PFRS 3 AND PFRS 10

INTRODUCTION/OVERVIEW
Consolidation/Group Reporting (Related Accounting Standards)
o PAS 27 – Separate Financial Statements
- Focus specifically on how to present separate FS by the investor/parent (>50% ownership or control over
subsidiary)
o PAS 28 – Investment in Associates
- Focus specifically on how to account transactions of investor/parent (>20% ownership or significant influence
over an associate)
- Equity method
o PFRS 3 – Business Combinations
- Defines business combinations
- Recognition and measurement on how to treat goodwill / non-controlling interest / identifiable
assets/liabilities acquired
o PFRS 10 – Consolidated Financial Statements
- Defines control
- When the acquiree exercises control over its investments
- Requires the parent or the investor to present consolidated FS
- Consolidation procedures that the investee must follow when preparing consolidated FS
- Exceptions: E.g. Investment entities, that are not required to prepare consolidated FS
o PFRS 11 – Joint Arrangements
- Activities that are jointly executed by parties
- 2 Types: Joint ventures and Joint arrangements (Defines specific accounting treatment for these types)
o IFRS 12 – Disclosure of Interest to other Entities
- Prescribes disclosures for subsidiaries, associates, joint arrangements, and others
Types of Investments

Types of Investments Subsidiary Associate Joint Arrangement

Criteria Control Significant influence Joint Control
Shares >50% >20% N/A

Other Notes:

 Even if the interest of the parent/investor does not reach >50% (only an indicator not absolute) of the investee but there is an existing control over its
significant operations, the investment must be accounted under investment in subsidiary.
 Significant influence means the power to participate and not to control
 If the investment is 20% or less (other than stated on the table above) will be accounted in accordance with PFRS 9 or PAS 39 Financial Instruments. -
Affiliates

Definition of terms:

 Parent/Holding Company – owns outstanding stock of other companies/ usually does not produce goods or services itself. Its main purpose is to own shares
of another company to form a group.
PART 1: BUSINESS COMBINATIONS (PFRS 3)
Objective: Improve relevance, reliability and comparability of information about business combination and its effects.
Principles for:
o Measuring assets, liabilities, non-controlling interest
o Recognizing goodwill
o Disclosures
Other Notes:

 Assets and liabilities must need to constitute a business

 A business must have 3 elements (INPUTS: e.g. PPE/inventories, PROCESS: e.g. production/workforce, OUTPUTS: dividends/cost savings)

Types of Business Combination

1. Merger/Acquisition
- E.g. Company A + Company B = Company A or B
Other Notes:

 Examples of Successful Company Mergers and Acquisitions:

Disney and Pixar / Marvel Acquisition
In 2006, Walt Disney Co. acquired Pixar for $7.4 billion. Since then, movies such as Finding Dory, Toy Story 3, and WALL-E, have generated billions in
revenue. Three years after the Pixar acquisition, Disney’s CEO Bob Igner, set out to acquire Marvel Entertainment for $4 billion.

Considering 11 Marvel movies have brought in more than $3.5 billion since the acquisition, and is a good example of a successful acquisition across all
fronts. In fact, it is often hailed as one of the top mergers and acquisitions for a few key reasons. One, Disney gained access to Pixar’s more advanced
technology, which created value, and two, Disney did not destroy what made Pixar specific (i.e. Pixar’s culture) when the two companies came together.
Google and Android Acquisition
In 2005, Google acquired Android for an estimated $50 million. At the time of the deal, Android was an unknown mobile startup company. The move made
it possible for Google to compete in a market owned by Microsoft with Windows Mobile and Apple’s iPhone. This deal is one of Google’s biggest M&A
deals because 54.5% of U.S. smartphone subscribers use a Google Android device as of May 2018.
Reference: https://dealroom.net/blog/successful-acquisition-examples
2. Consolidation
- E.g. Company A + Company B = Company C
- Company A (Separate FS) + Company B (Separate FS) = Company C (Consolidated FS)
Acquisition Method
STEP 1: Identify the acquirer
- e.g. Merger, either large company acquires smaller companies or vice versa – reverse acquisition
STEP 2: Determine the acquisition date
- The date parent starts to acquire control over subsidiary and use acquisition method
STEP 3: Recognize assets, liabilities, and non-controlling interest
- Recognize assets and liabilities at acquisition date at fair value
- Fair value adjustments are necessary
- Recognize subsidiary’s unrecognized assets and liabilities
- Non- controlling interest (minority interest): equity in subsidiary that is not attributable directly or indirectly
to the parent (see example below)
Example:

