BSA 3203: Accounting for Business Combination (Transcribe: March 16, 2021)

Module 3: Consolidated
Financial Statements (Part 1)
Usage of PFRS 10
 PFRS 10 prescribes the principles for the preparation and the presentation of the consolidated
financial statements.
 PFRS 10 is the applicable standard with respect to consolidated financial statements.

Definition of Terms (PFRS 10)

 Parent – An entity that controls (have exercising control over) one or more entities.
 Siya yung acquirer (since siya ang may control) acquiring entities for its
advantages
 nakadepende ang movement ng entities sa kanya kung ano ang gusto niyang
mangyari
 Subsidiary – An entity that is controlled by another entity.
 Also known as the Acquiree
 The entity to which the parent has control with.
o In short, may control si parent over kay subsidiary.
 These are the companies that were acquired by the parent or the acquirer
over the business combination.
 Group – A parent and its subsidiaries.
 In one group, there can be more than one subsidiary
o Ang importante lang naman is makapagexercise ng control si parent
over the entities that are affiliated companies (or the subsidiaries).
 Consolidated financial statements
– The financial statements of a group in which the assets, liabilities, equity, income,
expenses and cash flows of the parent and its subsidiaries are presented as those of a
single economic entity.
 By virtue of a single economic entity, a single set must be prepared on a
financial statement for the use of the users.

Note: In the previous topic – business combination (Module 2), the acquirer acquired companies
using either stock acquisition or asset acquisition.
Kapag asset acquisition – nagkakaroon ng automatic consolidation kasi automatically
marerecognize yung acquired asset and assumed liabilities ng isang entity once the
acquirer acquired the acquiree. Having said that, nung inacquire na – the acquirer would
immediately record in its books yung asset acquired and liabilities assumed, kaya siya
tinawag na automatic consolidation.
Pero kapag stock acquisition, hindi ganon ang nangyari. Dito kasi ang inacquire lang ay
shares of stock – yung mga voting shares, that would give the acquirer the controlling
voting rights dun sa entity na inacquire. In this case, there are two existing separate legal
entities (parent and subsidiary) – at the date of the preparation of the financial statements,
it is required by PFRS 10 to prepare a consolidated financial statement.
 BSA 3203: Accounting for Business Combination (Transcribe: March 16, 2021)

Preparation of Consolidated FS
 Now, with respect to the preparation on the consolidated financial statements;
o PFRS 3 deals with the accounting for a business combination at the acquisition date;
while
o PFRS 10 deals with the preparation of the consolidated financial statements after the
business combination.

 [GENERAL RULE] A parent entity is required to present consolidated financial statements,

[EXCEPTION] except when all of the following conditions are met:
a. The parent is a subsidiary of another entity and all its other owners do not object to the
parent not presenting consolidated financial statements;
 Si parent ay isang subsidiary din ng ibang entity, ibig sabihin may iba pang
company na nagcocontrol sa kanya other than itself.
 Example:

o Exception (#1) can be applied kapag sinabi ni B na ayaw niyang

magpresent ng consolidated FS (B and C consolidated FS) AND
hindi nagobject si A.
o Note that dapat sa simula ay ayaw ni B na magpresent ng
consolidated financial statement – kasi the parent (B) “MAY NOT”
present the consolidated FS, so discretionary ni B sa simula.
o But if ayaw ni B magpresent ng FS at nagobject si A – since may
control si A kay B, then B would have to forcefully present the
consolidated FS – “all its other owners DO NOT object”
b. The parent’s debt or equity instruments are not traded in a public market (or being
processed for such purpose); and
 They are not selling securities in the public, they are not in the process of selling
securities to the public through initial public offering, for which there is no public
accountability involved.

c. The parent’s ultimate or any intermediate parent produces consolidated financial

statements that are available for public use and comply with PFRSs.

o A is an ultimate parent of B and C

o C’s intermediate parent is B
o Exception (#3) can be applied if si A (ultimate parent) or if si B
(intermediate parent) ay naglabas na ng consolidated FS that are
available to the public in compliance with the PFRSs.
 BSA 3203: Accounting for Business Combination (Transcribe: March 16, 2021)

Elements of Control
Remember: The basis for consolidation is control
 Bago makapagprepare ng consolidated
financial statement there must be first and
foremost the existence of control.
 Without control, then there would be no
consolidation

 Control exists if the investor has all of the following:

 PFRS 10 requires an investor to determine whether it is a parent by assessing the
following: (These three must be present to gain control)
1. Power over the investee;
2. Exposure or rights, to variable returns from its involvement with the investee;
and
3. The ability to use its power over the investee to affect the amount of the
investor’s returns.

