BM2010

Consolidation – Subsequent Dates

The Consolidation Procedures (Guerrero & Peralta, 2017)

International Financial Reporting Standard (IFRS) 10 requires that a parent shall prepare consolidated
financial statements using uniform accounting policies for like transactions and other events in similar
circumstances. For example, on the measurement of property, plant, and equipment, if the group uses the
revaluation model, then all entities in the group shall use the said valuation model to measure their property,
plant, and equipment.

However, there are times that a subsidiary may have to adopt an accounting policy that is different from
that is used by the parent. In such cases, appropriate adjustments shall be made to the financial statements
of the subsidiary to align its policy to those used in the consolidated financial statements. For example, Son
Company (SC), a subsidiary of Parent Company (PC), used the cost model to measure the biological assets
because they did not adopt the International Accounting Standards (IAS) 41 – Agriculture. If PC and its
other subsidiaries use the fair value model for biological assets following IAS 41, then the amount of
biological assets in the financial statements of SC shall be adjusted first before they can be included in the
consolidated financial statements.

Consolidation and Accounting Procedures

As one can remember, consolidation of an investee begins from the date the investor obtains control of the
investee. It ceases when the investor loses control of the investee.

The approach used in preparing a complete set of consolidated financial statements subsequent to the
acquisition is similar to preparing a consolidated statement of financial position (SFP) as of the date of
acquisition. However, in addition to the SFP, the statement of comprehensive income (SCI) and statement
of retained earnings (SRE) must also be consolidated.

Consolidated financial statements are prepared using the following basic accounting procedures:

• Combine like items of assets, liabilities, equity, income, expenses, and cash flows of the parent with
those of its subsidiaries.
• Eliminate the carrying amount of the parent’s investment in each subsidiary and the parent’s portion of
the equity in each subsidiary.
• Eliminate in full the intercompany assets, liabilities, equity, income, expenses, and cash flows relating
to transactions between entities of the group. Intercompany losses may indicate an impairment that
requires recognition in the consolidated financial statements.

Consolidated Comprehensive Income

As the consolidation subsequent to a subsidiary’s acquisition involves changes that take place over time,
the resulting financial statements rest heavily on the concepts of comprehensive income.

Consolidated comprehensive income may be solved using two (2) approaches:

• Parent Company Approach. In this approach, the consolidated comprehensive income is part of the
total enterprise’s income assigned to the parent company’s stockholders. For a wholly-owned
subsidiary, all income of the parent and the subsidiary accrue to the parent company. For a partially
owned subsidiary, a portion of its income accrues to its non-controlling interest (NCI), and it shall not
be included in the consolidated net income.

In simple cases, the consolidated comprehensive income equals the total earnings for all companies
consolidated, less any share of NCI in the income.

Illustrative Example:

P Company (PC) owns 80% of the stock of S Company (SC) which was purchased at book value. In
20X1, SC reported a comprehensive income of P50,000 while PC reported a comprehensive income
of P120,000, which includes P20,000 dividends from SC. The consolidated comprehensive income for
20X1 shall be computed as follows:

05 Handout 1 *Property of STI

 student.feedback@sti.edu Page 1 of 9
 BM2010

P Company’s Comprehensive Income P120,000

Less: Dividend Income (20,000)
Comprehensive Income from Own Operations 100,000
S Company Comprehensive Income from Own Operations 50,000
Total P150,000
Less: Share of NCI in S Company’s Income (P50,000 x 20%) (10,000)
Consolidated Comprehensive Income P140,000

• Entity Approach. When a subsidiary is wholly-owned by the parent, the consolidated comprehensive
income is computed similarly to that of the parent company approach. On the other hand, when a
subsidiary is partially-owned by the parent, the portion of its income accruing to the NCI is included in
the consolidated comprehensive income.

In short, the consolidated comprehensive income under this approach is equal to the total earnings of
all companies consolidated. If the NCI share is deducted from the consolidated comprehensive income,
one will derive the income attributable to the parent.

