Intercompany vs Amortization of Excess

Source: Parent and Subsidiary or Acquisition

Subdiary with another
Subsidiary

Gain Eliminated between No Gain in Amortization

Parents & Subdiaries of Excess

Associate Investment:
Amortization of Excess= Only applicable to Depreciable Assets Loss Eliminated Between
Parent & Subsidiary
How to Report Income:
Excess/ Remaining Useful Life of the Depreciable Asset
Profit Reported by Subsidiary(Associate) Amorizations:
Note: Land is an example of non depreciable assets The Receving Entity will The Acquired entity
Less: Gain or Excess in Fair be depreciating the must update their
Amortization of Excess of Fair Value of Asset Value Acquired Depreciable Depreciation Expense
Add:
Asset at its acquisition Based on the FV at the
Ammortization of Excess Carrying Value of Asset
OCI Cost date of acquisition
Less:
Share of Prefence Shareholders in
Fair Model Intercompany Gains
the profit of an Associate P to S Building costing Therefore the subsidary
Add:
Types of PNL Do the Opposite for Loss the parent P50,000 was has not adjusted their
Equity Intercompany Loss
Classification sold to the subsidary for books from the
Less:
P60,000 with a 5 Year acquisition
Type of Investments Debt Acquisition Amortization of Intercompany Loss
Investment Properties Associate Investment 20%- 50% Ordinary Shares useful Life
Add:
Cummulative Non Cummulative P Acquired S as a
Internal Amortization of Intercompany Gain
1. Held with no Particular Use Consolidation More than 50% Old Dep Ex = 10,000 subsidary the only
Equals: Adjusted Profit of Subsidiary Arrears= Every
Funds 2. Bought for the purpose of Creating an New Dep Ex =12,000 depreciable asset is a
PNL Less: Preference Shareholder
Investment Property Declaration No Declaration Dep Ex is Over stated building with a CV of
Preference Share in Profit is entitled to One Basic
3. Operating Lease In Effect Understate P50,000 and a FV of
Equals : Adjusted Profit of Subsidiary to Ordinary Share holders Dividends if
Fair Value Model 4.Bought for the Purpose of Capital Share of Preference Share of Preference the Net Income to P60,000 with 5 yr useful
These are cash Times ratio of Months as an owner (Applicable only if you acquired Cummulative
Appreciation Shareder is Equal to Share Holders is Zero Correct ADD life
restricted for Non ownership in the middle of the Year)
Type of Classification Actual Declared Dividends Note the Transfering
OCI Current Purposes Par Value of PS
Times Percentage of Ownership Entity will adjust Per books = P10,000
Equals: Share in the Profit of the ASsociate Times: Dividend Rate Per Acquistion = 12,000
One Basic Dividends Identifiable Assets Less Liabilities
Add: Bargain Purchase Option Per acquisition will be
This reported in PNL Amortized Cost This Can also Equal the Equity of the Subsidary
Investment Income followed.
Fair Value Model Equity: The Dep ex is
Acquisition of Investment in between Dividends Declared: Understated
Computation of Good will
PNL-FAFVPL= Financial Asset @ Fair Value Through Profit and Loss thus the Net income is
Selling Price of Investment at date of acquisiton Carrying Value of the Net Assets
Purchase Price of Investment over stated.
Initial Recognition: Less: Add:
Less: Note the Subsidary
Cost = FAFVPL. Dividends Receivable Excess Fair Value (Understatement of Asset)
Fair Value of Net asset of Investment Acquired should adjust
INitial Recognition of Investment Less:
Goodwill(Bargain Purchase)
Subsequent Measurement: Excess Carrying Amount of Asset (Overstatement of Asset)
Times: Percentage of Acquistion Notes for Non Depreciable Assets sold Record a Realized Income Record a Loss
Fair Value at Year End = Subsequent Measurement
Equal : FV of Associate's Net Assets to 3rd Party ( Intercompany GAIN
Associate or Exces FV) Parent sold a Land to Subsdiary cost of the Land is When the parent acquired the subsdiary a Non Depreciable Asset - Land
Source of Income to Reported in the Comprehensive Income Statement Suppose a Company Bough the shares of another company P50,000 , the selling price was P60,000. had a Cost of P50,000 and a FV of P60,000 subsequently the Subsdiary
Dividends = PNL for P60,000 , before acquisition the investment was Beg Less: Dividends Acquired
Subsequently the Subsidary sold the Land to a 3rd sold the Land to a 3rd Part for P45,000
Change in Fair Value = PNL suppose to receive dividends worth P10,000 Add: Investment Income Party for P45,000
Gain or Loss on sale = PNL Gain on Sale of Associate:
The Subsdiary Records a Loss of (5,000)
Note: Unrealized Gain or Loss of FAFVPL is a nominal account and closed every Initial Recognition: 50,000 SP to 3rd Party 45,000 Subsidary Should adj their Income by a 10,000 Loss
year Dividends 10,000 Selling Price - CV of
Cost Subsdiary (60,000)
Selling Price 60,000 Associate = Gain or Loss
Ending Balance Loss on sale (15,000)- Recorded by Subsidary As if the Land was sold with a cost of P60,000
OCI-FAFVOCI= Financial Asset @ Fair Value Through OCI

