the book value of the subsidiary's net assets as shown below: é Consideration given (price paid) pid P100,000 Less book value of interest acquired (100%): . . Common stock, S Company P50,000 ss APIC—S Company: | 30,000, 6 yi Retained earnings —‘S Company 20,000... “100,000 Pe 0- Excess F After posting the entry in the preceding page recording the stock acquisition in the books of P Company, the separate statement of financial position of P Company and S Company immediately after the acquisition is presented in Illustration 14-2. Note that only the statement of financial position has changed to reflect the P100,000 reduction in Cash and the recording of the Investment in S Company account forthe same amount. Scanned with CamScanner= Chapter 1g 68 Illustration 14-2 P Company and S Company Statement of ial Position 1, 2017 q December a =i ‘ 4 Asem 130,000 Pp -0- | Cash 40,000 32,000 E Accounts receivable 50,000 20,000 nea : 180,000 158,000 Equipment — net 100,000 : it tock eed dane Company st Babs nao ‘otal Assets £5000" Eee Liabilities and Stockholders’ Equity read Abie ‘Accounts payable : 20. spot Common stock , ‘Additional paid-in capital aed 2000 Retained earnings r -* 500,000 210,000 Total Liabilities and Stockholders’ Equity Working Paper Elimination Entry. Before the preparation of the consolidated statement of financial position, the Investment in S Company: account balance should be eliminated, because the two companies will be treated as one. Similarly, the subsidiary’ iiminated because its assets and liabilities belong to stockholders equity accounts are eli the parent, not to ‘outside equity owners. This is accomplished by the following, elimination entry in the consolidated working paper. E(1) Common stock S Company 50,000 Additional paid-in capital —S Company , 30, 000 20,000 Retained earnings - S Company Investment in S nS COnpa, 100,000 bo pore tetory seit entry decreases to zero the Investment in S Company the cases that followali and the three stockholders’ equity accounts of $ Company. In void eotifsig the align ees are numbered sequentially. To books‘ 23 with jo i i ee parent or subsidiary, all working paper ‘elimi at {hat appear on the separate lesignated by an entry preceded by an "E" ion entries appearing in the Scanned with CamScannerConsolidated Statement of Financial Positi ‘sition — Date of Ai ic icquisition 69 lidation Worki a low Hate The working paper showing the elimination entry teste feria poston of Company nS Con keno atin -2. e acct : 1 ym Iustration added together. ‘Ounts are placed side by side so that they may be easily Mustration 14-3 P Company and Subsidiary Consolidation Working Paper December 1, 2017 Eliminations |P Company |S Company Debit Credit Consolidated Assets Cash P130,000 -0- ‘Accounts receivable 40.000 ig 32 aot 130,000 Inventory pane | ga 72,000 Equipment ~ net 180,000 | 158,000 338,000 Investment in S Company 100,000. (1) 100,000 = Total Assets P500,000 | P210,000 610,000 Liabilities and Equity” | oe Accounts payable 280,000 110,000 390,000 Common stock: z Z P Company 100,000 i 100,000 'S Company ‘ : 50,000 | (1) 50,000 ‘Additional paid-in capital: P Company * 80,000 80,000 S Company 30,000 (1) 30,000 % Retained earnings: . P. Company 40,000 40,000 S Company 20,000 (1)__20,000 Total Liabilities and Equity P500,000 P210,000 P100,000 100,000 610,000 The following features of the working paper for consolidated statement of financial position on the date of: acquisition should be emphasized: 1. ° The elimination entry is not recorded in either the parent company’s or the subsidiary’s accounting records; it is only a part of the working paper for the tion of the consolidated statement of financial position. : $ 2. The consolidated paid-in capital amounts are those of the parent company only. eliminated in the process of unts always are Subsidiaries’ paid-in capital amo consolidation. Scanned with CamScannerChapter 1g 70) dine ings of the parent ly the retaine™ on accounting reflects i ined earnings include onl. A 3. Consolidated retainer iththe principe that cauistiot stockholders i rebh start after acquisition ofstock and not a combining it cerest. F ition ofa si it osition ofa single th ts in the consolidated column reflects the ene all intercompany oe womice entity comprising two legal er ese after €! in the statement of: pes Take note that these are exactly the sae ‘elilustration 1 4-1). position prepared after the acquisition of asset @ shinies os ts in the consolidate Consolidated Statement of ‘Financial Position. The Se aiet in the consolidated column of the working paper are presented in Oe sidan, § Company as follows: ‘ ae and it \, statement of financial position of P Company Mlustration 14-4 ‘ P Company and Subsidiary Bs Consolidated Statement of Financial Position December 1, 2017 Assets Current Assets ean aod. a 72,000 Accounts receivable 5 ‘ a 1 ee Inventory : : : Total Current Assets : ~ 272,000 ‘Non-current assets Equipment 338,000 P610,000 _ Total Assets Liabilities and Equity Current liabilities 4 Accounts payable a P390,000 Stockholders’. Equity ono stock 100,000 dditional paid-in capi , Retained earnings capital 80,000 Total Lisbiltesand Equity 2 $40,000 220,000 : ‘ P610,000 Scanned with CamScannerConsolidated Statement of Financial Position — Dat — Date of Acquisition 71 Case 2: Acquisition at More than Book Vah value When the book values of the 0 alues net assets of the di and the consideration given (pri Fe een) asec tot al jrai cleans eir fair values, from the subsidiaty, the excess iieceaeeeanr San onan oon IHustration: Assume that P Company acquire: for P110,000 in cash on Dera oe S Company's outstanding commonstock _ On the date of acquisiti , eet E with the followii et P Company records the acquisition of stock on its books Invespneit in S Company "170,000 fi - 110,000 