POWER over the investee

 When the investor has existing rights that gives the current ability to direct the investees
relevant activities.
 Kapag merong kakayahan si investor na idirect ang relevant activities ni investee company –
then merong power and hence may control
 “Relevant Activities”
o Activities of the investee that significantly affect the investees returns
o The investor’s current ability to direct the investees relevant activities is often evidence
by the investors ability to establish and direct the investees operating and financing
policies.
o Nakafocus don sa operating and financing policies ni investee company – kung may
kapangyarihan si investor na magkaroon ng affect itong operating and financing
policies ni investee to bring to his (to the investor’s) advantage then there is power.
o Example for decisions affecting relevant activities:
 Establishing operating and capital decisions of the investee, including the budgets
 Appointment and remuneration of investees key management personnel or
services providers
 Terminating the investees services or employment
 Power arises from rights, and may be obtained directly from the voting rights conferred by the
shareholders. However, power may also arise from other sources, such as contractual
arrangements.
o Example of rights in the form of voting rights – this will give rise to power to appoint,
reassign, or remove members of an investee’s key management personnel

Exposure or rights, to VARIABLE RETURNS from its

involvement with the investee
 “Variable Returns”
o Ang returns kasi na pinaguusapan ay mula sa operations – which is not the same
every year or is never fixed.
 BSA 3203: Accounting for Business Combination (Transcribe: March 16, 2021)

 When an investor has exposure or rights to these variable returns, because of its
involvement or its transaction with this investee company, then there is control.
 BSA 3203: Accounting for Business Combination (Transcribe: March 16, 2021)

The ability to use its power over the investee to affect the
amount of the investor’s returns.
 The investor is using its power to direct the relevant activities so that he can affect the
investees returns for his benefit
 Meron siyang right/ability to direct the investees operating and financing policies.

Accounting Requirements
 The financial statements of the parent and its subsidiaries used in preparing consolidated
financial statements shall have the same reporting dates. (The maximum difference in
reporting dates is 3 months.)
 If a parent and a subsidiary reporting periods do not coincide, the subsidiary will be
the one to adjust. The subsidiary shall prepare financial statements that coincide with
the parents reporting period before consolidation.
 If it is impracticable to do so, the subsidiaries financial statements shall be adjusted
for significant transactions and events that occur between the end of the subsidiaries
reporting period and that of the parent.
 The difference between the parents and the subsidiaries end of the reporting periods
shall not exceed three months.
 Pinapayagan ni PFRS 10 na wag nang magprepare ng bagong financial
statements basta yung difference ng date ng subsidiary at parent ay hindi
lalagpas ng 3 months. 3 months ang maximum difference.
 Kapag lumagpas sa 3 months, either magaadjust si subsidiary (if impractical) or
gagawa siya ng bagong financial statement with respect sa date of the reporting
period ni parent.

 Consolidated financial statements shall be prepared using uniform accounting policies.

 If the subsidiary uses different accounting policies, its financial statements need to be
adjusted to conform to the parents’ accounting policies before they are consolidated.
 Example Scenario
o Let’s say na yung parent entity ay gumagamit ng revaluation model to measure
it’s PPE pero yung subsidiary is gumagamit ng cost model.
o In that scenario, magaadjust or magcoconvert si subsidiary with respect dun sa
kanyang policy on its measurement sa PPE at gagawing revaluation model para
tugma sa policy na ginagamit ni parent before na magkaroon ng consolidation.

 Consolidation BEGINS from the date the investor obtains control of the investee and CEASES
when the investor loses control of the investee.
 Example Scenario:
o July 1, 2021 = nakapagobtain ng control si A (which shall be the investor) over
kay B (which shall be the investee). The group's consolidated financial statement
for the year ended December 31, 2021 will only include the investees result of
operations from July to December 31.
 Kasi nga ang consolidation ay magsisimula lamang magmula kung kelan
siya nakapagobtain ng control.
 Yung period ng January 1 to June 30 = hindi pa nakakapagobtain ng
control si A, so hindi yun kasama sa consolidation report.
 BSA 3203: Accounting for Business Combination (Transcribe: March 16, 2021)

Measurement
 Income and expenses of the subsidiary are based on the amounts of the assets and liabilities
recognized in the consolidated financial statements at the acquisition date.
 Let’s say ang pinaguusapan ay Depreciation Expense sa consolidated financial
statements. Ang depreciation na icocompute ay based sa fair value ng asset nung
acquisition date rather than it’s carrying value in the accounting records of the
subsidiary.
 Kasi nga diba, in business combination – we recognize the fair value of the assets
acquired, so, subsequent to that – kapag magaamortize or depreciate na – nakabased
dapat yun sa fair value ng asset recognized in the consolidated financial statements at
the acquisition date.

