CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS:

Lesson 3: SUBSEQUENT TO DATE OF ACQUISITION

Objectives:

At the end of the lesson, you will be able to:

a. Learn about the recognition and measurement in the financial statements of
the identifiable assets acquired, the liabilities assumed and any non-
controlling interest in the acquire for business combinations; and
b. Learn about the recognition and measurement of the goodwill acquired in
the business combination or a gain from a bargain purchase

If an entity is controlled by another entity (its parent) and their intragroup transactions, then its financial
statements may not reveal a true picture of its activities. Consolidated financial statements are prepared
on the basis that the group is a single economic entity, by aggregating the transactions and balances of
the parent and all its subsidiaries.

The IFRS and IAS are adopted in the Philippines as PFRS and PAS

Based on the new suite of consolidated standards, subsidiaries are accounted for under PFRS 10 while
disclosure requirements are based on PFRS 12 and preparation of separate financial statements are
based on PAS 27.

For the preparation of separate financial statements of an entity, i.e. the parent only financial statements
rather than the consolidated financial statements, investments in subsidiaries (and associates and joint
ventures) should be recognized either at cost or in accordance with PAS 39 or PFRS 9 Financial
Instruments.

COST METHOD OF ACCOUNTING

The cost method is based on the theory that the accounting for an investment in a subsidiary should be
the same as accounting for any other long-term investment in securities.

Under the cost method, an investor records its investment in the investee at cost.
Following is a summary illustration of parent company entries using the cost method:
Transactions Entries
1 Acquisition of share capital Investment
Cash/Other Assets/Share Capital

2 Profit reported by the subsidiary No Entry

3 Net loss reported by the subsidiary No Entry

4 Regular dividends paid by the subsidiary Cash/Other Assets

Dividend Income

5 Liquidating dividends paid by the subsidiary Cash/Other Assets

Investment

6 Year end adjustment for the differential:

Loss on impairment of goodwill.
Amortization of other intangible assets, No entry
and depreciation on the adjuatment in
plant and equipment values

Illustration:
The statements of financial position of Maricon Corp. and Gloria Co., on January 31, 2019, prior to a
business combination are presented below. Assume that all the non-current assets are depreciable assets.
Maricon Corp. Gloria Corp.
Book Value Fair Value Book Value Fair Value
Cash 25,000 5,000
Accounts Receivable 8,000 2,000
Merchandise Inventory 15,000 17,000 8,000 10,000
Plant and Equipment 42,000 50,000 16,000 19,000
Goodwill 5,000 1,000
Total Assets 95,000 32,000

Current Liabilities 17,000 3,000

Long-Term Liabilities 10,000 11,000
Ordinary Share Capital, P 2 par 40,000
Ordinary Share Capital, P1 par 4,000
Paid-in Capital in Excess of Par 10,000 3,000
Retained Earnings 18,000 11,000
Total Liabilities and Shareholders' Equity 95,000 32,000

Assume that on this date, GME Corp. share capital has a par value of P4.00 and a market value of
P5.00 while Maricon Corp. share capital has a market value of P2.50.
Maricon Corp. acquired 3,600 shares (90% interest) of the 4,000 outstanding shares of Gloria Co. on
January 31, 2019 by issuing 8,200 of its P 2.00 par and P 2.50 market value share capital. The entries for
some given transactions using cost method are as follows:

Transactions Entries
1 Acquisition of 3,600 sh Investment in Gloria Co. 20,500
Cost 8,200 @ P 2.50 Ordinary Share Capital 16,400
Additional Paid-In Capital 4,100

2 Gloria Co. reports P 40,000 profit for 2019 No Entry

3 Gloria Co. pays P 5,000 Cash 4,500

dividends in December 2019 Dividend Income ( P 5,000x90%) 4,500

4 Differential adjusting entry at December 31, No entry

2019

Consolidated Working Paper Subsequent to Acquisition

Subsequent to a business combination, a parent company together with all its subsidiaries shall continue
to maintain their separate accounting records. However, consolidated financial statements must be
presented by the parent of the entities in the group. This practice is an application of the basic feature of
financial accounting of substance over form wherein the entities (parent and subsidiary or subsidiaries)
are considered separate and distinct in form but are considered one in substance.

Prior to the preparation of consolidated financial statements, certain procedures must be followed. As a
result, consolidation procedure must be performed every period in which consolidated financial statements
are presented.