ee a ae Fy A" 770,000 ter the above entries has been et aci isflowaes | posted, the affected asset accounts of PCompany are P120,000 Cash 110,000 Investment in S Company The excess of the consideration given over the book value of interest acquired is computed below: Consideration given (price paid) P110,000 Less book value of interest acquired: (100%) Common stock —S Company 50,000 ** APIC-—S Company 30,000 7 Retained earnings — S:Company 20,000 100,000 Goodwill P:10,000 The resulting excess is usually due to two factors: (1) the difference between the book : value of the subsidiary's assets and/or liabilities and their fair values, and (2) ‘the: existence of goodwill in the subsidiary company. Since the book value of the net assets in this ess is treated as goodwill. example is equal to their fair values, the exe Scanned with CamScanner2 Chapter 14 ’ Working Paper Elimination Entries. After the computati cess (goodwill), oe ymputation of ‘the ex’ the elimination entry to be posted in consolidation working paper can now be prepared as follows: EQ) Common stock—S Company "30,000 Additional paid-in capital — S Company 3 : Fao Retained earnings — S Company ot a . Coulwa ’ 110,000 Investment in S Company 7 i limination Consolidation Working Paper. The working paper showing the above elir entry is presented below: Hlustration 14-5 P Company and Subsidiary Consolidation Working Paper December 1, 2017 ; Eliminations P Company | S Company Debit Credit Consolidated Assets Z t Cash P120,000 P -0- a ape 4 Accounts receivable - 40,000 32,000 ze Inventor 50,000 20,000 , ry Equipment — net 180,000 158,000 338,00( Goodwill 1) 10,00 10,00 Investment in $ Company 110,000 (2) 110,000 Total assets 500,000 | __P210,000 ‘ P610,00 Liabilities and Equity 7 Accounts payable 280,000 | 110,000 P390,00d Common stock d : ~~ ——-P Company 100,000 100,000 § Compéty 30,000 | (1) 50,00 ¥ ‘Additional paid-in capital ~ : oma 80,000 30,00d ompany peep 30,000 | (1). 30,001 P Company 40,000 ompany ' 40,00 = os 20,000 | (1) 20,00 : Liabilities and Equity | Ps00,000'| 210,000 P110,00 P110,000_| * P610,00 ) | , Scanned with CamScannerConsolidated Statement of Financial Postion ~ Date of Acq lequisition 373 , Ananalysis of the consolidati i | past ‘on working paper (Iilustration 14-5) reveals the following: 3 Those tvestment in § Company accounts eliminated, z a inthcans ay sous of S Company is eliminated.” the consolidated col ,000 (as computed) is inserted as an asset in 4, Theassetsand liabilitiesof SC bined wit Company toarve at the consolidate ee eeoms Xd with those of P. 5. P Com aii cuidtie sarod Stockholders equity acegunts ate extended in the Consolidated Statement of Financial Position. Th i dd fa a . The formal consolidated statement | oft financial Position resulting from the 100% acquisition of S Company taken from the consolidated column of the consolidation working paper is presented below: Illustration 14-6 | PCompany and Subsidiary | Consolidated Statement of Financial Position | December 1,2017 f | Assets |. Current assets gn Cash ~~ P120,000 | Accounts receivable : 72,000 | Inventory, : 2 70,000 k Total current assets 3 * i 262,000 | Non-current assets nt Equipment ss | Goodwill eg | Total non-current assets — | a | Total assets : Ps10,000 Liabilities and Equity - . 390,000 < Accounts payable ps gi ree | Stockholders! Equity “ 100,000, | Common stock A 80,000 | Additional paid in capital 140,000 | Retained earnings ; 220,000 Total stockholders’ equity 610,000 Total liabilities and equity aati Scanned with CamScanner7. 4 y Chapter 14 Case 3: Acquisition at Less than Book Value— Bargain Purchase A bargain purchase exists when the price paid is less than the fair value of the subsidiary’s net identifiable assets. The excess is treated as gain on acquisition or gain on bargain purchase. Illustration: Assume that P Company paid only P80,000 for the 100% interest in the stockholders’ equity of S Company. P Company would make the following entry to record the acquisition: in SC : 80,000 De ee ete : P 80,000 bove entry recording the investment in $ Company, the separate After posting the al t i statement of financial position of P Company will show the following balances of the affected accounts: Cash * 150,000 ‘ 80,000 Investment in S Company Before the preparation of working paper elimination entry, the difference (excess) between the consideration given and the book value of interest acquired is computed as - follows: © Consideration given (price paid) P 80,000 Less book value of interest acquired (100%): Common stock — S Company _ 50,000 Additional paid-in capital - S Company 30,000 Retained earnings — § Company 20,000 100,000 Gain on acquisition (bargain purchase) (20,000) Working Paper Elimination Entry, After computing the income from acquisition, working paper elimination entry can now be prepared as follows: E(l) Common stock - $ Company 50,000 Additional paid in capital - S Company 30,000 : Retained earnings — S Company “20,000. Investment in S Company a 80,000 Retained earnings — P Company (Gain) 20,000 Take note that since only a statement of financial position is bein; repared, the gain Sequisition is closed directly to the parent's retained cating = sae Scanned with CamScannerConsolidated Statement of Financial Position Date of iti E lequisition Consolidation Working Paper, Thy ‘ 5 ati ies ; r The wor! i imination ents saltiecosaiactanens epee anc position is shown below: Company and Subsidiary Consolidation Working Paper December 1, 2017 Eliminations eae, os 5 Conso- ‘ompany Company. Debit _ Credit lidated Assets P ; ; Cash ©. }2'P180,000.. Pp ..0. ‘ . 120 P150,000 ‘Accounts receivable 40,000 “32,000 72,000 Inventory 50,000 20,000 i 70,000 Equipment | »-[<: ; 180,000. }.-~ 158,000 | - 338,000 Investment.in $ Company “|” 80,000 : iy’ 80,600 Total Assets ° * L£_P300,000 | — P210,000 |. 