CONSOLIDATION: ONE YEAR AFTER ACQUISITION

Note: Each time a Consolidated Financial Statement is prepared, ASSUME that it is the FIRST TIME
preparation of Consolidated F.S. In CONSOLIDATED FS, Parent and Subsidiary are VIEWED as ONE entity.
Meaning, ANY transactions between the Parent and Subsidiary must be elimimated.

FV C.I.(controlling Interest/ PARENT(P))

Add: FV NCI (not be less than B.V. of SHE of S)
TOTAL FAIR VALUE [of Subsidiary(S)]

Using that formula, we can observe that in Consolidation, the Subsidiary is measured at F.V. Therefore,
Fair Value measurement of the Subsidiary(S) must be done EVERYTIME CONSOLIDATED FINANCIAL
STATEMENTS are prepared.

The F.V. measurement of the Subsidiary(S) must be the:

INITIAL measurement(@date of Acquisition)

Add: Results of Operations of Subsidiary(S) .
FAIR VALUE OF SUBSIDIARY -ENDING BALANCE

Needless to say, that FV of S – End is to be allocated to C.I. and N.C.I.

ONE YEAR AFTER ACQUISITION: CONSOLIDATED F.S.

The ONLY Consolidated F.S. prepared at the DATE of ACQUISITION is the Consolidated B.S.
A Consolidated Income Statement is ALSO prepared on the SUBSEQUENT preparation(s) of consolidated
FS.

The main problem here is how to prepare consolidated income statement and what are the effects of
the operations of S in the consolidated BS.

ANALYSIS OF THE EFFECTS OF OPERATIONS OF S ON THE CONSOLIDATED B.S.

Using the Formula in the previous lecture:

B.V of SHE of S
Common Stock (CS) Pxx
APIC xx
RE xx Pxx
F.V. adjustments on Assets of S xx
Goodwill/(Gain) xx
TOTAL CONSIDERATION (F.V. of S) Pxx

The FV of the Subsidiary(S) is composed of three amounts:

 1. BV of NET ASSETS (SHE) of S
2. FV adjustments on Assets of S
3. Goodwill/(Gain)

To compute the F.V. of S:

BV of Net Assets(NA) of S
Add: FV adjustments on Assets of S
Goodwill/(Gain) .
Total F.V.(date of acquisition) of S
Add: Cumulative Effects of Operations of S
Total F.V. of S – End

The TOTAL F.V. of S-END will be allocated to CONTROLLING INTEREST(CI) and NCI in accordance to their
percentages.

Observe that the cumulative effects of operations of S is the only reason that changes the F.V. of
Subsidiary.

Don’t forget that a Consolidated F.S. is to be prepared here, meaning, some EFFECTS of operations of S
is not found in the BOOKS of subsidiary.

Those effects came from the ADJUSTMENTS TO F.V. on ASSETS OF S. Remember that F.V.
measurements in the Net Assets of Subsidiary will reflect ONLY in Consolidated FS.

Normally, there are three(3) major changes in the SUBSIDIARY resulting from its operations:
1. R.E. due to Net Income of Subsidiary (NIS). This is already recorded in the books of Subsidiary.
2. R.E. due to dividends distributed by S to its owners(CI and NCI). Already recorded in the books of
Subsidiary AND Parent but needs to be ELIMINATED.
3. Amortization (Depreciating/Charge to COGS) of FV Adjustments on Assets of S.
It is Not recorded in any books and therefore included in the ELIMINATION ENTRIES.

Dividends Declared by the Subsidiary

Accordingly, any transactions between the Parent and Subsidiary must be eliminated.
The subsidiary will record back the Dividends declared. And the Parent will remove the Dividend
Income. The difference will reduce the NCI.

FV Adjustments on Assets of S
It is determined at the date of acquisition. The Fair Value of Assets is identified on item by item basis.

Each Asset @ FV Pxx

Less: Each Asset @ BV xx
Fair Value Adjustment Pxx(xx)
The Fair Value Adjustment is also called Excess Attributable to Identifiable Assets.

The Excess Attributable to Identifiable Assets must be AMORTIZED subsequently.

If the excess is from Depreciable Asset, the excess must be AMORTIZED also in the manner how the
asset is depreciated.

IF the excess is from Inventories, the excess must be AMORTIZED in proportion to the inventories sold.

All of the excess will be expensed if the asset is sold.

All entries related to the Excess Attributable to Identifiable Assets must be found in Elimination Entries
only.

As a result, the Total Amortization of excess attributable to identifiable assets will be adjusted to Net
Income of Subsidiary in Consolidation purposes only.

All of the effects above must be reflected to Consolidated R.E. to compute the F.V. of S-END.

CONSOLIDATED NET INCOME of SUBSIDIARY(NIS)

Entity Approach
Net Income of P Pxx
Less: Dividends from S xx
NI of P own operation Pxx
Add: NIS Px
Less: Amort of Excess x xx .
Consolidated Com Income Pxx
Less: NI of S Attri to P* xx
NCI in NIS Pxx

*Net Income of S attributable to Parent

[Net Income of S minus Amort of excess]
Multiply: percentage of CI(control. Int)
Net Income of S attributable to P

Note: Amortization of excess must be the current year amortization.

ELIMINATION ENTRIES

E(1) C.S. -S PXX

APIC -S X
R.E. -S X
Investment in S PXX
 NCI XX
Note: C.S., APIC and R.E. are @BV. R.E. must be the BV @ the DATE OF ACQUISITION

E(2) ASSETS(FV>BV) Pxx

Goodwill(if goodwill) x
ASSETS(FV<BV) Pxx
Investment in S x
NCI x
GAIN(if gain) x

E(3) Dividend Income PXX

NCI X
Dividends-S PXX
Note: Dividend Income is the dividends receive by P from S. Dividend-S must be the total dividends
declared by S.

E(4) Depreciation Expense PXX

Cost of Sales X
Accum Dep PXX
Inventory X
Note: this is to record the amortization of excess

E(5) NCI in NIS PXX

NCI PXX
Note: NCI in NIS is computed above.

CONSOLIDATED BALANCE SHEET

1. Combine the Assets of P and S

2. Combine the Liabilities
3. Use the SHE of the PARENT ONLY
4. Apply the effects of elimination entries
5. Establish new SHE account, name it NCI
6. All income and expense on the elimination entries are added/deducted to R.E. of P
7. NCI in NIS will be deducted to R.E. of P.
8. C.S.-S, APIC-S, R.E.-S and Dividends-S in elimination entries are ignored.