 Investments in subsidiaries are accounted for in the parent’s separate financial statements
either:
a. at cost;
 The investment in subsidiaries is initially measured equal to the value assigned to
the consideration transferred at the acquisition date and subsequently measured
at that amount unless the investment becomes impaired.
 Yung initial measurement and subsequent measurement ay parehong at
cost – magiiba lang ang subsequent measurement kapag nagkaroon na
ng evidences suggesting that the investment account is impaired.

b. in accordance with PFRS 9 Financial Instruments; or

 In accordance with PFRS 9, the investment in subsidiary is initially measured
equal the value assigned to the consideration transferred at the acquisition date
and subsequently measured at fair value.
 Kung magkano ang initial measurement – at the end of the reporting
period, you will now get the fair value of the investment. You have to
remeasure the investment equal to its fair value.

c. using the equity method.

 The investment in subsidiaries initially measured equal to the value assigned to
the consideration transferred at the acquisition date and subsequently increase or
decrease for the investor share in the changes in the investee’s equity.
 Merong fluctuating balance yung equity method compared sa (a) and (b).

NCI in Net Assets of the Subsidiary

 Non-Controlling Interest (NCI) is equity in a subsidiary not attributable directly or indirectly to a
parent. This pertains to the portion of the voting shares, not acquired/controlled by the parent.
 Non-controlling interests shall be presented in the consolidated statement of financial position
within equity, separately from the equity of the owners of the parent.
 Non-controlling interest in the net assets consists of:
1. The amount determined at the acquisition date using PFRS 3; and
2. The NCI’s share of changes in equity since the acquisition date
 BSA 3203: Accounting for Business Combination (Transcribe: March 16, 2021)

NCI in Profit or Loss and

Comprehensive Income
 The profit or loss and each component of other comprehensive income in the consolidated
statement of profit or loss and other comprehensive income shall be attributed to the following:
Note: “Attribute” = hahatiin
1. Owners of the parent
2. Non-controlling interests
 Total comprehensive income is attributed to the owners of the parent and the non-controlling
interest, even if this results in the non-controlling interest having a deficit (negative) balance.

Preparing the
Consolidated financial statements
 Consolidated financial statements are prepared by combining the financial statements of the
parent and its subsidiaries line-by-line by adding together similar items of assets, liabilities,
equity, income, and expenses.
Example Scenario: “line-by-line”
 Si parent ay may cash na 10,000 at si subsidiary ay may cash na 5,000, ang
consolidated balance following the line-by-line is 15,000.
 If ang Accounts Receivable naman ay 30,000 kay parent at 12,000 kay subsidiary –
then ang consolidated balance following the line-by-line is 42,000 Accounts Receivable.
 “line-by-line” = Analysis PER ACCOUNT

Consolidation at Date of Acquisition

1. Eliminate the “Investment in subsidiary” account. This requires:
a. Measuring the identifiable assets acquired and liabilities assumed in the business
combination at their acquisition date fair values.
b. Recognizing the goodwill from the business combination.
c. Eliminating the subsidiary’s pre-combination equity accounts and replacing them with the
non-controlling interest.
 Elimination of the investment in subsidiary account is eliminated against the equity
out of the subsidiary.
 Why? Kasi iisa lang dapat ang lalabas na equity – yung kay parent and NCI lang,
wala na dapat iba since sila ang may ari (equity owners).
 Yung kay subsidiary – ang nagmamay ari (yung may control) ay si parent, so if
nilagay yon doble ang ownership ni parent, dapat isang buo lang.
 With respect sa NCI, kailangan siya ilagay dun kasi possible na hindi lahat ay
pagmamay ari ni parent. Let’s say na 80% ang ownership ni parent – so yung equity
ay attributable lang sa kanya ay 80%, the other 20% should be reflected kay NCI.