4 630,000, Liabilities and Equity i : oe ‘Accounts payable 280,000]. 110,000 i 390,000 Common stock: i 5 - : P Company 100,000 : 100,000 ‘S Company 50,000 |» (1)'$0,000 ‘Additional paid-in capital: iad teens : i P Company 7h" 30,000 | ; "80,000 'S Company 30,000 |‘ (1) 30,000 |’ * Way Ne Retained earnings: , P Company mem 40,000 (1) 20,000: | + 60,000 S Company 20,000 | _(1) 20,000 a Total Liabilities and equity 500,000 | P210,000 | _ -P100,000 P100,000 | 630,000 Take note that the income from acquisition is not presented in the above working paper, because it is closed directly to the retained earnings of P Company (P40,000 +P20,000). Consolidated Statement of : Financial Position. From the consolidated column, a formal consolidated statement of financial position cannow be prepared. ) Scanned with CamScannereg = : Chapter 14 AcOuisriy Yas aa [ON i Z interest)” OF PARTIALLY OWN SUBSIDIARY (Less than 100% The consolidat idatio ’ 7 e-consolidationen arent company and its partially owned subsidiary differs from ‘a wholl ed subsidiary i : es ae otno: ine i ly owned subsidiary in one major respect — the recognition (cD ise interest (formerly called minority interest), Non-controlling interest parent’ ed as "the equity ina subsidiary not attributable, directly or indirectly, toa Then n-controlling interest in the net income of the subsidiary is presented in the Consolidated statement of comprehensive income (to be discussed in Chapter 15) and the non-controlling interest in the subsidiary's net assets is shown in the consolidated statement of financial position in total and is not broken down into common stock, additional paid in capital, and retained earnnings. The NCI must be shown asa component of stockholders’ equity. ; MEASUREMENT OF NON-CONTROLLING INTEREST * Asdiscussed in chapter 13, IFRS 3 provides two options of measuring non-controlling interest in an acquiree: 1. at fairvalue, or ‘aie: 2. _atthenon-controlling interest's proportionate share of the acquiree's identifiable net assets. Under option 1, any goodwill that arises at the time of acquisition is allocated between the parent and the non-controlling interest (NCI). _ Under option 2, any goodwill that arises at the time of acquisition is assigned only to the parent: x 2 * ‘There is no requirementt in IFRS 3 to measure non-controlling interest on a consistent basis for similar types of business combinations and therefore, an entity has a free choice between the two options for each transaction undertaken. The option to value NCI at fair value will be used throughout (unless stated). : er tbe purpose of measuring non-controlling interest at fair value, it may be possible to letermine the acquisition-date fair value on the basis of active market prices of the ao fee not held by the acquirer. When a market price is not available, the acquirer techniques UFRS'), fair value of the non-controlling interests using other valuation Fora detailed i : ne dia the: Statement opener consolidation procedures for a partially owned subsidiary, nancial slits ean ofP Company (Ilustration 14-7) and the statement ext page (Ilustration 14. the fair values of the assets and liabilities of S Company J : -8) before acquisition will be used. Scanned with CamScannerConsolidated Statement of Financial Becki, Date of Acquisition 7 Mlustration 14-7 PCompany Statement of Financial Position December 1, 2017 Assets iE ia Current assets “Liabilities a Cash P2 Accounts receivable non equate payable P 160,000 7 aoe Total liabilities ea Non-current assets: 000 Stockholders" Equity : Land sl 200, Building (net) enue Common stock, P10 par value 400.000 Equipment (net) , 400,000 Retained earnings 502,000 Total “1,440,000 Total equity 1,402,000 Total assets 1,962,000 Total liabilities and equity P1,962,000 Mlustration 14-8 SCompany ; Statement of Financial Position : December 1, 2017 Assets f : Book Value.’ Fair Value Accounts receivable P 40,000 P_ 40,000 Inventory ton 00 110.000 Bei 300,000. 500,000 gs (net) 30,000 120,000 Equipment (net) 80,000. __ 120,000 Total assets P 600,000 222900000 Liabilities and Equity P 80,000 P 80,000 Accounts payable i 200,000 200,000 * Bonds payable ‘ os oad P. 280,000 P 280,000 Total liabilities 3 x Stockholders' Equity: P 20,000 Common stock, P1 par 180,000 Additional 'paid in capital 120,000 Retained earnings - 3 320,000 Total equity ; P320,000 P620,000 Net assets Scanned with CamScanner78 Chapter 14 Case 4: Acquisiti 3: Acqui ' accounts. quisition at More than Fair Value with Adjustment of Subsidiary Illustration: Assume that instead of paying cash, P Company issued 16,000 shares ofits P10 par The common stock for 80% (16,000 shares) of the ‘outstanding shares of S Company. fair value of P Company's stock is P50 and the fair value of the 20% NCI is assessed to be P170,000. P Company also pays 'P50,000 in professional fees to accomplish the acquisition. P Company would make the following entries: Q@) . To record the acquisition of S Company stock: Investment in S Company (16,000 shares x P50) 800,000 Common stock (16,000 shares x'P10) 160,000 ‘Additional paid in capital 640,000 (2) Torecord. acquisition-related costs: ‘Retained earnings — P Co. (Acquisition expense) 50,000 Cash , 50,000 10 retained earnings of P Company since ‘Acquisition expense isto be closed directly t ing consolidated. only the statement of financial positions are bei The consolidation procedures for this case are as follows: 1.. Compute goodwill. In accordance with IFRS 3, goodwill is the excess of. + © Theaggregate of (i) the acquisition date fair value (FV) of the consideration transferred, (ii) the amount of ‘NCI, and (iii) the fair value of the parent's _~ previously held interest in the subsidiary; over Bg + Theacquisition-date fair value of the net assets acquired. Using the above, goodwill is computed as follows: “Price paid P. 800,000 Non-controlling interest (at fair value) 170,000 Total . 