MODULE

2
(CONSOLIDATED FINANCIAL
STATEMENTS AT THE DATE OF
ACQUISITION)
ACQUISITION OF STOCKS
SEPARATE FINANCIAL STATEMENTS

Separate financial statements are defined in

PAS 27 as those presented by a parent, an
investor in an associate or a venturer in a
joint venture in which the investments are
accounted for on the basis of the reported
results and the net assets of the investee.
SEPARATE FINANCIAL STATEMENTS
The financial statements of a parent
company that report investment in
subsidiary companies and the financial
statements of the subsidiary companies
that report interest held by a parent as
share capital are complete statements of
the related units treated as separate legal
entities and not as a single economic
entity.
Another dimension of reporting is required
when an investor possesses control or
significant influence or contractual
arrangement or joint control over the
financial and operating policies of subsidiaries
and associates, respectively. This dimension
of financial reporting is described as the
consolidated financial statements that
present the financial statements of a group as
those of a single economic entity.
 STOCK ACQUISITION
If one entity acquires the voting stock of another entity and the
acquirer obtains control over the acquiree which is not
dissolved, a parent-subsidiary relationship is created.
The parent and subsidiary is considered as one economic entity
that must facilitate the preparation of consolidated financial
statements.
The purpose of consolidated financial statements is to present
the financial performance and financial position of the parent
company and its subsidiaries as if the group were a single
economic entity.
 CONTROL
ELEMENTS OF CONTROL (IFRS 10)
1. Power over the investee.
2. Exposure or rights to variable returns from its involvement
with the investee.
3. The ability to use the power over the investee to affect the
amount of the investor’s returns.
 CONTROL
Control can be present with less than 50% of voting
shares if other factors indicate control, e.g.:
• Irrevocable agreement with other shareholders to
convey
voting rights to parent
• If parent holds rights, warrants, convertible debt, or
convertible preferred shares that would, if
exercised or converted, give it >50% of votes
• If there are contractual agreements which give
control.
 POWER OVER THE INVESTEE
An investor must have existing rights that
give it the current ability to direct the
relevant activities of an investee company
so that the said investor possesses power
over the said investee.
 RETURNS
The Investor is exposed to variable returns
on his involvement with the investee and
these variations is brought about by the
investee’s performance.
Link Between Power and Returns

The investor can use his power over the

investee to influence the variable returns
coming from his involvement with the
investee.
An investor which has a 70% controlling
interest in an investee company and does
not have a seat in the board cannot wield
his influence to affect such returns coming
from his involvement with the investee
company.
Voting rights from ordinary shares may give
the investor power over the investee.
Contractual arrangement may also grant
rights that bestow the investor power over
an investee.
NON-CONTROLLING INTEREST
The shares not acquired by the parent are owned by the other
shareholders, referred to as the “non-controlling shareholders”.

The value of shares held by the non-controlling shareholders

appears on the CONSOLIDATED SHE as “non-controlling
interest” (NCI)
NON-CONTROLLING INTEREST
According to IFRS 3, a non-controlling interest is measured at
fair value of the non-controlling shares or at proportionate fair
value of the acquiree’s net assets.
The two methods mentioned result to different amounts of
goodwill. If the fair value of the NCI is adopted, full goodwill will
be recognized while adoption of the proportionate fair value of
the net assets of the acquiree company, the parent’s goodwill or
partial goodwill will be recognized.
 CONTROL PREMIUM
Control premium is an amount that the
buyer is willing to pay over the current
market price of a publicly traded
company. The premium is usually justified
by the expected synergies, such as the
expected increase of cash flow resulting
from cost savings and revenue
enhancements achievable in the merger
or consolidation.
BUSINESS COMBINATION ACHIEVED IN STAGES

A step acquisition is a business

combination in which the acquirer holds
an equity interest in the acquiree prior to
the acquisition date on which it obtains
control.
In some instances, stocks are purchased in
series or stage before control is obtained.