2. Add, line by line, similar items of assets and liabilities of the combining constituents.
 BSA 3203: Accounting for Business Combination (Transcribe: March 16, 2021)

Consolidation
Subsequent to Date of Acquisition
Step 1: Analysis of effects of intercompany transaction
Step 2: Analysis of net assets
Step 3: Goodwill computation
Step 4: NCI in net assets computation
Step 5: Consolidated retained earnings computation
Step 6: Consolidated profit or loss computation
Step 7: Computation for profit or loss attributable to the owners of the parent and to NCI

Step 1: Analysis of effects of intercompany transaction

 This is relevant when the parent and subsidiary had intercompany transactions during the
period or in the previous periods. This is discussed in the next chapter.
“Intercompany Transaction”
 May transaction si parent and subsidiary by way of transfer of inventory.
 Let’s say na may transfer of inventory from parent kay subsidiary or vice versa
o Parent  Subsidiary: Downstream
o Subsidiary  Parent: Upstream
 It is not limited to inventory – pwede ding transfer of depressible assets, transfer of
non-depreciable assets

Lateral Transfer
 Meron ding tinatawag na Lateral Transfer – kapag Lateral Transfer may tinatransfer
from subsidiary to another subsidiary.

Step 2: Analysis of net assets

Acquisition Consolidation Net
Subsidiary
Date Date Change
Share Capital (& Share Premium) xx xx
Retained Earnings xx xx
Other Components of Equity xx xx
Totals at Carrying Amounts xx xx
Fair value adjustments at acquisition date xx xx
Subsequent depreciation of fair value xx xx
adjustment
Unrealized Profits (Upstream only) xx xx
Net Assets at Fair Value xx(a) xx(b) xx(c)
(a) This amount is used for computing goodwill in ‘Step 3’.
(b) This amount is used for computing NCI in net assets in ‘Step 4’.
(c) This is used for computing consolidated retained earnings in ‘Step 5’
 BSA 3203: Accounting for Business Combination (Transcribe: March 16, 2021)

Notes:
“Fair value adjustments at acquisition date”
 Increase ng fair value ng mga identifiable assets acquired and liabilities assumed, so kapag
magkaiba ang carrying amount and fair value, yung difference nila – yun yung adjustments sa
total ng subsidiary’s equity account at fair value = para updated yung fair value ng equity.

“Subsequent depreciation of fair value adjustment”

 Kapag may increase sa fair value because of the increase in the identifiable assets acquired –
that increase (lalo na kapag depreciable) will be amortized, yun yung subsequent depreciation
of fair value adjustment.

Step 3: Goodwill computation

Remember: May dalawang formula of valuing NCI with respect to its goodwill computation –
proportionate approach and fair value approach.

Formula #1: NCI is measured at NCI’s proportionate share

Consideration Transferred xx
Add: Non-Controlling Interest in the Acquiree (Proportionate xx
Share)
Add: Previously held equity interest in the Acquiree xx
Total xx
Less: Fair Value of net identifiable assets acquired (xx)
Goodwill at Acquisition Date xx
Less: Accumulated impairment losses since acquisition date (xx)
Goodwill, net – current year xx
Note: Ang fair value of net identifiable assets acquired shall be considered as 100%.
[fair value of net identifiable assets acquired x % of NCI]
So, walang share sa goodwill si NCI kapag nakaproportionate siya – attributable lahat lang kay
parent.
Magkakaroon lang ng share sa goodwill si NCI kapag nakaFair value approach (formula #2),
so kapag nakafair value approach – may share sa goodwill si parent at si NCI.

“Accumulated impairment losses since acquisition date”

 Idadagdag na sa computation since subsequent measurement na ang pinaguusapan –
hindi lang at acquisition date.
 Remember that you have to test goodwill for possible impairment because it is not
amortized. If possible na magkaroon siya ng impairment – subsequently ibabawas yung
impairment loss para makuha mo yung goodwill net of impairment loss for the current year.
 BSA 3203: Accounting for Business Combination (Transcribe: March 16, 2021)

Formula #2: NCI is measured at fair value

Consideration Transferred xx
Add: Previously held equity interest in the Acquiree xx
Total xx
Less: Parent’s proportionate share in the net assets of subsidiary (xx)
Goodwill attributable to owners of parent – acquisition date xx
Less: Parent’s share in goodwill impairment (xx)
= Goodwill attributable to owners of parent – current year  xx
(a)

Fair value of NCI xx

Less: NCI’s proportionate share in net assets of subsidiary (xx)
Goodwill attributable to NCI – acquisition date xx
Less: NCI’s share in goodwill impairment (xx)
= Goodwill attributable to NCI – current year (b)  xx

= Goodwill, net – current year [(a) + (b)] xx

Note: Ang goodwill, kapag fair value approach – paghahatian ni NCI and ni Parent. Kapag
proportionate naman – lahat ng yun ay kay parent lang.
Kapag nagkaroon ng subsequent impairment ng goodwill, kung sino ang nagshare sa goodwill
– sila din ang magsheshare sa impairment loss. So, since kapag fair value approach – may
share si parent and NCI sa goodwill, sa impairment loss ay share din sila.