970,000 Less fair value of net assets acquired =” 620,000 Goodwill 6 \ wi ‘ ‘ 350,000 Scanned with CamScannerConsolidated Statement of Financial Position Date ef Acquistion : Ze The following assumptions should be noted in the computation of goodwill: : Nan. ceatrolling Interest is measured at fair value (P170,000). If the fair value of the non-controlling interest is not given, its fair value may be estimated by making an assumption. It may be assumed that if the parent would pay P800,000 for an 80% interest, then it may be implied that the entire subsidiary company is worth P1,000,000 (P800,000/80%). Assuming this is true, the NCTis worth P200,000 (P1,000,000 x 20%). The goodwill then would be P380,000 [(P800,000 + P200,00) - P620,000)}. . Non-controlling interest may also be measured on the basis of its proportionate interest in the acquiree's identifiable net assets. Under this option NCI is equal to P124,000 (P620,000x 20%). The goodwill then would be P304,000 [(P800,000 + P124,000) — P620,000]. = 2. . Prepare a Determination and Allocation (D &A) of excess Schedule. TheD &A schedule that follows revalue the entire entity, including NCI. Parent NCI Fair Value (80%) (20%) Fair value of subsidiary P 970,000. 800,000 - P170,000 Less book value of interest acquired:’ + a, Sa Common stock: P. 20,000 Additional paid in, capital 180,000 Retained eamings 5 120,000 Total equity P.320,000 ‘320,000 P320,000 Interest acquired 80% 20% Book value : ; 256,000 P 64,000 Excess ‘ ee P650,000 P544,000 106,000 Adjustment of identifiable accounts: Ge a - Inventory (P110,000 FV ~ P100,000 BV) P( 10,000) Land (P130,000 FV — P80,000 BV) (50,000) Buildings (500,000 FV - P300,000 BV): (200,000) Equipment (P120,000 FV ~ P80,000 BV) (40,000) Total aia ~)_PG00,000) Goodwill “| P-350,000 Note the following features of the D & A of excess schedule for a less than 100% Parent ownership interests. * ~The "fair value of subsidiary" line contains the fair value (FV) of the entire company, the price paid by the parent, and the fair value of the NCI. a * — The total stockholders’ equity of the subsidiary (book value of net assets) is allocated 80% to'controlling interest (P256,000).and 20% to NCI(P64,000). ‘ * — The entire adjustments of subsidiary net assets (P650,000) will be allocated P544,000 to controlling interest and P106,000toNCI. * When the fair value of an asset exceeds the book value, the difference reduces the excess. Conversely, when an asset's book value is higher than its fair value, the difference increases the said excess. i Scanned with CamScanner80 Chapter 14 Entries. Based on the D & A of Excess schedule, | Working Paper Eliminations z working paper elimination entries can now be prepared as shown below: + Eliminate subsidiary stockholders’ equity against the investment account (80%) and NCI account (20%) as follows: E(1) Common stock — S Company 20,000 : Additional paid in capital -S Company 180,000 Retained earnings - S Company 120,000 Investment in S Company “256,000 i 64,000 Non-controlling interest (NCI) the net assetsto their fair values. The total adjustment « Allocate excess by adjusting is allocated to parent company (P544,000) and to NCI (P136,000). . E(Q) Inventory 10,000 Land i % 50,000 Buildings 200,000 Equipment 40,000 Goodwill 350,000 Investment in S Company * 544,000 106,000 Non-controlling interest (NCI) Consolidation working Paper. The working paper for the consolidated statement of financial position is shown in Illustration 14-9 in the next page. ‘ The following should be noted in the working paper. * The total stockholders' equity of S Company is eliminated. + The investment accountis totally eliminated. All subsidiary assets are adjusted to 100% of fair value, regardless of, ‘parent's interest. + The total fair value of the NCI (P170,000) is extended in the consolidated column. * 100% of the fair values of subsidiary accounts are consolidated with the existing é book values of the parent company accounts. . -* The amounts that will appear in the formal consolidated statement of financial position'are shown in the last column of the working paper. 3 a eae equity of the consolidated column shows the components of the ontro]ling interest (common stock, APIC and retaini i total non-controlling interest (NCI). riaintd earnings) aa Scanned with CamScannersidated Statement of Financial Posit Consol ment of Financial Position — Date of Acquisition 81 stration 14-9 p Company and Subsidiary Consolidation Working Paper December 1, 2017 - _ Eliminations and Adjustments s Company | Company Debit Credit ‘ied Assets Cash ' P 168,000 | P -0- “Accounts receivable 144/000 ‘hod P 168.000 Inventory 160,000 | . 100,000 | (2) 10,000 270.000 Land 200,000 80,000 |» (2) 50,000 330,000 paling 840,000 | 300,000 | (2)200,000 1,340,000 Equipment 400,000 80,000 | (2) 40,000 '520,000 Investment in S,Company 800,000 (1) 256,000 r (2) $44,000 Goodwill (2)350,000 + 350,000. Total 2,712,000_| 600,000 3,162,000 Liabilities and Equity seat boys ‘Accounts payable P 160,000. | P 80,000 P 240,000 Bonds payeble 400,000 200,000 600,000 Common stock: Re P Company $60,000 : 560,000 ___ $ Company 20,000 | .(1) 20,000 ‘Additional paid-in capital: P Company 1,140,000 1,140,000 $ Company | 180,000 |. (1)180,000 : Retained eamings: " P Company 452,000 452,000 'S Company 120,000} (1)120,000 : NCI to consolidated (1) - 64,004 170,000 y : 2) 106,00 Total p2.712,000 | » P600,000 | _P1970,000_| _~P970,000 3,162,000 Eliminations and adjustments “Fe 4NCI account. (1) © Eliminate 100% subsidiary equity against investment account an‘ accot wunts that are undervalued: (2) » Allocate excess by a Inventory b., Land c. Building d, Equipment e.. - Total adjustment is allocated to Investment acco! adjusting the following asset accot yunt and NCI. Scanned with CamScannerChapter 14 82 : 5 itic al consolidated statement Consolidated Statement of Financial Position. The formal cons® “ange for 16,000 “financial positi i % acquisition of S Company inex=) a oft psn ein oot coho conse aabon Youn paper (/Ilustration 14-9). P Company and Subsidiary Consolidated Statement of Financial Position December 1, 2017 Assets Current assets : _ P 168,000 Cash mm 184,000 Accounts receivable | 270,000 ‘ Inventory . 