Ww
swnts (Part 1)
Chapter 4
Consolidated Financial Statements (Part 1)
Related standards:
PERS 10 Consolidated Financial Statements
ection 9 of the PERS for SMEs samee
Overview on the topic
Our discussion on business combination is subdivided into the
following chapters:
Chapter Title Coverage
4 Consolidated FS (Part 1) Basic consolidation procedures
5 Consolidated FS (Part 2) _ Intercompany. transactions
6 Consolidated FS (Part 3) Miscellaneous topics
7 Consolidated FS (Part 4) | Measurement at other than cost
Learning Objectives
1. State the elements of control.
2. Prepare consolidated financial statements at the acquisition
date.
3, Prepare consolidated financial statements at a subsequent
date.
Introduction
(PERS 3 Heals with the accounting for a business combination at
the acquisition date, while PFRS 10 deals with the preparation
and presentation of consolidated financial statements after the
business combination.
> 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.”
aparent and its subsidiaries.”
om “an entity that controls one or more entities.”
ie sidiary — “an entity that is controlled by another entity.
1W.Appendix A)
7 & R
he
4 Corot 130
hi eg
A parendentitles are required to prey
financial statements, except as follows
1, A parent is exempt from presenting consolid
statements i
a. itis a subsidiary of another entity (whether wholl
or partially-owned) and all its other owners do
to its non-presentatio
Pare
Consoy ida
Aled fing
Not ob
a of consolidated
statements; RENO OD try
y
bits debt or equity instruments are not traded in . 4
~ market (or being processed for such purpose); ang PUM
its ultimate or any intermediate parent
- consolidated financial statements that are avai
public use and comply with PFRSs.
2. Post-employment benefit plans or other long-term em;
benefit plans to which PAS 19 applies.
Prody
lable fo
r
Ployee)
Control
Control is the basis for consolidation. PFRS 10 requires an invest
to determine whether it is a parent by assessing whether |
controls the investee.
> Control of an investee — “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 affed
those'returns through its power over the investee.”
(PFRS 10.Appdendix A)
Control exists if the investor has all of the following:
a. Power over the investee;
b. Exposure, or tights, to variable returns from the investee;
©. Ability to the affect returns through use of power.
such as when $e ‘estors collectively contre, ‘vested
reley. _.eY Must act together to direct the ny i
‘ant activities, none of them individually controls the inv" ated Financial Statements (Part 1) - 431
Ac cordingly, each investor accounts for its interest in the investee
jn accordance with PFRS 11 Joint Arrangements, PAS 28 Investments
in Associates and Joint Ventures or PFRS 9 Financial Instruments, as
appropriate.
Example: ae
‘ABC Co. holds ‘70% of the voting shares of Alphabets, Inc. XYZ,
Inc, the former majority owner of Alphabets, holds 10% of the
voting shares of Alphabets but retains its power to appoint the
majority of the board of directors of Alphabets. The other 20% is
held by various shareholders holding shares of 1% or less.
Decisions about the relevant activities of Alphabets require the
approval of a majority of votes cast at relevant shareholders’
meetings - 75% of the voting rights of the investee have been cast
at recent relevant shareholders’ meetings.
Analysis:
Neither ABC Co. nor XYZ, Inc. has control over Alphabets Co.
Power
‘An investor has power over an investee when the investor has
existing rights that give it the current ability to direct the
_investee’s relevant activities.
> Relevant activities - “activities of the investee that significantly
affect the investee’s returns.” (PFRS 10.Appendiv A)
An investor's current ability to direct the investee’s
relevant activities is often evidenced by the investor's ability to
establish and direct the investee’s operating and financing
policies, eg, making operating and capital decisions, and
“appointing, remunerating, and terminating key management
Personnel,
Power arises from rights and it may be obtained directly
from the voting rights conferred by shareholdings. However,
Power may also arise from other sources, such as contractual
arrangements. Examples of rights that can give an investor power: a. Voting rights (or potential voting rights);
b. Rights to appoint or remove members of the investee’s key
management personnel or another entity that directs the
relevant activities of the investee; .
Rights to direct the investee to enter into transactions for the
benefit of the investor; and
d. Other decision-making rights that give the investor the ability
to direct the investee’s relevant activities, (PFRS 10.815)
Administrative rights
When voting rights do not have a significant effect on an
returns, such as when voting rights relate to
administrative tasks only and contractual arrangements
determine the direction of the relevant activities, the investor
needs to assess those contractual arrangements in order to
determine whether it has rights sufficient to give it power over the
investee.
Unilateral rights
If two or more investors individually (unilaterally) have the ability
to direct different relevant activities, the investor that has the
current ability to direct the activities that most significantly affect !
the returns of the investee has power over the investee. |
Protective rights i
‘An investor can have power over an investee even if other entities !
have existing rights that give them the current ability to
participate in the direction of the relevant activities, for example
when another entity has significant influence. !
However, an investor that holds’ only protective rights
does not have power over an investee, and consequently does rat
control the investee. |
> Protective rights are “rights designed to protect the interest
the party holding those rights without giving that patty Pa
over the entity to which those rights relate.” (pres 10. appent®)
@Z Statements (Part 1 133
examples of protective rights
.
\ Jender’s right to seize the assets of the borrower if the
* :
porower defaults on a loan, or to restrict the borrower from
undertaking activities that are detrimental to the lender.
The right of holders of non-controlling interests to approve
s
capital expenditure above a specitied amount, or the issue of
equity or debt instruments.
Un right
Entity A holds 10% voting rights in Entity B. Entity A is also the
Entity A
al right and Protectiz
franchisor of Entity B. The franchise agreement confers
come decision-making rights regarding the operations of Entity B.
Analysi
The franchise agreement — provides both — Entity = A
(investor/franchisor) and Entity B (investee/franchisee) unilateral
rights in directing the relevant activities of Entity B. In assessing
the existence of power, the entity with the ability to direct the
activities that most significantly affect the returns of Entity B has
power over Entity B.
If the decision-making rights granted to Entity A are
designed solely to protect the franchise brand (protective right)
and the unilateral right of Entity B is to operate the franchise in
accordance with the franchise agreement but for its own account,
Entity A does not have power over Entity B.
Substantive rights
In assessing whether it has a power, an investor considers only
substantive rights, i.e., rights which the investor has the ability to
exercise,
Application examples ~ Substantive rights
Fact Pattern (This applies to each of the independent case
An investee’
at schedule
.
below)
5 policies over relevant activities can be changed only
d shareholder's meetings or at special meetings.
The neat scheduled shareholders’ meeting is in § months, Shareholders that individually or collectively hold at k
of the voting rights can call a special meeting t6 ch “ast
existing policies over the relevant activities. This ange
ig notice to the other shareholders, which ieane, i
that
givin,
special meeting cannot be held for at least 30 days.
Case #1 .
Aninvestor holds a majority of the voting rights in the investee, -
Analysis:
The investor's v
~ able to direct the investee’s relevant
shareholder's meeting and a special meeting. i
oting rights are substantive because the investo,;
activities in both a schedyj..
ed
‘Case #2 (PFRS 10.B24) :
‘An investor owns a forward contract (or an option contract that ig |
4in the money’) to purchase a majority of the investee’s shares. The
contract's settlement date is in 25 days.
Analysis:
The investor's voting right:
shareholders are unable to change
relevant activities because a special m
Jeast 30 days, at which point the contract will have been settled.
s are substantive. The existing
the existing policies over the
ecting cannot be held for at
Case #3
The settlement, date of the forward contract
contract) in Case #2 is in 6 months.
(or the option
7
are not substantive. The existing |
e relevant
Analysis: °
The investor's voting rights
shareholders can change the existing policies over th
activities through a special meeting.
Voting rights
The i ‘s abili i
zn re s ability to direct the relevant activities of an inv
mally obtained through voting or similar rights. er
i inancial Statentents
consolidated Fin ments (Part 1) 15.
power witha majority of the voting rights
saninvestor that holds more than half (51% or more) of the voting
rights ofan investee is presumed to have power over the investee,
a when this is clearly not the case.