Types of InvestSubsidiary
Criteria Control
Shares >50%
 Types of InvestSubsidiary
Criteria Control
Shares >50%

- Method 1: Its proportionate share of the fair value of the subsidiary’s net assets
- Method 2: Full fair value – based on the market value of shares held by NCI (affects goodwill)
STEP 4: Recognize goodwill
- Goodwill: Asset representing future economic benefits arising from other assets acquired in a business
combination that are not individually identified and separately recognized

Types of Investments Subsidiary Associate Joint Arrangement

- Example: Parent pays 100,000 for FV of subsidiary’s net assets worth 80,000, the goodwill would be 20,000.
Other Notes:

 >0 = Goodwill (Capitalize as part of other assets for annual impairment review)
 <0 = Negative Goodwill or Gain on Bargain purchase (P/L)

PART 2: CONSOLIDATED FINANCIAL STATEMENTS (PFRS 10)

Objective: Establish principles for presentation and preparation of consolidated financial statements when an entity
controls one or more entity.
- Requires parents to prepare consolidated FS
- Defines control
- Accounting requirements for preparation of FS and outlines the procedures you need to follow
Control
- An investor controls the investee when the investor exposed or has rights to variable returns from its involvement
on investee (subsidiary)
- Has the ability to affect returns through its power over the investee
Power
- Existing rights that give the current ability to affect the relevant activities of the investee
- Relevant activities: substantively affect the investees return (e.g. purchasing decisions, research and development)
Consolidated Financial Statements
- Financial Statements of a group presented as those of a single entity
- E.g. Company A + Company B = Company C
- Company A (Separate FS) + Company B (Separate FS) = Company C (Consolidated FS)
- Must follow consolidation procedures plus accounting requirements in making consolidated FS (e.g. uniform
accounting policies, different reporting dates of parent and subsidiary, presentation of NCI, interest in ownership
Accounting requirements
Consolidation Procedures:
STEP 1: Combine like items of assets, liabilities, equity, income, expense, and cashflows of parent and subsidiary
STEP 2: Offset (Eliminate) the carrying amount of parent’s investment in subsidiary and parent’s portion of equity of
each subsidiary.
STEP 3: Offset or eliminate in full the intra-group assets, liabilities, equity, income, expenses and cashflows relating to
transactions between companies in the group.
Other Notes:

 In point of view of the external users to the group, as if there is no transaction.

Example: (To be discussed in detail, please download practice discussion excel sheet on your Microsoft teams)
MATANDA Corporation owned 80% of shares of BATA Corporation. Below are the statements of financial position of
both MATANDA and BATA at December 31, 2020. NCI is assessed to be 100,000. Prepare the consolidated statement of
financial position of MATANDA Corporation at December 31, 2020.
IF: NCI is measured at its proportionate share of Bata’s net assets.
IF: NCI is measured at Full fair value – based on the market value of shares held by NCI

Matanda Corporation Bata Corporation

ASSETS
Current Assets
Cash and cash equivalents 20,000.00 5,000.00
Trade and other receivables - Bata Corp 8,000.00
Other receivables 30,000.00 18,000.00
Inventory 55,000.00 34,000.00
Non-current Assets
Property, plant and equipment 120,000.00 90,000.00
Investment in Bata (64,000 shares) 70,000.00 -
Goodwill (acquired in business combi)
Other assets 4,000.00

LIABILITIES AND EQUITY

LIABILITIES
Current Liabilities
Trade Payables - Matanda Corp (8,000.00)
Other payables (35,000.00) (12,000.00)
Loan repayable within 12 months (10,000.00)
Non-current Liabilities
Finance lease liability (2,000.00)

EQUITY
Equity attributable to owners of the parent
200,000 shares (1 peso each) (200,000.00)
80,000 shares (1 peso each) (80,000.00)