99, Total : S200 ae Saree assets : : 330,000 Building en eo 2 Equipment Le Y Gaodwill 2 - — 350.00 ans ; 2,540,000 Total assets pele Liabilities and Equity F Liabilities ‘Accounts payable P_ 240,000 Bonds payable ; 600,000, Total liabilities : : j 840,000 | Stockholders’ Equity: Pe ; Common stock * 560,000 | Additional paid in capital |”. 1,140,000 tained earnings 2 452,000 bial controlling equity ay OEE IBY zs 2,152,000 m-controlling interest ; ’ ; 170,000 faliequity Be oo * 2,322,000 oral lities and equity P3,162,000 ke that the above consolidated statement of financial position i ofa sation. Thenent eaaihond position is prepared onthe Fe este financial stern ne Pe ce Scanned with CamScannerConsolidated Statement of Financial Position — Date of Acquisition 83 Adjustment of Goodwill Applicable to NCI. : InCase 4, the total goodwill is P3. " 50,000. This is allocated between the and the NCI. The: allocation iscalculated using the following value a Total Parent Price NCI Fair Value (80%) (20%) Company fair value 970,000 Fair value of net assets excluding goodwill 620,000 went ican Goodwi 350,000 304,000 46,000 The NCI share in goodwill of P46,000 could be reduced to zero, but the NCI share in the fair value of net identifiable assets is never teduced. This means that the total Sair value of NCI can never be less than the NCI percentage of the fair value of the net assets. In this case, it cannot be less than P1 24,000 (P620,000 x 20%). Illustration: To illustrate the above principle, assume that the assessed fair value of NCI is P120,000 which is less than P124,000. Since, the NCI value can never be less than its share of net identifiable net assets, the value of NCI would therefore be taised to P124,000 (replacing the P120,000). The goodwill computation and allocation would be modified as follows: yE ALE shay Total Parent Price'*:. NCI Fair Value: (80%) (20%) Company fair value 924,000 800,000 P124,000 Fair value of net assets excluding goodwill 620,000 496,000" ‘' 124,000 Goodwill P304,000. P304,000 Pp -0- Take note of the following in the above assumptions: * Ifthe P120,000 fair value of NCI is used, the NCI share in the total gocdwill of P300,000 (P920,000 — P620,000) is negative P4,000 which is not permitted. * — Thetotal goodwill of P304,000 is only allocated to the parent company. If goodwill becomes impaired in future periods, the impairment loss would be allocated to the controlling interest only. ; : A Scanned with CamScannerChapter 14 45, * dias Case 5: Acquisition at Less than Fair Value with Adjustment of Subsidiary accounts. Illustration: i ‘val Using the same data, assume that P Company issued 8,000 shares ofits Ee per x ae common stock for 80% of the outstanding shares of S comin «fessional share of P Company stock is P50. P Company also pays Eo a eee fees to complete the combination. P Company would make the following, (1) Torecord the acquisition of S Company stock: Investment in S Company (8,000 shares x P50) - 400,000 Ae Common stock (8,000 shares x P10) 320,000 Additional paid in capital (2). Torecord acqusition-related costs:. Retained earnings — P Co (acquisition expense) 50,000 ee Cash . A Assuming that the fair value of the 20% NCI is not given, the following assumptions would be made to estimate its value. If thé parent pays P400,000 for an 80% interest, then itmay be assumed that the entire subsidiary company is worth P500,000 (P400,000/ 80%). Refer this as the "implied value" of the subsidiary company. Assuming this is to be true, the NCI is worth 20% of the total subsidiary company value (P500,000 x 20% = P100,000). The NCI value, however can never be less that its share of net identifiable assets (P124,000). Therefor, the NCI share of company value is to be increased’ to P124,000 (replacing the P100,000). 2 The consolidation procedures for this case would be the following: 1. Compute the gain on acquisition (excess of the FV of net assets acquired over the aggregate of the consideration transferred, the NCI and the FV ofam viously held equity interest in the acquire) as follows: ae Price paid Non-controlling interest (at fair value) eno Total Si Less fair value of net assets acquired (excluding goodwill) eorid Gain on acquisition P06 a6} A Scanned with CamScanner« hdeied Setement of Pianeta Psion Daigo siti lequisition 85 The gain is to be recogni, aie tues snized only by the controlling interest (ERS 3) as Taal Implied Parent ° NCI ‘air Valu Company fair value P524, 7 ony Less FV of net assets (excluding goodwill) go.) : pec OR Gain on acquisition ; : ! P(96,000) —P(96,000) P| Prepare the Determination and Allocation of Excess Schedule: Implied | Parent Price _ NCI Fair Value (80%) _(20%) Fair value of subsidiary i 524,000 400,000 124,000 Less book value of interest acquired: —— —_— — Common stock 20,000. - Additional paid in capital 180,000 Retained earnings 120,000 \ Total equity : 320,000 P320,000 320,000 . Interest acquired gras 80% 20% Book value : 256,000 64,000 Excess 204,000 P144,000 P_60,000 Adjustments of identifiable assets: Trae ce Inventory . é ~ (10,000) ae ae Buildings : i Equipment (40,000) Total (300,000) Gain on acquisition x P( 96,000) Working Paper Elimination Entries. The D &A of excess schedule above provides the data to prepare the following elimination entries: Eliminate 100% of the subsidiary stockholders’ equity against the investment account (80%) and the NCI (20%) as follows: 20,000 E(1) Common stock —S Company 30,000 rca paid in capital ~ S Company 7000 ; Retained earnings — S Company ~ -/256,000 Investment in S Company ‘ 64,000 Non-controlling interest (NCI) “ Scanned with CamScanner86 Chapter 14 + Adjustthe asses ofthe subsidiary to thei fir values and allocate the tot adstment to controlling interest (P144,000) and NCI (60,000): EQ) Inventory , 10,000 Land * 50,000 Buildings 200, 906 Equipment 40,00! Retained earnings — P Company 144000 Investment in S Company 60,000 Non-controlling interest (NCI) Ape age iss jrectly to the: retained earnings Take note that the gain on acquisition is closed dir tl position js to be prepared of the parent company, since only the statement of finan r . 