© .
Holding more than half of the voting rights results to
power when: oe
The relevant activities are directed through majority vote; or
‘rity of the members of the governing body that directs
p. Amal ee :
vant activities are appointed through majority vote.
the rele’
of the voting rights but no power
does not have power over an investee, even if he
an half of the voting rights, if:
direct the inyestee’s relevant activities is coriferred *
party who is not an agent of the investor. For
the investee’s relevant activities are subject to
government, court, administrator, receiver,
Majority
‘An investor
olds more th
a, The right to
to a third
example,
direction by @
liquidator oT regulator.
"4, The investor's voting rights are of substantive.
Power without a majority of the voting rights
power even if he holds less than a majority
An investor can have
of the voting rights of an investee. For example, through:
a. A contractual arrangement between the investor and other
vote holders;
Rights arising from other contractual arra
The investor's voting rights;
Potential voting rights; or
A combination of (a) - (d).
ngements;
eppnos
Contractual arrangement with other vote holders
A contractual arrangement between an investor and other vote
holders can give the investor power if the contractual
arrangement gives the investor: . a. The right to exercise the voting rights of oth,
eT Vote ho
sufficient to give the investor power; or
b.’ The right to direct how other vote holders vote to by
"investor to make decisions about the relevant actiyi ties,
"+ Under the Corporation Code of the Philippines, an example of g a
arrangement described above is referred to as “proxy.
Example: (PFRS 10.843 - B45)
Investor A holds 40% of the voting rights of an investee, The
60% is held by 12 other investors, each holding 5%. A shareholgy
agreement grants Investor A the right to appoint, remove and gy
the remuneration of management. responsible for directin,
televant activities. To change the agreement, a two-thirds Vote of
the shareholders is required.
Analysis:
Investor A has power over the investee because of his contractual
tight to appoint, remove and set the remuneration of
management. :
example, the investee’s ‘manufacturing Processes or other
Operating or financing, activities that si
investee’s returns, However, in the absence of any other rights,
economic’ dependence of an invest
; tee on the investor (such as
customer-supplier telationship) does Not result to Power.
The investor's voting rights .
An investor with less than a majority of the Vv
Power when he. has -the Practical ability to di
activities unilaterally. .
Oting rights has
ect the relevant
aap
+ r eae :
Mvestee’s relevant activities, for _
nificantly affect the | ements (Part 1) 137
Example 1
Entity A holds 40% of the voting rights of Entity B. The remaining
@% is held by numerous shareholders in very small
denominations. None of the shareholders make collective
Anal
Entity A has power over Entity B because the other shareholdings
are widely dispersed and are not being exercised collectively.
Example 2
Entity A holds 30% of the voting rights of Entity B. Four other
investors hold 5% each. The remainder is widely dispersed. None
of the shareholders make collective decisions. Decisions about
Entity B’s relevant activities require a majority of vote. Seventy
five percent of the voting rights have been cast in previous
shareholders’ meetings.
Analysis:
Entity A has 110 power over Entity B because it does not have the
ability to unilaterally direct Entity B’s relevant activities. This
requires the active participation of the other shareholders.
Example 3 ;
Entity A holds 40% of the voting rights of Entity B. Two other
investors hold 28% each. The remaining 4% is held by numerous
other investors.
Analysis:
Entity A has no power over Entity B because the two other
investors have the ability to cooperate and prevent Entity A from
directing the relevant activities of Entity B.
Potential voting rights
When determining the existence of control, an investor considers
potential voting rights that are currently exercisable, regardless of
the intention or financial ability to exercise them. 138 chapters
ee
Potential voting rights include share warrants oe a
options, debt or equity instruments that are cOmvET TD
ordinary shares, or other similar instruments that S hd
have the potential to give the entity voting POW’ ue
another party’s voting power over an investee- ercisable if a4
Potential voting rights are not currently ex
cannot be exercised until a future date or until the occurrence of
future event. . :
However, during consolidation, non-controlling interes
are determined on the basis of present ownership interests and do
not reflect the effect of potential voting rights. Potential voting.
rights are considered only for purposes of determining thy
existence of control, which in turn determines whether an investeg|
should be consolidated.
Example:
Entity A owns'40% of the voting rights in Entity B. Entity A ag
holds bonds that are currently convertible into Entity B’s ordinay
shares. If the bonds were converted, Entity. A’s voting ti
would be increased to 60%.
Analysis:
Entity A has power over Entity B. The existing voting rights plus
the substantive potential voting rights result to a majority of the
Voting rights in Entity B.
Substantive removal and other rights held by other parties
Substantive removal and other rights held by other parties
affect the decision maker's ability to direct the relevant activ
of an investee,
> Removal rights are “tights to deprive the decision maker
decision-making authority.” (PFRs 10.Appendix A)
Such rights are considered when evaluating whethet
decision maker is a principal or an agent for other parties:
Investor acting as an agent ‘does..not control an inven dated Financial Statements (Part 1) 439
example, @ decision maker that is required to obtain approval
froma small num
ber of other parties for its actions is generally an
agent.
Exposure or rights to variable returns
Aw investor is exposed, or-has a right, to variable returns if its
om its involvement with the investee vary depending on
returns
the investee’s performance.
Ability to use power to affect investor's returns
The investor's ability to use its power to affect its returns from the
investee provides the link between power and variable returns.
Only if this ability exists along with power and exposure or right
to variable returns does the investor obtain control over the
investee.
Elements of Control
Variable
returns
Power | > _| Ability to affect returns |g
|
Control
Accounting requirements
Reporting dates
The financial statements of the parent and its subsidiaries used in
preparing consolidated financial statements shall have the same
reporting date.
If the parent’s and its subsidiary’s reporting periods do
not coincide, the subsidiary shall prepare financial statements that
coincide with the parent’s reporting period before consolidation.
If this is impracticable, the subsidiary’s financial
statements shall be adjusted for significant transactions and events
that occur between the end of the subsidiary’s reporting period
and that of the parent's. The difference between the parent's and
bing OPS. PRE $l Wd Wwingol/ Br v's end of reporting periods shall not exceeg
subsidial
Ss.
months Sine SPINIMLD g
Uniform accounting policies POLICIES |
Uniform accounting policies shall be used. It the subsidiary
different accounting policies, its financial statements nee, dtp
adjusted to conform to the parent’s accounting policies before they
are consolidated. Ree Ab pir roti
Example:
A British parent entity uses the revaluation model to measure its
property, but a Philippine subsidiary uses the cost model.’ The j
Philippine subsidiary’s directors find the revaluation mode] too /
costly to implement. j
Question: In the consolidated financial statements, is the group /
allowed to measure the Philippine subsidiary’s property under )
the cost model? 5
Eprss ier |
Answer: No, the Philippine subsidiary’s property shall be adjusted |
to conform to the group’s accounting policy of revaluation model. , i
PRAM B
Consolidation period
Consolidation begins from the date the investor obtains control of |
the investee and ceases when the investor loses control of the |
investee.
For example, if an investor obtains control of an investee i
on July 1, 20x1, the group’s consolidated financial statements for
the year ended December 31, 20x1 shall include only the investee’s
results of operations from July 1 to December 31, 20x1,
On the other hand, if a parent loses control over its
subsidiary on September 30, 20x2, the 8roup’s consolidated’
financial statements for the year ended December 31, 95.9 shall
include only the investee’s results of operations from, January 1,10
September 30, 20x2.
ym
Ot ee poe inc avsiton Day ir
to¥vy Wy Ye
I Statements (Part 1) vn g vawiiege mn
a L pre Gime rmrr AY Ta 141
ry np HARTER PT tHe ba Wi
easurement Cu tisitons ae oF
d expenses
Income -
nd expenses of the Subsidiary are based on the amounts
s unt
income an epee
ssets and liabilities recognized in the consolidated financial
”
ts at the acquisition date. ‘ayo? 13"\- sy Congouiunt
For example, depreciation expense in the consolidated
ments is based on the related asset's acquisition-date
financial state
fair value, rather than its carrying, amount in the, subsi
accounting Feo" eed fn eH 2
Weer enti) i eee jess
nvestment in subsidiary reqer tHE ONT 6 A
in. subsidiaries are accounted for in the parent's
t 10% ACGu Est
Investments i
al statements either:
separate. financi
a. at cost; y my
b. in accordance with PERS 9; or *
c._ using the equity method. Emad hae WPET rereoro Se
eee nus yun Pa et MUTE pies
Measurement at cost AYA
in subsidiary is initially measured equal to the
The investment
value assigned to
date and subsequently mea:
investment becomes impaired.
ransferred at the acquisition
the consideration t
hat amount, unless the
sured at t
PERS 9
initially measured equal to the
red at the acquisition
ment in accordance with
ary is i
ideration transfe
ed at fair value.