Illustrative Example:
Using the information in the above problem, the consolidated comprehensive income under the entity
approach is computed as follows:

P Company’s Comprehensive Income P120,000

Less: Dividend Income (20,000)
Comprehensive Income from Own Operations 100,000
S Company Comprehensive Income from Own Operations 50,000
Consolidated Comprehensive Income P150,000
Less: Share of NCI in S Company’s Income (P50,000 x 20%) (10,000)
Attributable to Parent P140,000

Accounting for Investment in Subsidiary (Guerrero & Peralta, 2017)

International Accounting Standards (IAS) 27 – Separate Financial Statements provides that in the separate
financial statements of an entity who have an investment in subsidiaries, joint ventures, and associates, it
may elect to account for its investments using the following methods:
• Fair Value Method. IFRS 10 – Business Combination, IFRS 12 – Disclosure of Interest in Other Entities,
and IAS 27 – Separate Financial Statements require a parent that is an investment entity to measure
its investment in particular subsidiaries at fair value through profit or loss following IFRS 9 – Financial
Instruments. Thus, there will be no consolidation.

An investment entity is defined as an entity that:

o Obtain funds from one (1) or more investors to provide them with investment management
services;
o Commits to its investors that its business purpose is to invest funds solely for returns from
capital appreciation, investment income, or both; and
o Measures and evaluates the performance of substantially all of its investments on a fair value
basis.

Illustrative Example:
Entity A, a vehicle manufacturer, is the parent company of investment entity B. The latter has holdings
in various companies that are not active in the automobile sector.
In this case, as an investment entity, B must report companies in which it holds a controlling interest at
fair value through profit or loss. On the other hand, A must fully consolidate its subsidiaries, including
B.

• Equity Method. It is used when the acquirer owns 20% up to 49% of the voting power off the acquiree.
In other words, this method is used when the acquirer exercises a significant influence only over the
operations of the acquiree. This method is applied to investments in associates and joint ventures.

05 Handout 1 *Property of STI

 student.feedback@sti.edu Page 2 of 9
 BM2010

• Cost Method. It is used when the acquirer owns directly or indirectly more than half of the voting power
of the acquiree. In other words, it is used when the acquirer exercises control over an acquiree. In this
method, the “Investment in Subsidiary” account is retained at its original cost-of-acquisition balance.
Income on the investment is limited to dividends received from the acquiree.

Consolidation of Wholly- and Partially-Owned Subsidiaries (Guerrero & Peralta, 2017)

Just like the consolidation at the date of acquisition, consolidation in the subsequent dates also depends
on whether the subsidiaries are wholly- or partially-owned by the parent company. Given below are their
various instances.

Consolidation of Wholly-Owned Subsidiary

Given below is an example of a transaction for a wholly-owned subsidiary subsequent to the date of
acquisition.
Illustrative Example I:
On January 2, 20X1, Peter Corporation (PC) acquires all the common stock of Saul Company (SC) for
P300,000. At that time, SC has P200,000 of common stock outstanding and retained earnings of P100,000.
The carrying and fair values of SC’s net identifiable assets are equal.
Analysis of the acquisition is as follows:

Consideration P300,000
Non-Controlling Interest (NCI) -
Total Implied Fair Value of Subsidiary P300,000
Less: Fair Value of Net Identifiable Assets 300,000
Goodwill -

On December 31, 20X1, SC reported the following results of its operations:

Net Income P50,000

Dividends Paid 30,000
Required: Using the cost method, prepare the set of consolidated financial statements at the end of the
year.

Answer:
First, determine the goodwill or gain on bargain purchase. In this case, it was already given. Then, prepare
the entries that must be made by Peter Corporation for the year.

Then, prepare the elimination entries. The following steps may be followed in preparing for the elimination
entries:
1. Eliminate the parent’s equity in the subsidiary’s stockholder’s equity at the date of acquisition.
2. Eliminate the Dividend Income account against the Dividend Declared by the subsidiary.
Using the above steps, the working paper elimination for Peter Corporation and Saul Corporation on
December 21, 20X1, are given on the next page.