4 meee ee i case is presented on the date of acquisition. The consolidation ‘working paper for this Pp below: P Company and Subsidiary a . " q Consolidation Working Paper : : December 1, 2017 i i | “Eliminations ] P s & Adjustments Conso- Company | Conary Debit Credit lidated ™ 3 Cash P 168,000 Pie : Fe \ccount i 144,00 st iF : ees : 160,000 190,000: | = (2) 10,000 | 270,000 Land 200,000 30,000 | (2) 0,000 330,000, Building ha 340,000 | 300,000 | (2)200,000 : 1,340,000. Equipmént 400,000 80,000 | 2) 40,000 | 6 600 520,000. | "Investment in S Compati 400,000 - ¢ , ah er | 2) 144,000 : a Total 72,312,000 | — P600,000 2,812,000 ‘Accounts payable P 160,000 | 7P 80,000 | P 240,000 Bonds prs 400,000 | 200,000 600,000 P Company 480,000 |. hs 180,000 pe ee 20,000 | + (1) 20,000 je P Company 3 820,000 7 ; 820,000 Rael ed 180,000 | - (1)180,000 ig Company . 452,000 % Z (2) 96,000 548,000 ee 120,000 | (1)120,000 eee NCI to consolidated ; : . w 64,0 124,000 Total 2,312,000 | ‘6 ee 312, 00,000 | 620,000 2,812,000 Scanned with CamScannerConsolidated Statement of Financial Position: ~ Dite of Acquisitic fcquistion 87 TECHNIQUES IN THE Cay) GOODWILLAND/ORG ATN ON Ao ON AND ALLOCATION OF The following are the steps that wil always work if used in the order shown below: WITH GOODWILL: Assume the price paid by the parent is P600,000. Step 1: Enter the value for column A2 (sum of fair vah pany identifiabl : f ee assets). Then enter appropriate Percentage of that: value into oan C2. The - amounts are fixed regardless of the price paid by the parent. ne ) @) © ‘Company - ParentPrice NCI Value Implied FV (80%) (20%) 1 Company fair value x 2, _ Fair value of net assets excluding goodwill 620,000 - 496,000 124,000 3. Goodwill Step 2: Enter the price paid by the parent for the controlling interest in-B1. @)’ ~. B) oO * Company... Parent Price: ' NCI Vaslue ‘ate Implied FV (80%) (20%) 1. Company fair value oe 600,000 2._ Fair value of net assets excluding goodwill 620,000 496,000 124,000 3._Goodwill Step 3: Compare B1, the price paid by the parent, and B2, the parent's share'of the fair value of the company's net identifiable assets. If B1 is more than B2, enter B3 the difference, which is the goodwill applicable to the parent. Then complete C1. Normally, this amount will be proportionate to B1. It can bea different amount (based on estimated fair value) but never less than C2. In this case it is assessed to be P180,000 even though the proportionate value would be P150,000 for this example. Compute now the value of C3 and complete the remaining colums. : @) ® oO Company ParentPrice. NCI Value : Implied FV (80%) (20%) * 1." Company fairvalue : 3 P780,000 600,000 -- P180,000* 2. _ Fair value of net assets excluding goodwill 620,000 496,000 124,000 3. Goodwill i 160,000. _P104,000 “. P56,000 more can be differen than the proportionate value of P150,000 (P600,000/80% x a 4 can be different than the proportio ; aby be more than P124,000 an re Scanned with CamScanner1 88 Chapter 14) WITH GAIN ONACQUISITION: Assume the price paid by the parent is 450,000. Step 1: Enter and allocate fair values. 6 a ®) ice NCIValue Company Parent Price “ implied FV (80%) 20%) 1. Company fair value 124,000 2." Fair value of net assets excluding goodwill 620,000 __- 496,000 3._Gain on acquisition Step 2: Enter the price paid by the parent. 7 ; “ y ParentPrice NCIValue pled 80%) 2086) 0 1. Company fair value = Ceo 124,000 2. Fair value of net assets excluding goodwill 620,000 zs 3._ Gain on acquisition Step 3: Calculate the gain: applicable to the parent (B2is more than B 1) and complete theremaining columns. @ @). © Company ParentPrice _ NCI'Value Implied FV (80%) (20%) i P124,000 1. Company fair value P574,000 450,000 A 2. Fair value of net assets excluding goodwill 620,000 496,000 124,000 3. Gain on acquisition f a (46,000) P(46,000) P -0-! Take note that Cl cannot be less than C2. Ifthe fair value of the NCI exceeded P124,000, the excess would be an offset to the gainoon the controlling interest. To illustrate, assume the NCI has a fair value of P130,000. @). @) © Company ParentPrice © NCI Value, Implied FV (80%) (20%) kh Company fair value 580,000 450,000 P130,000 2. Fair value of net assets excluding goodwill 620,000 - 496,000 124,000 3.__Gain on acquisition (40,000) (46,000) P6,000 The working paper elimination entry to allocate the excess would be: Investment in S Company 46,000, NCI . = 6,000 Retained earnings — P Company (gain on acquisition) * -_ 40,000 Scanned with CamScannerConsolidated Statement of Financial Position — Date Of Acquisitic juisition : a SUBSIDIARY'S PREEXISTING: Goon’ i: Ifthe acquired subsidiary has goodwill oni : 9 ets isignored in the computation and ae at time of acquisition, that goodwill Illustration: Assume the same example involving the 80% acquisiti 5 i r acquisition of S Comy Case 4 e 78. Assume further that S Contipany in its statement of. nancial position cape 7 (aussie 14-8) has a goodwill of P50,000 and the retained earnings balance is P170,000. The revised statement of financial position of § Compa isiti would beas follows: Position of $ Company on the date of acquisition SCompany .. 