Measure
The investment in subsidi
value assigned to the consi
date and subsequently measur
hod
initially measured equal to the
transferred at the acquisition
d for the investor's
Measurement using the equity met
The investment in subsidiary is
value assigned to the consideration
date and subsequently increased or decrease
share in the changes in the investee’s equity. Chay
stephen 5
ping boven 7 a)
ee enaeeroet “
Non-controling intorests (NCI) j
assets of the subsidiary
net assets 0)
NCI in the resented in the consolidated state,
net assets is P ; rately from the ¢ a
nancial position within equity, separately Pamity of
financial po
owners of the parent,
s of the subsidiary consists of:
the net assets of the su y consis
cone amount determined at the acquisition date using PrRg
a
and , ee
b. The NCI's share of changes in equity since the Acquis
date.
NCI in profit or loss and comprehensive income
The profit or loss and each component of other comprehengi
income in the consolidated statement of profit or loss
comprehensive income are attributed to the fol lowing:
1. Owners of the parent
2 Non-controlling interests
and oth
Total comprehensive income
the parent and to the NCI eve
controlling interests h;
Preparing the Consolidated financial Statements
nancial statements are
~onecl Prepared ining
financial Statements of the parent and its subsidi bier
by adding together sim Forcier
. ilar items of
income and expenses,
is attributed to the owners
nif this re :
sults inthe n
‘aving a deficit balance,
e by line
liabilities, equity,
the acy
Y the statements ial peition da
entities are consodai “he fanca posit e are simple
steps: CONSoli dati, © combining
1
Eliminate the “4
Mvesty
requires: pment’ hy SUbSidiany» jo Pinal Statements (Part 1) a
Consildl — ————__—
4, Measuring the identifiable assets acquired and liabilities
assumed in the business combination at their acquisition-
date fair values.
b, Recognizing the goodzwill from the business combination.
Eliminating the subsidiary’s pre-combination equity
accounts and replacing them with the non-controlling
interest.
2, Add, line by line, similar items of assets and liabilities of the
combining entities. The subsidiary’s assets and liabilities are
included in the consolidated financial statements at 100% of
their amounts irrespective of the interest acquired by the
parent.
Illustration: Consolidation at acquisition date
On January 1, 20x1, ABC Co. (parent) acquires 80% interest in
XYZ, Inc. (subsidiary). The financial statements of the combining
entities immediately after the business combination are shown
below:
Parent Subsidiary
Cash 10,000 5,000
Accounts receivable 30,000 12,000
Inventory 40,000 23,000
Investment in subsidiary 75,000 :
Equipment, net 180,000 40,000
Total assets 335,000. 80,000.
Accounts payable 50,000 6,000
Share capital 7 170,000 50,000
Share premium 65,000 a
Retained earnings 50,000 24,000
Total liabilities and equity 335,000 80,000
Additional information:
* The subsidiary’s assets and liabilities are stated at their
Acquisition-date fair values, except for the following: 1000. Fy
ment, net, 48,000 =
Inventory, P5:
Equip!
mined using PERS 3 is 3,000.
+ The goodwill dete ts of the subsidiary, also determing
The NCI in the net asset
PERS 3, is 918,000.
.
using
Requirement: Prepare the consolidated statement of finangy
position.
Solution:
Step 1: Eliminate the “Investment in subsidiary” account and:
a. Measure the subsidiary’s assets and liabilities at thei
acquisition-date fair values;
b. Recognize the goodwill; and_
Replace the subsidiary’s.pre-combination equity accounts
with the NCI in net assets,
Step 1- Eliminate “Investment in
subsidiary” account.
Cash
“ccounts receivable
Inventory
Step 1(a) - Measure
Subsidiary’s assets and
liabilities at
acquisition-date fair
Values.
2
Step U6) - Replace the
Subsidiary’s pre-
combination equity
Sounts with the NCI
net assets,
ac
in aements (Part 1)
— 145
cyoy 22 Ant Hine By Tne similar tems of assets an Fail
$ of assets and liabilities
the combining constituents,
Parent Subsidiary Consolidated
Cash 7 10,000
Accounts receivable 30,000 oon pan
Inventory 40,000 31,000 71,000
Investment in subsidiary "
Equipment, net 180,000 48,000 228,000
Goodwill 3,000 3,000
Total assets 359,000,
Accounts payable 50,000 6,000 56,000
Share capital 170,000 | 170,000
Share premium 65,000 65,000
Retained earnings 50,000 50,000
NClin net assets 18,000 18,000
359,000
Total liabilities & equity
diary are included
hough the parent
lowing,
& Notes:
# 100% of the assets and liabilities of the subsi
in the consolidated financial statement even U
holds only 80% interest. This is an application of the foll
concepts:
a. (Substance over
statements report
of the subsidiary and not j
legal percentage acquired.
b. “Entity theory” ~ the parent and subsis
Single reporting entity.
© The subsidiary’s pre-combination equity accounts
capital and retained earnings) are elimina’ di
replaced with the non-controlling interesi
© The share capital, share premium, anc 722%
accounts in the consolidated financ
the consolidated financial
control the whole
to the extent of the
form” —
t the parent’s ability t
just only UP
asa
diary is viewed the owners of the parent, while the NON-Controlfin,
account pertains to the other owners of the subsidiary, 8 int
* The equity structure appearing in the Consolidate, i
statements reflects that of a “legal entity,” The “groupe ang
a legal entity although each member ofthe group i et
legal entity. Thus, the consolidated financial Statement iS
the equity structure of the legal parent. The equity of the
members of the group is Presented in a single ling i
described as non-controlling interests, t
The consolidated statement of financial osition is shown below.
i ABC Group
| Consolidated statement of financial position
| As of January 1, 20x1
| ASSETS
| Cash : 15,000
| Accounts receivable 42,000
| Inventory 71,000
| Equipment, net 228,000
| Goodwill ~ 3,000
| TOTAL ASSETS 359,000
LIABILITIES AND EQUITY
| Accounts payable 56,000
| Total liabilities 56,000
| share capital 170,000
| Share premium 65,000
l Retained earnings 50,000
| Owners of parent 285,000
| Non-controlling interest 18,000
Total equit 303,000
TOTAL LIABILITIES AND EQUITY
359,000
* Observe that the non-controlling interest ig presented
within equity but separately from the equity of the owners of the
parent. sated Financial Statements (Part 1)
Traditional Accounting Method
The consolidated financial statements can also be prepared by
using (
worksheet.
147
‘a) consolidation journal entries and (b) consolidation
CJE #1: To elintinate investment in subsidiary and recognize goodwill
yan. 1,
20x1
Inventory
Equipment
Share capital - XYZ, Inc.
Retained earnings — XYZ, Inc.
Goodwill
Investment in subsidiary
Non-controlling interest
to adjust the subsidiary's assets to
acquisition-date fair values, to eliminate the
investment in subsidiary and subsidiary’s pre-
combination equity, and to recognize goodwill
and non-controlling interest in the consolidated
financial statements
8,000
8,000
50,000
24,000
3,000
75,000
18,000 eameseprromse,y “epi om
womaae 4 0 *y00q 5 Aseypregnes ag er
ey ‘ _
vanecial Statements (Part 1)
inal
sagan TON
149
ation subsequent to date of acquisition
idation procedures subsequent to the acquisition date
» same procedures of (a) eliminating the investment in
jrnvatve the account and (b) adding, line by line, similar items of
subea ities, income and expenses of the parent and the
. However, this time, changes in the subsidiary’s net
consi
Inustration 1: Consolidation - Subsequent to date of acquisition
lus
On January 1, 20x1, ABC acquired 80% interest in XYZ, Inc. for
975,000.