Pero kapag proportionate – lahat ng impairment loss ay kay parent lang since yung goodwill ay
sa kanya lang attributable.

Step 4: Non-controlling interest in net assets of the

subsidiary
Subsidiary’s net assets at fair value – current year xx
Multiply by: NCI percentage x%
Total xx
Add: Goodwill to NCI net of accumulated impairment losses (xx)*
Non-controlling interest in net assets – current year xx
* This amount is zero if NCI is measured at proportionate share. Goodwill is attributed to NCI only if
NCI is measured at fair value.
 BSA 3203: Accounting for Business Combination (Transcribe: March 16, 2021)

Step 5: Consolidated retained earnings

Parent’s retained earnings in current year-end xx
Consolidation Adjustments:
Parent’s share in the net change in subsidiary’s net xx
assets
Less: Unrealized profit (Downstream only) (xx)
Add/Less: Gain or loss on extinguishment of bonds (xx)
Less: Impairment loss on goodwill attributable to Parent (xx)
Net Consolidation Adjustments  xx
Consolidation Retained Earnings xx

Step 6: Consolidated profit or loss

Parent Subsidiary Consolidated
Profits Before Adjustments xx xx xx
Consolidation adjustments:
Less: Unrealized profits (xx (xx) (xx)
)
Less: Dividend income from subsidiary (xx (xx) (xx)
)
Add/Less: Gain or loss on extinguishment of bonds xx xx xx
Net Consolidation Adjustments  xx  xx  (xx)
Profit Before Fair Value Adjustment xx xx xx
Less: Depreciation of fair value adjustments (xx) (xx) (xx)
Less: Impairment loss on goodwill (xx) (xx) (xx)
Consolidated profit of loss xx xx xx

Step 7: Profit or loss attributable to owners of parent and

NCI
Owners of Parent NC Consolidated
I
Parent’s profit before FVA* xx N/ xx
A
Add: Share in the subsidiary’s profit before FVA* xx xx xx
Less: Depreciation of FVA* (xx) (xx) (xx)
Less: Share in impairment loss on goodwill (xx) (xx) (xx)
Totals xx xx xx
*FVA = Fair Value Adjustments
 BSA 3203: Accounting for Business Combination (Transcribe: March 16, 2021)

Consolidated Statement of Financial Position

Parent Subsidiar Consolidated
y
ASSETS:
Investment in subsidiary - eliminated xx - -
Other Assets (Parent + Subsidiary + FVA,net) xx xx xx
Goodwill (Step 3) - xx xx
TOTAL ASSETS xx xx xx

LIABILITIES:
TOTAL LIABILITIES (Parent + Subsidiary + xx xx xx
FVA,net)
EQUITY:
Share Capital (Parent only) xx xx xx
Retained Earnings (Step 5) xx xx xx
Equitable attributable to owners of the parent xx
NCI in net assets (Step 4) xx
TOTAL EQUITY xx xx xx

TOTAL LIABILITIES AND EQUITY xx xx xx

Notes:
“Investment in subsidiary”
 Eliminated in full against the share capital/equity ni subsidiary
 Ang lulutang nalang kasi dapat na capital ay ang share capital ni parent company and NCI
 BSA 3203: Accounting for Business Combination (Transcribe: March 16, 2021)

Consolidated Total Assets

Total Assets of Parent xx
Total Assets of Subsidiary xx
Less: Investment in Subsidiary (xx)
Add: Fair Value Adjustments – net xx
Add: Goodwill – net xx
Add: Effect on intercompany transactions xx
Consolidated Total Assets xx

Consolidated Total Liabilities

Total Liabilities of Parent xx
Total Liabilities of Subsidiary xx
Add: Fair Value Adjustments – net xx
Add: Effect on intercompany transactions xx
Consolidated Total Liabilities xx

Consolidated Total Equity

Share Capital of Parent xx
Share Premium of Parent xx
Add: Consolidated retained earnings xx
Equity attributable to owners of the parent xx
Add: Non-controlling interests xx
Consolidated Total Equity xx
Note:
“Consolidated retained earnings”
 Yung kay parent lang, yung kay NCI kasi nandun na sa non-controlling interest account.