There are two working paper formats that may be used to consolidate financial statements subsequent to
acquisition which may include elimination of intragroup profits and losses, namely:
1. Trial Balance Working Paper- This format starts with the trial balances of the parent and the
subsidiary. When there is more than one subsidiary, each subsidiary is provided its own column.
2. Three-section working paper- The format, which provides one column for each subsidiary, is less
lengthy.

PREPARATION OF WORKING PAPER FOR CONSOLIDATED FINANCIAL STATEMENTS

Two steps are followed in the preparation of working paper: (1) preparation of the necessary adjusting and
elimination entries; and (2) combination of remaining items line-by-line.

The following adjusting and elimination entries are made in the working paper for the preparation of
consolidated financial statements:
1. Adjust the carrying amount of the investment account to the equity method balance at the
beginning of the current year.
 To record net increase in Retained Earnings
Investment in Subsidiary xxx
Retained Earnings, Parent xxx
  To record net decrease in Retained Earnings
Retained Earnings, Parent xxx
Investment in Subsidiary xxx
2. Eliminate the subsidiary shareholders’ equity accounts against the parent’s investment account
and recognize the non-controlling interest.
3. Eliminate Dividends Income received by the parent against dividends account of the subsidiary.
Dividend Income, Parent xxx
Dividend, Subsidiary xxx
4. Record the differential adjustment for the impairment of goodwill and/or depreciation on the plant
and equipment and/or amortization of intangibles for the difference between consideration
transferred and book value of the acquired interest in the subsidiary relating to prior periods and
current period.
 Impairment/depreciation/amortization on the increase in the recorded net asset values of
the subsidiary
Retained Earnings, Parent xxx
Expenses xxx
Assets xxx
 Depreciation on the decrease in the recorded net asset values of the subsidiary
Assets xxx
Expenses xxx
Retained Earnings, Parent xxx
Key points. The recording of the non-monetary assets at fair market value requires that future
depreciation/amortization on the assets be based on their acquisition price instead of their book
values.

Illustration. Assume that the trial balances at December 31, 2019 for Pamela Corp. and Sanyo Co.,
which are on the first two columns of the working paper presented on the following page. Pamela
Corp. acquired 80% interest in Sanyo Co. in January 2017 for P 300,000. On this date, the recorded
values of the assets and liabilities of Sanyo Co. approximate their fair market value, except for the
Equipment, which was undervalued by P 100,000. The equipment has an estimated remaining life
of 10 years depreciated on the straight line basis. Goodwill is tested for impairment. The expenses
and liabilities are inclusive of the income taxes. Pamela Corp. elects to measure the non-controlling
interest at its proportionate share of Sanyo’s identifiable net assets.

Profits and dividends of Sanyo Co. are reported as shown below:

Year Profit Dividends Paid
2017 30,000 16,000
2018 26,000 20,000
2019 32,000 10,000
88,000 46,000

The following computations are necessary before preparing the consolidated working paper.
1. Determine the book value of the interest acquired in Sanyo Co. at the time of the 80% share capital
acquisition, January 1, 2017.
 Ordinary Share Capital 40,000
Retained Earnings, January 1, 2019 138,000
Total Shareholders' Equity of Sanyo Co. 178,000
Interest acquired 80%
Book value of interest acquired 142,400

2. Determine and allocate the excess of cost over book value.

Cost 300,000
Book Value 142,400
Excess of cost over book value 157,600
Increase in equipment P 100,000 x 80% 80,000
Goodwill 77,600

3. Determine the amount of differential depreciation on the excess of cost over book value attributable
to equipment and impairment loss on goodwill.
a. Depreciation (P 100,000/10 years) P 10,000
b. Impairment of Goodwill 2,000
P 12,000
 Adjustments and Eliminations
Pamela Income Statement Non-controlling Interest Consolidated Statement
Debits Corp. Sanyo Corp. Debit Credit Debit (Credit) Debit (Credit) of Financial Position
Assets 100,000 30,000 130,000
Equipment 400,000 240,000 c 100,000 d 30,000 710,000
Investment in Sanyo Co. 300,000 a 16,000 c 316,000 -
Goodwill c 77,600 d 7,000 70,600
Expenses 320,000 110,000 d 10,000 442,000
- d 2,000
Dividends 10,000 b 8,000 2,000
1,120,000
Credits -
Liabilities 140,000 50,000 190,000
Ordinary Share Capital par P 1, Pamela Corp. 200,000 200,000
Retained Earnings, Jan. 1 Pamela Corp. 262,000 d 20,000 a 16,000 253,000
d 5,000
Ordinary Share Capital, P 2 par, Sanyo Co. 40,000 c 40,000 -
Retained Earnings, Jan. 1 Sanyo Co. 158,000 c 158,000 -
Revenues 510,000 142,000 (652,000)
Dividends Revenue from Subsidiary 8,000 b 8,000 -
Non-controlling interest c 59,600 (59,600)
Consolidated Net Income 210,000
Non-controlling interest Net Income 4,400 (4,400)
Net Income Attributable to Parent 205,600 205,600
62,000 62,000
1,120,000 390,000
TREATMENT OF SEPARATE ACCUMULATED DEPRECIATION ACCOUNT