Information on acquisition date (Jan. 1, 20x1):
+ XYZ's net. identifiable assets have a ca
trying amount of
74,000 and fair value of P90,000. The difference is due to the
following:
Carrying Fair Fair value
amount value adjustment (FVA)
Inventory 20,000 24,000 4,000
Equipment, net 40,000 52,000 12,000
Totals 60,000 76,000 16,000
* The remaining useful life of the e
quipment is 6 years, ~
* ABC measured the NCI at ‘prop
ortionate share’,
Information on Subsequent reporting date (Dec. 31, 20x1):
Statements of financial position
As at December 31, 20x1
ABC Co, XYZ, Inc.
ASSETS
Cash 23,000 57,000
Accounts receivable 75,000 32,000
Inventory 105,000 15,000
Investment in subsidi c 75,000
ubsidiary (at cost) i ,
wipment, net 140,000 30,006
T
OTAL AssETs
418,000 124,000. c Napto, 4
is
ques AND EQUITY 7,000 4
us ts YY able 3,000 1H
170,000 4
65,000, }
|
110,000 Py
" |
evant earings 415,000 ol
Mi
00 a
AL LIABILITIES AND EQUITY 118,
TU
fit or loss
tements of profit or
i. the year ended December 31, 20x17
for the y
ABC Co. xyz
300,000 id
(165,000) (7g
135,000 48,0,
Depreciation expense (40,000) (10,0
Distribution co
(35,000) (18,09,
Profit for the year 002000
* Ther were no dividends declared, no intercompany
transactions and no impairment of goodwill in 20x 1
Requirement: Prepare the December 31, 20x1 consolidated financial
statements,
Solutions:
The first thing that w
subsidiary’s net asset c
formulas below to simplify thi:
© should do is to analyze the changes in tht
fon date, We will use the
he acquis
8 Proc
Step 1: a
Step t: Analysis, of Subsidlary's net assets
XYZ, Inc, - : Ne
Sd Jan. 1 2001 Dee. 34, 2081 yayge
at carrying amount
Fair value adjustment 74,000 94,000.
SCEVA) 16,000 10,000 A
Net assets at fy ir value 90,000 4000 14 1000, daneial Statements (Part 1)
spate
oon in
oases alate
: doy late fess tibet
sp atagmnte tlopreelation
—_ FV
Ff 000
javenwly a0
Lip — —— ee 10,000
_rguipe 10,000 4.000 ,
Toul i 10,000
anes sts bo have Ber sol ating dhe ye
ego ents NY huring, the year lope +t
dwill computation
2; Goo!
is reported in the post-combination financial
goodwill that
ents 1S the amou!
step 2:
The
nt_ determined at the acquisition date less
stateme
accumulated impairment losses.
Consideration transferred - 75,000
Non controlling, interest in the acquire (90K x 20%) = Step 1 18,000
Previously bel equity interest in the acquire :
Total 93,000
of net identifiable assets: acquired (see Step 1) +
jan. 1, 20x71
ated impairment losses
ic, 31, 201
Fair value
Goodwill -
Less: Accumul
Goodwill - Dec.
Step 3: Non-controlling interest in net assets
iary'snet assets al fair value ~ Dec. 31, 2081 (este) 104,000
Su
Multiply by: NCI percentage 20%
Non-controlling interest in 20,800
Step 4: Consolidated retained earnings
— retained earnings ~ Dee. 31, 20x1 110,000
= : share in the net change in subsidiary's net assets 11,200
‘onsolidated retained earnings = Dec. 31, 20x1 121, 200.
14,000
Nel i
we change in XYZ’s net assets (see Step 1)
aa by: ABC’s interest in XYZ sv"
5s share in the i — 7
in the net change in XYZ's net assets 11200 152 Chapter 4
ao
'
led as )
The NCI computed in Step 3 can also be reconciled as follows;
t
a 180,
NCi at acquisition date on
NC's share in wet change in subsidiary’s net assets 04K x 27%) — 2a
NCI - Dee. 31,20x1 we ,
Both the parent and NCI share in the post-combinati,
ge in the subsidiary’s net assets. The parent's share j,
included in retained earnings, while the NCI's share is included jy
NCL.
Step 5: Consolidated profit or loss
Profits of ABC & XYZ (60k + 20K) 80,000 ly
Depreciation of FVA (se Step 1) (6,000) | ;
Consolidated profit 74,000 |
The consolidated profit is attributed to the owners of the
parent and NCI as follows:
Owners of parent NCI Consolidated
Parent's profit before FVA 60,000 N/A 60,000 | |
Share in XYZ's profit before FVA 16,000 4,000 20,000 |
Depreciation of FVA™ (4,800) (1,200) _(6,000)
Totals
71,200 2,800. 74,000
° (20,000 profit of XYZ x 80! 16,000 shi
000 share of ABC); (20K x 20% = 4,000
share of XYZ). This allocation is lik uf \ nie
¢ the parent saying, “what is yours is outs,
What is mine is mine alone.”
“6
” (96,000 depreciation of F VA x 80% = 4,800 shi
share of XYZ), are of ABC); (6K x 20% = 1,200
We no . t
Consolidated yaa i" ne information we need to draft
oe jal stateme: i
Consolidation Procedures, ‘ements, Recall the — follo Statements (Part D)
. 153
sestment in subsidiary” account,
pate the “ne
and liabilities at their
the subsidia:
weadate firir values, net of depreciation.
the goodwill.
psidiary’s equity account
pm
3. Measure
asset!
py, Recogniz
Replace the sul s with NCI in net
Ada, line by line, similar items of assets and liabilities.
‘ABC Group
Consolidated statement of financial position
As of December 31, 20x1
ASSETS
ash 3000+ 57.00) 80,000
cable (73,000 + 22,000) 97,000
120,000
‘Accounts recelvs
Inventory (105,000 +
ent in subsidiary (Eliminated)
180,000
\)+ 0 FVA net, Step 1)
Investme’
Equipment, net (140.000 + 30,000 + 10,000 FVA net, Step 1)
Goodwill (Step 2) 3,000
TOTAL ASSETS 480,000
=
LIABILITIES AND EQUITY
Accounts payable (73,000 ~ 30,000) 103,000 |
Total liabilities 103,000
Share capital (Parent only) 170,000
Share premium (Parent only) 65,000
Retained earnings (Parent only - Step 4) 121,200
Ors of pret 356,200
paconroling interest (Step 3) 20800
ital equity 3 77000
TOTAL LI
LIABI A
ND EQUITY 480,000 154 Chapter 4
ABC Group
Statement of profit or loss
For the year ended December 31, 20x1
‘Salles (800.000 + 120,000)
_ Cost of goods sold (165k 6 72K 44K dep'n, of FVA on inventory)
Gross profi
Depreciation expense (40k + 10K + 2K dep'n. of FVA on equipt)
Distribution costs (35,000 + 18,000) — _
Profit for the year
Profit attributable to:
Owners of the parent (Step 5)
Non-controlling interests (Step 5)_
Traditional accounting method
The consolidated financial statements can also be prepared by
(a) consolidation journal entries and (b) consolidation
using
worksheet.