05 Handout 1 *Property of STI

 student.feedback@sti.edu Page 3 of 9
 BM2010

Then, prepare the consolidation working paper. There are various formats for preparing a set of
consolidated financial statements. One of the most widely used is the three-section working paper. It
consists of one (1) section for each three (3) basic financial statements: Statement of Comprehensive
Income, Statement of Retained Earnings, and the Statement of Financial Position. The other format is the
trial balance approach which consists of the trial balance of the parent and subsidiary, eliminations and
adjustments, Statement of NCI, Controlling Retained Earnings, and the Consolidated Statement of Financial
Position.
In this case, the three-section working paper will be used, as given below:

To assure the accuracy of the consolidated comprehensive income and consolidated retained earnings in
the working paper, one may verify them using the method given on the next page.

05 Handout 1 *Property of STI

 student.feedback@sti.edu Page 4 of 9
 BM2010

Lastly, prepare the consolidated financial statements.

05 Handout 1 *Property of STI

 student.feedback@sti.edu Page 5 of 9
 BM2010

Consolidation of Partially-Owned Subsidiary

Assume instead that on January 2, 20X1, Peter Corporation (PC) purchases 80% of the common stock of
Saul Company (SC) for P300,000. On the said date, the assets and liabilities of SC are equal, except for
the following:

Book Value Carrying Value

Inventory 60,000 65,000
Property, Plant, and Equipment 300,000 360,000

An analysis of the acquisition is as follows, wherein NCI is measured using fair value basis.

Consideration P300,000
Non-Controlling Interest (NCI) 75,000
Total Implied Fair Value of Subsidiary P375,000
Less: Fair Value of Net Identifiable Assets 365,000
Goodwill P10,000
All the beginning inventories are sold during the year; therefore, none is left in the ending inventory. The
property plant and equipment have a remaining life of 10 years from the date of acquisition, and the straight-
line method of depreciation is used.

For the first year immediately after the acquisition, Saul Company reported the following:

Comprehensive Income P50,000

Dividends Paid 30,000
Required: Using the cost method, prepare the set of consolidated financial statements at the end of the
year.

Answer:
First, determine the goodwill or gain on bargain purchase. In this case, it was already given. Then, prepare
the entries that Peter Corporation must make for the year.

Then, prepare the eliminations entries. The following elimination procedures may be used to eliminate
intercompany transactions when the investment is not equal to the book value of the interest acquired:
• Eliminate the equity accounts of the subsidiary at the date of acquisition against the investment and
NCI accounts.
• Eliminate the intercompany dividends and recognize the NCI’s share of subsidiary’s declared
dividends.
• Allocate excess to the specific assets and liabilities of the subsidiary.
• Amortize the allocated excess except goodwill following the accounting for the asset to which it is
assigned.
• Assign income of the subsidiary to NCI.

The above procedures are applied in this case, as given on the next page.

05 Handout 1 *Property of STI

 student.feedback@sti.edu Page 6 of 9
 BM2010

The amounts recorded in the elimination for allocated excess can be computed as follows:

The share of NCI from the adjusted net income of the subsidiary can be determined as follows:

Then, prepare the consolidation working paper as given on the next page.

05 Handout 1 *Property of STI

 student.feedback@sti.edu Page 7 of 9
 BM2010

To assure the accuracy of the consolidated comprehensive income and consolidated retained earnings in
the working paper, one may verify them using the following methods:

05 Handout 1 *Property of STI

 student.feedback@sti.edu Page 8 of 9
 BM2010

Lastly, prepare the consolidated financial statements.

Reference:
Guerrero, P., & Peralta, J. (2017). Advanced accounting: Principles and procedural applications, volume 2,
2017 edition. GIC Enterprises & Co., Inc.

05 Handout 1 *Property of STI

 student.feedback@sti.edu Page 9 of 9