3s __ Statement of Financial Position - December 1, 2017 Assets “Book Value —_‘Fair Value Accounts receivable mie P 40,000, P 40,000 Inventory 3 “A 100,000. 110,000 Land 80,000 130,000 Buildings (net) 300,000 500,000 Equipment (net) ; 80,000 120,000 Goodwill j 50,000, Total assets P 650,000 _P_ 900,000 Liabilities and Equity. , y Accounts payable s P 80,000 ne ne Bonds payable amano": ede i liabilities P_280,000 Pp 280,000 tockholders' Equity: - , ‘ Common stock, P1 par ' P. nO Additional paid in capital - 10 000 Retained earnings v 2 Total equity P_ 370,000 ‘370,000, P620,000 Scanned with CamScanner90 Assume that P C coe 80% (16,000 ‘ompany issued 16,000 shares of i 000 shi 000 shares of its P Company's shaken: the outstanding shares of S eat The fair value of? ‘ompany also pays P: eo ithe fair value of the 20% NCIis assessed to be P200,000. Company would make the 100 in professional fees to accomplish the acqui: ition. P () Torecord ty e the following entries: : ee 1; 1¢ acquisition of S Company stock: vestment in S Company (16,000 she 5 es x P50) Common stock (16,000 shares P10) i 800,000 160,000 iditional paid in capital 640,000 (2). Torecord acquisition-related costs: Retained earnings — P Co. (Acquisition expense) 50,000 Cash 50,000 Computation and allocation of the goodwill: Foal Parent Price NCTVahue FairValue (80%) (20%), Company fair value 1,000,000 P 800,000 —P200,000 Fair value of net assets excluding goodwill 620,000 496,000 124,000 Goodwill P_ 380,000 P304,000 —_—~P_76,000 ‘The Determination and Allocation of Excess Schedule is as follows: Total Parent NCI ® Fair Value (80%) (20%) Fair value of subsidiary . P1,000,000 800,000 200,000 Less book value of interest acquired: Common stock ~ P. 20,000 ‘ ‘Additional paid in capital 180,000 Retained earnings 170,000 Total equity P 370,000 370,000 370,000 Interest acquired a 80% 20% Book value 296,000 P_74,000 Excess ¢ P 630,000 504,000 126,000 Adjustment of identifiable accounts: . oo Inventory P110,000 FV— P100,000BV) P (10,000) Land (P130,000 FV — 80,000 BV) (50,000) Buildings (P500,000 FV-P300,000 BV) (200,000) Equipment (P120,000 FV—P80,000BV) ” 40,000) Total _ P( 300,000) Goodwill : P330,000 Scanned with CamScannererrr rer mre erratic Consolidated Statement of Financial Position The working paper elimination, £(1) Common stock ~S Company Additional paid in capital — Retained earnings — S Company Investment in S Company Company Non-controlling interest (NCI) EQ) Inventory Land Buildings Equipment Goodwill » (380,000 ~ P50,000) investment in S Comp Non-controlling interest (NCI) te of Acquisition 91 entries based on the D & A of excess schedule are: 20,000 180,000 170,000 296,000. - 74,000 10,000 50,000 200,000 40,000 330,000 504,000 126,000 ‘The consolidation working paper with the corresponding changes is as follows: P Company and Subsidiary Consolidation Working Paper December 1; 2017 2 as Consoli- Company |-- Company Debit, Credit dated Cash P, 168,000} P — -0- P 168,000 ‘Accounts receivable 144,000 | 40,000 184,000 Inventory 160,000 100,000 (2) 10,000 270,000 Land 200,000 80,000 | (2) 50,000 330,000 Building 840,000 | 300,000 | (2)200,000 1,340,000 Equipment 400,000 | 80,000 | (2) 40,000 520,000 Investment in $ Company | - 800,000 : (1) 296, eat 7 (2) 5 0 - Goodwill 30,000 | (2)330,000 380,000 Total 2,712,000 | _P650,000_| 000 Liabilities and Equity . Accounts payable , P 160,000 | P 80,000 P 240,000 Bonds payable | 400,000 | 200,000 600,000 Common stock: P Company 560,000 560,000 $ Company 20,000 | (1) 20,000 Additional Paid in Capit « P Company 1,140,000 1,140,000 Company 180,000 | (1) 180,000 . Retained earnings i P Company 452,000 52008, § Company 170,000 | (1)170.009 | a4 000%} 206,000 NCI to consolidated Al Oy 1260 oe : San Total p2,712,000 | P650,000 | P1,000,000 | Pt.0d0,000 | _P3,192,000 x Scanned with CamScanner92 oe ante Chapter 14 STEP-ACQUISITION A business combination may involve more than one exchange transactions, that is when there are successive share purchases. This is often knownas a step-acquis! ition, where the purchases of blocks of shares in an investee are made at different points in time. The ~ additional blocks of shares are purchased from other shareholders either through the open market (if the investee is listed) or through private arrangements' (if the investee is unlisted). As such, there is usually no change in the equity capital of the subsidiary. The original IFRS 3 (2004) required that when a business combination involves more than one exchange transaction, i.e. when it is achieved in states of successive share purchases: 2 (a) thecostof the combination is the aggregate cost of the individual transactions; (b) the date of exchange is the date of each exchange transaction (Le. the date that each individual investment is recognized in the financ! acquirer), whereas the acquisition date is the date in which the control of the acquire. al statements of the acquirer obtains The original PFRS 3 further required that each exchange transaction shall treated separately by the acquirer, using the cost of ‘transaction and the fair value information at the date of each exchange transaction, to determine the amount of any goodwill with that transaction. This resulted in a step-by-step comparison of the cost of the individual invéstinents with the acquirer's interest in the fair value of the net assets at each step. In other words, it was then necessary to compare the cost of investment of each block of shares purchased with its share of the underlying net assets of the subsidiary at each transaction date, i.e., the goodwill ina step-acquisition was determined ona piecemeal. basis. The goodwill determined for each