CE #1: To eliminate investment in subsidiary
[De] Inventory 4,000
| | Equipment 12,000
| | Share capital (same as yearend) 40,000
Share premium (same as yearend) 10,000
| Retained earnings (74K ~ 40K - 10K) 24,000
| Goodwill 3,000
Investment in subsidiary
NCI (90K x 20%)
The entry above is exactly the same consolidation jou
entry that was made at the acquisition-date consolidation. Nol
that all amounts pertain to the acquisition date. yer
jaated Financial Statemen
ts (Part 155
55
0
EF cst ofS
4,000
psoquent £0 soxt, the accounts debited for the depreciation
4 oa in preceding years are the “yetained earnings” of both
for their respective shares. For
i
e ee ‘and the subsidiary
the pare jn the December 31, 20x2 consolidation, the
ean ‘on of FVA.S recorded as follows:
p ings — ABC (6K°» 60%) 4,800
ed earnings XYZ (6K* x 20%) 1,200
; 2,000
4,000
4,000
gnized in 20x1
his amount pertains ——o
JE #3 To adjust the Parent's and Subsidiary’s retained earnings for the
depreciation 9 -FVA during the year _
Retained earnings - ABC (GK +2K) x 80%) 4,800
1,200
Retained earnings — XYZ [(4K + 2K) * 20%)
come summary — working paper —
JE #4: To recognize NCI in ost-acquisition change 1! XYZ
18,
‘he | Retained earnings - XYZ
Retained earnings —
NCI (post - acquisition
ABC ®
ye |
\ This represents the parent's share 17 the profit or loss of
before FVA (‘Step 5’,
Th :
is represents the profit or loss attr ibutable to NCI
The su si
he ie of Na sin CJE’s #1 and #4 represents the Dec
ca icquisition-date net assets (CJE #1)
Novara tision net assets (CJE #4)
ing interest in net assets - Dec. 31, 20x1
a _ QO0OPL
(o00'es) ‘000°SE) ISSO UORNGUISIG
(o00'zs) 000'z z (000'0L) (000'0r) esuedxe uojeioeideq:
000624 000'8r 000'ge4 3yOsd SSID
“(0007rrz) 000'r z { (000'S9 1 PIOs Spoob jo }s0D
o00‘0zr 000'0ZL 000‘008 sales
000'08¢ 008"ZEE 008ZbE 000‘rzb 000°8 Le "ALOZ 2 AVIT WWLOL
000°LZE 000°%6 000°SbE Aunbe je}OL
00802. vee oos'oz = S ySe78}u! Burjoquoo-UON
002'1Z4 ’ 000'91 oos'sr yee — 000'rr 000‘OLL sOulwee poulejoy
000's9 000°! + 000'01 000's9 winjweud eseys
000'021 o00'ov st 000'0r 000041 feydeo areys
000°€0r 0000 000°%Z SanGeEH EOL
000°e01 000'0E O000°EL ‘aiqeked sjunoooy
ALINDA GNV SALLITIGWIT
p00%08y 00°24 000°8LF SLSSSV TVLOL
000°E 000'e 4 5 = TMpooS
o00'o8L z o00'z ooze o00'0e 000'0rL yeu wewdinb3
- 5 000'sz S 000'sz Aueipisqns ul juauysanul
oo0'oz a 000'r o00'y + o00's o00'soL . Asoquaauj
000'26 000'zz 000'Sz aqealaoas syuncooy
00'08 = = 000'2S 000'ez yse
= —— aie} aa siassv
“peiepyjosuon 4 Je1 37D Sjueunsni[pe uopepliosuoD # ye15rO “dul ZAK “0D OaV
9ST Consolidated Financial Statements (Part 1) ~——T
15
Whether the contemporary method (
iilustrated) or the traditional method » the first method
used in preparing
consolidated financial statements, the concepts applied
same, Analyze the summary below: Sais
an ABC Co, XYZ Inc, Consolidated —
a 23000 57,000 60.000 _/ Subsdlny eos
acces abe 75,000 22,000 $7,000 =
. 105,000 15,000 120,009//__ | Measure asuts and Liabilities at
Sem bedi 75,000 ES | acquisition date fai values, net of
Invensnen 140,000 30,000 coereciaieny
guigenent net 180,000 "| -tavty (105K +15K + OFVA, net)
Equip (MOK +30K + 10K FVA, ne)
coodwill 3,000,
TOTAL ASSETS 478,000 124,000 480,000. \ eee
Recognize the goodwill
[ABILITIES AND EQUITY
Accounts 73,000 _ 30,000 103,000
2 oxalate 75,000 30000 103,009. | These erain to theparet onl
Sexe 7000 40900 17000° £7 ther te chap nubs
share premium 65,000 10,000 65,000
Retained earings 110,000 44,000 121,200
203800 <_| Replace the subsidiary’ equity
accounts with the NCI in net assets.
so
Total eqxty "345,000 94,000 ___ 377,000
480,000
‘TOTAL LIABILITIES & FOS
TOTAL LIABILITIES & EQUITY 418,000 _ 124,000
oy 300,000 120,000 420,000 -—_| Recognize depreciation of FVA:
(165,000) (72,000) _ (241,000) <_] ~ COCS: GeSK 72K: Ak Ine
* Depreciation expense: (WOK + 10K +2K
Cost of goods sold
% 135,000 48,000 179,000, /| isin
‘Gras profit
Depreciation expense (40,000) (20,000) (62,000)
Diseibution costs (85,000) (28,000) _* 63,000)
60,000 20,000 74,000
‘rok forthe year
The formulas below may provide additional guidance in
e formulas are
a
solving CPA board questions. Analyze how th
derived from the summary above.
Total assets of parent _ 418,000
Total assets of subsidiary 124,000
Investment in subsidiary (75,000)
Fair value adjustments — net 10,000
Goodwill - net 3,000
Consolidated total assets 480,000 qilustration 2: NC
ary 1, 2
ion date
« XZ
97000 and fair value of P90,000. The difference is due toa.
pment with a carrying amount of 60,000 and fair
value of 976,000. The equipment’s remaining useful life is
piece of equ
years.
{ measured at Fair Value
20x1, ABC acquired 80% interest in XYZ, Ine. fy.
7 in. 1, 20x1):
7's net identifiable assets have a carrying amount of
Chapter 4
ew
«ABC measured the NCI at a fair value of ®20,000.
assets
ent in subsidiary (at cost)
Equipment, net
TOTAL ASSETS
Total liabitities
Share capital
Retained earnings
Total equity
TOTAL ABILITIES AND. EQUITY
ion on subsequent reporting date (Dec. 31, 20x):
ABC Co.
178,000
80,000
160,000
418,000
73,000
235,000
110,000
345, 5, 000
418,000. (Part
159
In ren 130,000
5 (240,000) (10,0
expe an — (240,000) __(100,000)
pRoHT FOR THE YEAR a 60,000 30,000
«There were NO dividends declared, no intercompany
transactions and no impairment of goodwill in 20x1.
Prepare the consolidated financial information on.
Step 1: Analysis of subsidiary’s net assets
: ‘Net
XYZ, Inc. Jan, 1, 20x1 Dec. 31, 20x1 change
Net assets at carrying amount 74,000 104,000
Fair value adjustments: (FVA) 16,000" 12,000
90,000 116,000 26,000
Net assets at fair value
Useful life Depreciation FVA, 12/31/x1
Gl] FVA, 1/1/x1
Equipment _ 16,000" 4yrs. 4,000 12,000
Totals 16,000, 4,000. 12,000
* (75,000 fair value ~ 60,000 carrying amount)
Step 2: Goodwill computation
aimee at ‘proportionate share’, the goodwill is
7 aa to the owners of the parent. However, if NCI is
ownets of the ir value, the goodwill is attributable to both the
parent and NCI. To compute for the attributed
amounts, we wi .
follows: will modify our previous formula for goodwill as 160 Chapter 4
Consideration transferred
Previously held equity interest in the acquiree
Total
Less: Parent's proportionate share in the net assets
of subsidiary (90,000 x 80%) - Step 1
Goodwill attributable to owners of the parent
Fair value of NCI
Less: NCI's proportionate share in the net assets
of subsidiary (90,000 x 20%) - Step 1
Goodwill attributable to NCI
Goodwill - Dec. 31, 20x1
We can reconcile the computed amount using our
previous formula:
Consideration transferred 80,000
Non-controlling interest in the acquiree (air value) 20,000
Previously held equity interest in the acquiree Z
Total
Fair value of net identifiable assets acquired (Step 1)
Goodwill - Dec. 31, 20x1
- Step 3: Non-controlling interest in net assets
The amount of goodwill attributable to NCI is included in the nai
net assets as follows:
Step 4: Consolidated retained earnings
late retained earings ~ Dec. 31, 20x1
a S share in the net change in subsidiary's net assets
‘onsolidated retained arming ngs - Dec. 31, 20x1 sat Finacial Statements Dart 1)
consi
ny lol
w Net change xy : Set Assets (Sty
mratipt’ [ABC's interest in XY a
veces in the net change ind net asset, 80%
ABC'S Ss net assets 5
step consolidated profit or loss
rise ABC & XYZ (81K 308) 90,000
Depreciation of FVA (Ste) (4000)
restate meh 86,000
Owners of parent_NCI Consolidated
spafore FVA 60,000 N/A 60,000
24,000 6,000 30,000
cats provi
part Z's profit before FVA “?