Illustration: Assume that the equipment in the earlier problem is presented as follows:
Book Value Market Value Pamela Corp.
01/01/2017 01/01/2017 Difference 80% Interest
Equipment 180,000 348,750 168,750 135,000
Accumulated Depreciation (120,000) (232,500) (112,500) (90,000)
Net 60,000 116,250 56,250 45,000

The working paper elimination entry at December 31, 2017.

Equipment 135,000
Accumulated Depreciation- Equipment 90,000
Investment in Sanyo Co. 45,000

NON-CONTROLLING INTEREST

The portion of profit and loss and net assets of the group which belongs to the non-controlling interest
should be presented separately in the consolidated financial statements.

Illustration: XYZ Corp. acquired on January 1, 2017, 60% of the outstanding share capital of ABC Co. for
P 1,800,000. At the date the equity of ABC Co. comprised of Ordinary Share Capital of P 500,000 and
Retained Earnings of P 1,500,000. The book value of the net assets is equal to fair value except for the
equipment with a P 100,000 excess of fair value over book value and estimated remaining life of 10 years.
XYZ Corp elects to measure non-controlling interest at its proportionate share of ABC Co.’s identifiable
net assets.

The profit after tax of ABC Co. for the year ended December 31, 2017 was P 1,000,000 and the retained
earnings at that date were P 2,500,000.

The share capital and pre-acquisition retained earnings are eliminated against the cost of investment in
the consolidated financial statements with the following entry:
Ordinary Share Capital, ABC Co. 500,000
Retained Earnings, ABC Co. 1,500,000
Equipment 100,000
Goodwill 540,000
Investment in ABC Co. 1,800,000
Non-controlling Interest 840,000

The goodwill is calculated as follows:

Consideration Transferred 1,800,000
Non-controlling interest 40% (P 2,000,000+P100,000) 840,000
Total 2,640,000
ABC Co. net assets at fair value 2,100,000
Goodwill 540,000
The non-controlling interest in the profit for the year is P 396,000 (40% x (P1,000,000-P100,000/10).

The non-controlling interest in the net assets at year end is P 1,240,000 (40% x (P500,000 + P2500,000
+ P100,000).

The consolidated retained earnings will include XYZ Corp. share of the retained earnings since acquisition
of P 594,000 [(P594,000 [(P2,500,000-P1,500,000-P10,000)X60%].

CONSOLIDATED NET INCOME

The amount reported as consolidated net income is the combined net income of the parent and all the
subsidiaries after taking into consideration the various adjustments for intragroup balances and
transactions, intragroup profit and the impairment/ amortization/ depreciation of the differential. The part
of the income of the total enterprise that is assigned to the shareholders of the parent company is net
income (profit) attributable to the parent; while that part of the subsidiaries not attributable to the parent is
non-controlling interest net income (profit).

Illustration. Assume that Poveda Corp. owns 80% of the share capital of Santa Co. which was acquired
at more than book value. The excess is attributable to an equipment the requires adjustment in
depreciation of P 10,000. During 2017, Santa reports net income of P 100,000, while Poveda Corp. reports
earnings of P 400,000 from its own operations and dividends received from Santa of P 30,000.
Consolidated net income for 2017 is as follows:

Own operation income of Poveda 400,000

Net income of Santa 100,000
Adjustment for depreciation 10,000 90,000
Consolidated net income 490,000

The net income (profit) attributable to Poveda Corp. is:

Net Income of Poveda 400,000

Add Share in Santa net income P 90,000 x 80% 72,000
Net income attributable to the parent 472,000
Non-controlling interest net income is P90,000 x 20% = P 18,000

CONSOLIDATED RETAINED EARNINGS

Consolidated retained earnings is that portion of the undistributed earnings of the consolidated enterprise
accruing to the shareholders of the parent company. As with a single entity, ending consolidated retained
earnings is equal to the beginning consolidated retained earnings balance plus net income attributable to
the parent, less dividends declared by the parent.