of the various steps was then aggregated for presentation on the consolidated statement of financial position. Fair Valuing Previously Held Stake Therevised IFRS 3 (2008) requires that ina business combination achieved i stages c S 3 ( o mbinati the got oft copnbipation Shall include any equity interest in the aiestetes achieet oa snus ean the acquisition date. It further requires that the acquirer shall Mae C Consequently, oa ei said inthe acquiree at fair value as of the acquisition _ held equity investment shall berecognized in oi loss, ow Scanned with CamScannerConsolidated Statement of Financial Posi, : sition — Date of Aoquistt 2 jon 93 For example, ifthe equity interest an a measured reliably, that cost carrying amount remeasured to its fair value acquisition date and any difference shall be eel in profit ee = As previously discussed, under the revised IFRS 3, when th ‘previously equity interests ‘atthe date controls otiiod the yo vl on coabianoa acaleied as the excess of (a).over (b) below: (a) theaggregate of: : (@)._ the fair value of the consideration transferred; @ the amount of any non-controlling interest in the acquiree measured at fair value or at the non-controlling interest's share of net asset; and (i) the acquisition-date fair value of the acquirer's previously held equity interest intheacquiree. oe (b) thenet of the acquisition-date amounts of identifiable assets acquired andthe © liabilities assumed. Thus, instead ofa step-by-step comparison of cost of ‘purchase with share of net assets (under the original IFRS 3) to determine goodwill on each step, the goodwill on combination under the revised Stahdard is calculated only once i.e. atthe date cont isobtained and this may include non-controlling interests share of goodwill. . Scanned with CamScanner94 Chapter 14 Mlustration: PInc. made the following purchases of equity shares in $ Inc.: 7, Balances in of shares Cost retained earnings (000) _{p'000) (1000) January 1,2015 10,000 15,000 20,000 January 1, 2016 15,000 40,000 Pret January 1,2017 30,000 75,000 50,000 55,000 130,000 The summarized statements of financial position (other format) of the two companies for the year ended December 31 » 2017 areas follows: 7m Pinc. SIne. ; , (P'000) (P'000) Property, plant and equipment 200,000 100,000 Investment in S Inc. < 130,000 - Current assets ; 70,000 150,000 400,000 250,000 Common shares of P1 each 200,000 100,000 Retained earnings 120,000 80,000 Current liabilities 3 40,000 50,000 Non-current liabilities 40,000 50,000 400,000 250,000 In prior years, P Inc. had no influence in § Inc. and the investment in S$ Inc. was measured at cost because its fair value then could not be measured reliably. On January 1, 2017, P Inc. assumed control of $ Inc. 5 It is the policy of the group to measure non-controlling interest at acquisition date fair ae On January 1, 2017, the fair value of the common shares of S Inc. was P2.50 per share. a Scanned with CamScannerConsolidated Statement of Financial Potton Date of Acquis lcquisition 95 Goodwill on Combination Based on the data on page 94, the goodwill o: (Under the original IFRS 3: 1 combination is computed as follows: Jan. 1, 2015" Jan.1, 2016 2 21 Jan.1,2017 Tota (P'000) (000) ('000) 00) Cost of purchase (a) 15,000 40,000 75000. Share of net assets: : : Share capital i ‘ 100,000 Pre-acquisition profits" one 1 soa Net assets Aare 120,000 Per cent stake 10% eG oom Share of net assets (b) 12,000 19,500 45,000 Goodwill on combination (a-b) 3,000 20,000 «30,000 - 53,500 The group's retained eamings at December 31, 2017 can be calculated as follows: ; ¢ (P'000) Parent's retained earnings fe 120,000 Share of post-acquisition mn profits of S Inc.: 10% x(80,000-—20,000) - 6000 15% x (80,000-30,000) ‘ 7,500 30% x(80,000-50,000). ss, OE ee 142,500... Total The non-controlling iriterest at December 31,2017 is 81,000 (45% x 180,000). (ii) Under the revised IFRS 3: © : : Parent NaI .. Total * (55%) (45%) (P'000) (P'000) (P'000) Aggregate of: 4 Fair value of consideration transferred (30%) 75,000 75,000 : NClat acquisition date fair value (45% x 250,000) 112,500 12,500, Fair value of previously held state (25%x 250,000) 62, 2 62,500 aan Fair value of S Inc. as a whole 250,000 137,500 Net assets acquired: 100,000 ne capital : S00 acquisition profits aD a a fi 150,000 82,500 67,500 100,000. 55,000 45,000 Goodwill on combination 2 — Scanned with CamScanner96 Chapter 14 The group's retained earnings at December 31, 2017 can be calculated as folows: (P000) 120,000 Parent's retained earnings Gain on re-measurement of previously held stakes: a )10,000x P2.50—P15,000 10, 15,000 xP2.50—P40,000 (2,500) Share of post-acquisition profits of S Inc. 55%x (80,000-50,000) ‘ es P 9 Current liabilities (P600 + P300) iso Non-current liabilities (P1,100 + P400) Total liabilities 2,400 Stockholders’ Equity : ‘ 4 Common stock, 150 shares, P1 par 2 P 15 Additional paid in capital ety 450 Retained earnings © 1,400) Controlling interest P2,000 Non-controlling interest (NCI) 1,600 3,600 Total liabilities and equity 6,000 The following features of the consolidated statement of financial. position should be noted: * Theconsolidated statement of financial position is in the name of Public Company, » fhe legal parent. ; . he consolidated equity accounts balances at date of combinati h Private Company only (legal subsidiary). nation pent . HAE 1scomputed as follows: ‘otal paid in capital of Private C Net shares issued (150 shares x Pl pany F240) APIC ~ * TheNClrepresents inj i = as follows: theremaining shares ofthe Original Public Company, computed Common stock (100+ P150) APIC [P200 + (P1600 x 60%) _ Retained earnings °°”) PISO] Controlling interest (P1,100 x 60%) : Adjustment of non-current Total NCI massets and goodwill [(200 + 300) x 40%] RAC COLLEGE LIpRaR Scanned with CamScanner