De vecation of EVA o ee ae
0,800 5,200 86,000
Totals
og = 24,000); (30K x 20% = 6,000)
ve ok profit of XYZ x 80% =
a of FVA x 80% = 3,200); (AK om
dated financial jnformation — December 31, 20x1
Consoli
ther assets (178000 +44,000) 222,000
Investment in subsidiary (Eliminated)
Equipment, net 160,000 90.000 + 12,000 FVA net, Step 1) 262,000
Goodwill (Step 2) 10,000 _|
TOTAL ASSETS 494,000
LIABILITIES AND EQUITY
Total liabilities (73,000 + 30,000) 103,000
Share capital (Parent only) 235,000
\ Retained earnings (Parent ontly - Step 4) 130,800.
Otoners of parent . 356,800
| Non-contolling interest (Step 3 25,200
{ol equity 391,000
494,000.
TOTAL LIABILITIES AND EQUITY
430,000
Income (200,000 + 130,000)
(344,000)
Expense
PROFIT} TON es 100,000 + 4,000 dep’n of FVA, Step 1)
ITFOR THE YEAR _ = 86,000 162 Chapte
“—
gor goodie anol NCL gy,
an the Same.
pampurtations
> When NCL is measured at ftir value, the 00
ps ema
#s (Le. Stops 2 and 3) are modified, The other Se
Subsidiary’s cumulative preference shares /
cumulative preference shang
If the subsidiary has outstanding ae
“ad held by non-controlling kere
~ qwhether declared OF HOt, ay
profit before computing, for the
that are classified as equity
one-year preferred divident
deducted from the subsidiary’s
share.
parent’
Mlustration: Subsidiary’s cumulative preference shares
Bear Co. owns 75% of Cub Co's ordinary shares. Cub Co. his
P100,000 outstanding 12" preference shares, none ¢
which are held by Bear C ted individual
234,000 and PI 0x1. Neither
declared dividends.
> cumulative
9. Bear and Cub report
000, respectively, in
The preference shares have
profits of
company
dividends in arrears of 3 years.
Requirement: Compute for the profit attributable lo the owners of
the parent and NCL
Solution: —_ _
Owners ofparent NCI __ Consolidated
Bear's profit 234,000 N/A 234,000
Share in Cub’s profit 52,7500 175,000
Total 2,750 409,000
© Profit of Cub. Co. 175,000
One-year dividends on cumulative preference sh. (100K x 12%) (12,00)
Profit of Cub Co. attributable to ordinary shareholders oi
> Bear's share (163,000 x 75%) 122,280
> NCI's share (163,000 x 25%) 40,730
}
12,000
Profi :
rofit of Cub. Co. attributable to preference shareholders
NCI’s share in profit al al dinary shareholders
: a profit attributable to ordinary 5
: y shareholders _40/
Total NCI's share in Cub’s profit , = _163
ot SUMED ned Tran]
quired to prepare consolidated finan
c Fe arent is re
cgavement except in limited cases mentioned in PFRS 10.
jdated financial statements provide information on a
parent and its subsidiaries viewed asa single reporting entity.
Tre basis fOr consolidation is control. Control exists if an
5 the following over an investee: (1) power; (2)
*yestor has
or rights, to variable returns, and (b) ability to affect
when control is obtained and ceases when
ied for prospectively.
prepared using uniform
ation starts ¥
Jost. Both cases are account
financial statements are
cies and same reporting date.
Ives the following:
ent in subsidiary” account.
ry’s assets and liabilities at their
net of depreciation.
jidation invo!
the “Invest
a. Measure the subsidia
| acquisition-date fair values,
p.Recognize the goodwill.
c Replace the subsidiary’s eq
assets.
2 Add, line by Jin
« Co
1. Eliminate
uity accounts with NCI in net
e, similar items of assets and liabilities.
gS include the retained earnings
+ Consolidated retained earnin|
hare in the change in net assets
of the parent plus the parent's $
of the subsidiary since acquisition date.
0 Na in net assets includes the NCI at acq
Ndls share in the change in net assets of
| , ee date.
| a init is presented within equi
| te owners of the parent.
eae
| solidated profit or loss is attributed to the (
f the parent/and (b) NC
uisition date plus the
the subsidiary since
ty but separate from
a) owners 164 '
=e Chap
Relevant provisions of the PFRS for SMEs
Section 9 Consolidated and Separate Financial Staten,
A parent is required to prepa’ consolidated financial giant
except if: oa “Mey
a. the parent is itself 4 subsidiary and it5 Ultima, |
intermediate parent roduces consolidated 4,\"°
ith full PERSS or the PERS fo,
statements that comply with fu sor the PERS for sue
Ss,
quired with the intention of a
the acquisition date. ing
is not sold within one year, it m
consolidated by restating all prior period financial statems
except when the failure to sell is beyond the parent's con,"
sare parent remains committed t0 sell the subsidiary ny
b. the subsidiary is a
within one year from
If the subsidiary
A subsidiary is not excluded from consolidation sing
2. the investor is a venture capital organization or similar ent
or
b. the subsidiary’s business activities are dissimilar to those ¢
the other entities within the group, OF
c. the subsidiary operates in a jurisdiction that imposes
restrictions on transferring cash or other assets out of the
jurisdiction.
A parent that does not have public accountability may
preseni its separate financial statements in accordance with the
PERS for SMEs, even if it presents its consolidated finandal
statements in accordance with full PFRSs.
Special purpose entities (SPE)
An SPE is an entity that is created to accomplish a nal
objective (eg,, to effect a lease, undertake R&D activities
securitize financial assets). An SPE may take the form
corporation, trust, partnership or unincorporated entity. j
entitys oe are controlled by an entity are include
ted financial statements. fe
ajidated Financial Statements (Part 1) 165
Consolidate
control is “the power to govern the financial and operating
» eivcies of an entity s0 as to obtain benefits from its activities”
or intro is presumed to exist when the parent owns, directly
oe indirectly through subsidiaries, more than half of the
voting power of an entity.” (PFRS for SMES 9.4 & 9.5)
Consolidation procedures ;
a. Eliminate the investment in subsidiary.
b Measure the NCI in net assets and NCI in profit or loss and
: present them separately from those of the owners of the
parent. ;
c. Add, line by line, similar items of assets, liabilities, equity,
income and expenses of the combining entities.
The parent’s and NCI’s shares in the subsidiary’s changes
in equity and profit or loss are computed based on existing
ownership interests and do not reflect the possible exercise or
conversion of options or convertible instruments
Intragroup balances and transactions
Intragroup balances and transactions, including income,
expenses
and dividends, are eliminated in full.
Uniform reporting date -
The parent's and the subsidiary’s financial statements used in
Consolidation shall be Prepared as of the same reporting date. If
not, the subsidiary’s financial statements are adjusted first before
they are consolidated,
Uniform accounting Policies
— ae nancial statements are Prepared using uniform
are Giferent gn Ifa subsidiary uses accounting policies that
Statements are ie those of the group’s, the subsidiary’s financial
Justed first before they are consolidated. Acquisition and disposal of subsidiaries
The subsidiary’s income and expenses are consolidated
acquisition date to the date the parent ceases to conty
subsidiary. ;
When control ceases, the difference between the di
proceeds and the subsidiary’s carrying amount at disposal d;
recognized as gain or loss.