Only those dividends paid to the owners of the consolidated entity are part of the consolidated retained
earnings statement.
Illustration. Assume the same data for Poveda Corp. and Santa Co. and the following additional
information:
Poveda Corp. Santa Co.
Retained Earnings, January 1, 2017 1,600,000 1,000,000
Income from own operations 400,000 100,000
Dividends from subsidiary 30,000
Dividends declared in 2017 (120,000) (40,000)
Retained Earnings, December 31, 2017 1,910,000 1,060,000
The computation of consolidated retained earnings is as follows:
Retained Earnings of Poveda on Dec. 31, 2017 1,910,000
Dividends Received from Subsidiary (30,000)
Share in adjusted subsidiary income 72,000
Consolidated Retained Earnings 1,952,000

CONSOLIDATED FINANCIAL STATEMENTS

A consolidated statement of financial position, a consolidated income statement and a consolidated

retained earnings statement are prepared after a period a subsidiary operations to present summary of
financial progress of the entities in a group.

The amount assigned to the majority shareholders is designated as net income attributable to the
parent.

UNIFORM ACCOUNTING POLICIES

Appropriate adjustments have to be made to a group’s financial statements that uses accounting policies
other than those adopted in the consolidated financial statements for like transaction and events in similar
circumstances.

MEASUREMENT

Income and expenses of a subsidiary included in the consolidated financial statements have to be from
the date of gaining control until the date control ceases in a subsidiary.

REPORTING DATE

The financial statements of the parent and its subsidiaries used in the preparation of the consolidated
financial statements shall have the same reporting date.

If not same reporting end for parent and subsidiary, for consolidation purposes, a financial statement of
the subsidiary will be prepared using same reporting date as the parent. However, if it is impractical to do
so, adjustments for the significant events will be made for the subsidiary financial statements but in no
case that the difference in the reporting date exceeds three (3) months.
SUBSIDIARIES ACQUIRED OR DISPOSED OF DURING THE YEAR

The results of operations of a subsidiary for the financial reporting period in which the subsidiary is
acquired are included in the consolidated income statement only from the date of acquisition. Similarly,
the results of operations of a subsidiary are included in consolidated net income up to the date of disposal.

Illustration: If a 45% interest was acquired on October 1, 2017 and a further 30% interest was acquired on
April 1, 2018, it would be appropriate to include in the consolidated net income for the year ended
December 31, 2018, 45% of the earnings of the subsidiary for the three months ended March 31, and 75%
of the earnings for the nine months ended December 31.

FINANCIAL REPORTING SUBSEQUENT TO DATE OF REPORTING

Financial statements prepared subsequent to an acquisition reflect the combined entity only from the date
of acquisition.

Illustration. Assume the following information for Maricon Corp and Gloria Co.
2017 2018
Maricon Corp.:
Separate net income
(excluding any income from Gloria Co.) 1,500,000 1,500,000
Shares outstanding 30,000 40,000

Gloria Co.
Net income 300,000 300,000

Maricon Corp. acquired all the share capital of Gloria Co. at book value on January 1, 2018 by issuing
10,000 shares of Ordinary Share Capital. Subsequently, Maricon Corp. presents comparative financial
statements for the years 2017 and 2018. The net income and earnings per share that Maricon Corp.
present in its comparative financial statements for the two years are presented below.

2017:
Net income (profit) 1,500,000
Earnings per share 50

2018:
Net income (profit) 1,800,000
Earnings per share 45

LOSS OF CONTROL

If a parent loses control of a subsidiary, it shall:

1. Derecognize the assets and liabilities of the subsidiary
2. Recognize the fair value of the consideration received, if any, from the transaction, event or
circumstances that resulted in the loss of control.
 3. Reclassify to profit or loss, or transfer directly to retained earnings the amounts recognized in OCI
in relation to the subsidiary.
4. Recognize any resulting difference as a gain or loss in profit or loss attributable to the parent.

Reference:
Advanced Accounting Part 2, 2014 Edition
Gloria Tolentino-Baysa
Ma. Concepcion Y. Lupisan