The cumulative amount of any exchange differen,
relate to a foreign subsidiary recognized in other compre
income is not reclassified to profit or loss on disposal of
subsidiary. ¥;
If control ceases but the investor (former parent) cor
to hold investment in the former subsidiary, the invest
accounted for
2. at fair value, with changes in fair value recognized in profi
less, or
b. at cost less accumulated impairment losses.
Investments in quoted shares and investments for w
the fair value-can be measured reliably are measured at fair va
Measurement at cost is appropriate only when fair value cat
be measured reliably. The carrying amount of the investment
the date control ceases is the investment’s deemed co:
measurement purposes. d
If the investment retained in the former subsid
qualifies as an investment in associate or an interest in a joi
controlled entity, the investment is accounted for
a. at fair value, with changes in fair value recognized in profit
_ _ |oss,or 3
o at cost less accumulated impairment losses, or
* using the equity method. a eweweGme—— 167
PROBLEMS:
pROBLEM 1: TRUE OR FALSE
1, The bas! for consolidation is power. fF Creo
> Entity A acquires Entity B on November 1, 20x1. The 20x1
consolidated profit includes Entity B’s profit from January 1 to
December 31, 20x1 - it is as if control had existed for the entire
year. F ; Trem NOW 4 1 V awoke
Goodwill is remeasured to fair value at each reporting date. ¢
' py F en “DBT Fy LESS
w
Shecomyc ned Mh VaeD Lass
Use the, following information for the next two items:
Entity A acquired 90% interest in Entity B on January 1, 20x1
when Entity B’s net assets had a fair value of #100. On December
31, 20x2, Entity B’s net assets increased to 200 after adjustments
for acquisition-date fair values, net of depreciation.
The NCI on December 31, 20x2 is 20. ¥
Before consolidation, Entity A’s retained earnings balance is
1,000. The consolidated retained earnings is P 1,090. ¢ x
6. NCI in the net assets of a subsidiary is presented in the
consolidated financial statements as a mezzanine item. '
7. Goodwill is attributed both to the owners of the parent and
non-controlling interests only if the non-controlling interests
are measured at fair value. ~
8. The amount of goodwill attributed to non-controlling interests
is included in the measurement of non-controlling interests in
gn
the subsidiary’s net assets. 7
Use the following information for the next two items:
wy Co. owns 80% of Night Co. Day and Night reported profits of
fa and 100, respectively, in 20x1. There is no depreciation of
‘air value adjustment.
9, ‘
* Pe consolidated profit is P300, 7 Cart"
' The profit attributable to the owners of Day Co. is P280. *
[20+ & win] ° 25 aaSSQQx>__—_ i
—
Chapter 4
168
PROBLEM 2: FOR CLASSROOM pIsCUSSION
Consolidation at acquisition date
1. On January 1, 20x1, Health Co acquired 70% interes;
Wealth Co. The finanei@ ai stacemen's of the combining enti
right after the business combination are as follows:
Health Co- Weailtirg
Cy,
Cash 100.00 nt
" 00
Accounts receivable O ra c ay
Inventory y 4
Investment in subsidiary 560,000 |
4 30,000 10 py
400m)
Prepaid assets
5700)
Building, net ! f
Total assets 2ALY
70,000 90,0
Accounts payable )
Share capital ! 1,000,000 20000
Share premium d 350,000 50.00
Retained earings 990,000 230.05)
2,410,000 570.000
Total liabilities and equity,
of Wealth’s assets and liabilities
ate fair values, exce ot as follows:
Fair value
The carrying) amounts
approximate the acquisition-d
Carrying amount
‘Accounts receivable 40,000 20,000
7 400,000 540,000
Building, net
Health measured the NCI at ‘proportionate share’.
Requirement: °] .
quirements Prepare the consolicated statement of financial
position.
‘proportionate’
ea
consolidation subsequent to acquisition date -
ary
2. Pink Co. acqui: I% i
a quired 90% interest in Floyd, Inc. on Janu sancial Statements (Part 1)
sion on Jan. 1, 20x1:
net identifiable assets have a carrying amount
i ni
and fair value of P600,000. The difference is due S
* plovd’s
psd, 000
.
5 the following: :
Carrying amount Fair value .**
Tentory 100,000
Building, net 400,000
The remaining
pink measure
Information’ on Dec. 31, 20x1:
‘d the NCI at ‘prop
110,000 *%
510,000 1'¢
ugafal life of the building is 5 years.
ortionate share’.
statements of) ‘financial position
“ysat December 31, 20x1
ASSETS Pink Co. Floyd Co.
Cash . 620,000 120,000
‘Accounts receivable me ans
Nee bad 56000 ;
Investment in subsidiary (at cost) PaO j a
Prepaid assets D
paling et 1,100,000 350,000
Total assets 2,660,000. 658,000,
Accounts payable 50,000 90,000
Share capital 1,000,000 200,000
Share premium 350,000 50,000
Retained earnings 1,260,000 318,000
Bs
Teta iabltes and equity 2,660,000 658,000.
Statements of profit or loss
For the year ended December 31, 20x1 :
Sales Pink Co. Floyd Co.
Cost of 600,000 200,000
Gispat sold (200,000) (60,000)
Depreciation o 400,000 140,000
ee (100,000) 60,000) 170
Chaptery
Distribution costs
Profit for the
year
no dividends declared, 0° intercom,
goodwill in 201 7
e There were
ment of
transactions and no impair
Requirement: Prepate the December 31, 20x1 consolidated finang,
statements.
Solution:
quisition date - ‘fair value’
receding problem except that Pi
£965,000.
mn subsequent toa
Consolidatio
formation in the p
3, Use the ink
measured the NCTat a fair palue 0}
the December 31, 20x1 consolidated finané:
Requirement: Prepare
statements.
PROBLEM 3: EXERCISES
4. On January 1, 20x1, Sunny Co. acquired 60% interest in Rai
Co. for 300,000. The financial statements of Sunny Co.
i ght after the business combination follows:
Sunny CO. Rainy Co- i!
Carrying Carrying
amt. amt.
Inventory 400,000
Investment in subsidiary 300,000
600,000
Accounts payable
Share capital
Retained earnings ted Financial Sta
1
Chis measured uneler the proportionate share metho
Requirement: Prepare the consolidated statement. of financial
position on January 1, 20x1.
On January 1, 20x1, Hammer Co. acquired 80% interest in Volk
Co. The financial statements of the combining entities right
Cash 160,000 70,000
‘Accounts receivable 200,000 110,000
Inventory 400,000 80,000
Investment in subsidiary 520,000 2
Building, net 1,000,000 300,000
Total assets - 2,280,000 500,000
Accounts payable 100,000 20,000
Share capital 1,000,000 200,000
Share premium 300,000 100,000
Retained earnings 880,000 180,000
Total liabilities and equity 2,280,000 500,000
bilities approximate their fair values,
+ Folk’s assets and lial
100,000) and building (fair
except inventory (fair value is
value is ®400,000).
+ Hammer measured the NCI at ‘proportionate share’.
Requirement: Prepare the consolidated statement of financial
position.
3. On January 1, 20x1, Run Co. acquired 80% interest in Walk Co.
Information on Jan. 1, 20x1:
©. Walk 1. 1 20x
pare net identifiable assets have a carrying amount of
,000 and fair value of P600,000. The difference is due to the following: inventory (carrying amount, g; 00
100,000) and building (carrying amount, 300,009 fap
400,000). a
«The remaining useful life of the building ig 10 Year
« Runmeasured the NCI at ‘proportionate Share’, *
Information on Dec. 31, 20x1: 7
Statements of financial position
As at December 31, 20x1
ASSETS Run Co, +)
Cash 750,000 k
Accounts receivable 260,000
Inventory 200,000
Investment in subsidiary (at cost) 520,000
ant
Total assets 2,680,000 al
=
Accounts payable 80,000 ir
Share capital 1,000,000 2ang
Share premium 300,000
Retained earnings 1,300,000
Total liabilities and equity 2,680,000
Statements of profit or loss
For the year ended December 31, 20x1
Run Co.
Sales 800,000
Cost of goods sold (200,000)
Gross profit 600,000
Depreciation expense (50,000)
Distribution Costs (130,000)
420,000
: . cai
There were no dividends declared, no interc™!
transactions and no impairment of goodwill in 20x1- yr
sted Finacial Statements (Part 1)
yuo Prepare the December 31, 20x1 consolidated financial
gqatementS:
information in #3 above except that Run Co.
use the same
ata fair value of P130,000.
? red the NCI
meas
Requirement? Prepare the December 31, 20x1 consolidated financial
e
statements.
20x1, Joy Co. acquired 60% interest in Axion,
5. On January 1,
Information on Axion’s financial position on
Inc. for £300,000.
this date follows: .
+ The identifiable assets and liabilities approximated their
fair values except for inventories with carrying amount of
120,000 and. fair value of P80,000 and building with
carrying amount of P200,000 and fair value of ?250,000.
The building has a remaining useful life of 5 years.
+ Axion’s equity comprises only share capital and retained
earnings with carrying amounts of P250,000 and P40,000,
respectively.
« NClis measured at ‘proportionate share’.
All the inventories on January 1, 20x1 were sold during 20x1. No
dividends were declared by either entity during 20x1. There were
also no intercompany transactions and no impairment of
goodwill. The individual financial statements of the entities on
December 31, 20x1 are shown below:
Statements of financial position
4s at December 31, 20x1
JoyCo. Axion Co.
—_ foy Co. ‘ion Co.
“ash
4 143,000 60,000
Wentory
msn 440,000 160,000
ment in subsidiary (at cost) 300,000
ial =net 560,000 160,000
TAL ASSET: : =
SS 1,443,000 380,000
>, 14
LIABILITIES AND EQUITY
ble 200,000
1,000,000
243,000
1,243,000
1,443, 000
apital
Retained earnings
TOTAL LIABILITIES AND EQUITY
Statements of profit or loss
For the year ended December 31, 20x1
Joy Co.
Sales 300,000,
Cost of goods sold (165,000)
Gross profit . 135,000
Depreciation expense (40,000)
Distribution costs (32,000)
Profit for the year__
Reguirement: Prepare the consolidated financial statements as
December 31, 20x1.
6. Use the same information in #5 except that Joy Co. measu
the NCI at fair value of ®132,000.
Requirement: Prepare the consolidated financial statements as a
December 31, 20x1. Consolidated Financial Statements (Part 1) 17
5
pROBLEM 4: MICROSOFT EXCEL -
NOTE: This activity is OPTIONAL as the learner will need to
have access to a COMPUTER with a Microsoft Excel _®
tion installed in it.
applica
Open a Microsoft Excel® Worksheet and copy the following:
fa feat, |
fa Parent Subsidiary
2) Cash 40,000 5,000
3 | Accounts receivable 50,000 20,000
4, Inventory 10,000 25,000
5 investment in subsidiary 180,000
ra} Land 800,000 250,000
7
8 | Accounts payable 90,000 130,000
“9 | Share capital 500,000 80,000
10) Share premium 100,000
“1| Retained earnings 390,000 90,000
> To place commas on the amounts or increase/decrease
decimal places, use these buttons.
Dao ae 7
FI ee rete temas 0s trv
Bec re a ee Mere,
Be Bee Rupioe SA
Boor
hdd
Aoret c
SS
2. Make your table look like this: Parent
1
2
3
4
5
6
7 Goodwill
8 Toto, 4,080,000 300,009
9
“10 Accounts payable 30,000 130,000
“11. Share capital 500,000 80,000
“22. Share premium 100,000 ;
43. Retained earnings 390,000 90,000
44 NC
300,000
To format words or amountsinto *bold’, ‘italic’, or ‘bold ital,
use these:
Date
SG are
ha lines or double-rutes, use this:
shortcut for bold is CTRLAB, while the shortcut for italic is Subsidiary Consolidated
40,000 5,000
50,000 20,000
Invento! 10,000 25,000
{ment in subsidiary 180,000
800,000 250,000
Land
aright click, @ dropdown list appears, select ‘Insert’ from that list.
@ To get the total of Parent's assets, you can do any of the
following:
a. Select cell B8 then left click “AutoSum” (located: on the
“Honie” tab, “Editing” menu bar) - this one; or
b. Select cell BS then type the following formula =sum(B2:B7)
> To check a formula, select the cell with the formula (e.g., cell
B8) then press the ‘F2’ key on the keyboard.
> To get the total of Subsidiary’s assets, you can copy the
formula in cell B8 and paste it on cell C8, for example, select
cell B then press CTRL+C (shortcut for copy), select cell C8
then press CTRL+V (shortcut for paste).
> Get the totals of Parent's and Subsidiary’s liabilities and
equity,
CX
5 eS ATON PROCEDURES
, 5 pre the investment in subsidiary account by:
, asuring the subsidiary’s assets and liabilities at their
cquisition-date fair values; pter 4
ee
b Recognizing ree
: Replacing the sub:
net assets.
sdiary' equity accounts'with the No,
eenanress and liabilities approximate td
’ oe fair values, except for the following:
- Inventory, #5,000
- Land, 630,000
+ The goodwill is $30,000.
. The NCLis ®50,000. -
Step 1: Type zero for investment in subsidiar
column, :
'y in the “Consolidatg
Step 1(a);
® Select cell D4 then type
=B4+5000, Press enter.
* Select cell D6 then type
=B6+300000. Press enter.
Step 1(b);
ep 1(b): Ye 30000 for goodwill in the ‘Consoli ated’ column.
Step 1(c):
® 10): Type 50000 for NClin the ‘Consolidated’ colu
At this poj |
'S Point, your table Should look like
Ike this: . r
Statements (are
nancial Statement
cant Fi
Subsidiary Consolidated
40,000 5,000
| ats receivable 50,000 20,000
scour 10,000 25,000 15,000
4 ee ent in subsidiary 180,000 A
$ Invest™ 800,000 250,000 1,100,000
6 wil 30,000
90,000 130,000
accounts payable
44. share capital 100.000 “mm
“> share premium -
a2) St , 390,000 90,000
= petained earnings d
3B 50,000
44 NC 1,080,000 300,000
5. Totals
Step 2: Add, Tine by line, similar items of assets and liabilities: of
the combining entities.
> Select cell D2 then type =B2+C2. Press enter.
> Copy the formula in cell D2 (select cell D2 then press CTRL+C
on your keyboard).
Goto cell D3 and paste the formula (CTRL+V).
Go to cell D10 and press CTRL+V.
Select cell D1 then type =B11. Press enter.
Copy the formula in cell D11 and paste it on cell D12 and cell
D13,
Get the totals of asse
Consolidated’ colu mns.
vvv
F
ts and liabilities and equity in. the
These should be equal.
YX
Our table should look like this: 5 Investment in subsidiary 180,000 S,oqy
6 | Land 300,000 250,000
7 | Goodwill 7,100,099
8 Totals 7,080,000 __300,000 fl ae
9
10. Accounts payable 90,000 130,000 200%
11. Share capital 500,000 80,000 Sony
12. Share premium 100,000 100.0%,
13. Retained earnings 390,000 90,000 390,009
14 | NCL 00t9
15 | Totals 7,080,000 300,000 7,260,000"
Print the file and submit it to your teacher for grading.
PROBLEM 5: MULTIPLE CHOICE - THEORY
1. According to PFRS 10
a. a parent entity is required to consolidate its subsidiaries.
b, a parent entity is encouraged but not required to
consolidate its subsidiaries.
c. a parent need not consolidate a subsidiary if the
subsidiary’s business is different from that of the parent.
d. a parent entity is required to consolidate its subsidiaries
only for internal reporting purposes.
2. Which of the following is not an element of control?
a. Power
b. Exposure, or rights, to variable returns
©) Major holdings
d. Ability to affect return 8
ithe essential elements of control ig
yne oF s wows cd
$ peRS 10, an investor has power if
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