Initial Recognition Presentation in FS The Parent should Record a Realized Gain of P10,000
Cost + Direct Attributable Cost =FAFVOCI (Parent)
Unrealized Gain or Loss in FAFVPL will show in the Statement Vice Versa if Upstream Effect on Consolidated FS is P5,000 Loss
NOTE : THE ASSOCIATE BALANCE WILL NEVER BE NEGATIVE
Subsequent Measurement: of Profit and Loss and in the Comprehensive income As if the Land was Sold witha Cost of P50,000
Fair Value at Year End = Subsequent Measurement
Unrealized Gain or Loss in FAFVOC will show in the Statement
Source of Income to Reported in the COmprehensive Income Statement in OCI and in the Comprehensive Income. Short Cut approach
Dividends = PNL T Account Approach Note:
Change in Fair Value = OCI Cummulative Gain or Loss of OCI Investments are reported Only Applicable if there is no Sale of Investments
Unrealized Loss in OCI Unrealized Gain in OCI
Gain or Loss on Sale = Retained Earnings Directly to Statement of Changes in Equity and in the Balance
Sheet Closure of Gain Directly Closure of Loss Directly Initial Recognition
Charged to RE after Charged to RE after Less: Debt Securities
Sale Sale Latest FV
Cummulative Gain on OCI Cummulative Gain or Loss OCI
Cummulative Loss on OCI Amortized Cost
Types of Dividends and how they apply to Equity investments under PNL and OCI FV Model

1. Cash Dividends = Profit or Loss @ Fair Value

2. Property Dividends = Profit or Loss @ Fair Value @ the date of Declaration
3. Shares in Lieu of Cash Dividends =Profit or Loss @ Fair Value of Shares at date of Acquistion if not available. The Fair
AC
Value of the Shares that would have been given OCI
4. Share Dividends = No effect on income statement PNL
FV at the Date of Acquisition
5. Cash Dividends in Lieu of Shares = No Effect on the income statement however a Gain or Loss on sale must be reported FV at the Date of Acquisition
6. Liquidating Dividends = No Effect on income statement( Return of Investment) Add: Transaction Cost
FV at the Date of Acquisition Add: Transaction Cost
Number of Shares before assuming the Share Dividend Initial Measurement
Initial Measurement Initial Measurement
Add: Shares that would have been Received
Equal: Theoretical Amount of Shares in the Investment

Carrying Amount of Investment

Divide: Theoretical Amount of Shares in the Investment
Number of Shares Before Declaration NOTE THAT THE FAIR VALUE MIGHT NOT ALWAYS BE GIVEN FOR AC
Updated Value of Each Share
Add: New Shares Received
Equals: Updated Number of Shares
Cash Dividend Received in Lieu of Shares
Less: (Updated Value of Each Share x Shares that would have been Declared)
Carrying Value of Investment
Gain or Loss on Assumed Shares (PNL if FAFVPL and OCI if FAFVOCI)
Divided by: Updated Number of Shares Principal x PV Factor = PV of Principal
Cost Per Share Interest x PV Factor Applicable = PV of Interest
Fair Value at the Date of Acquisition

Subsequent Measurement

PNL & OCI = FV at Year End

AC= Amortized using the effective interest method with a Amortization Table

What is to be reported in the Profit or Loss Statement in change in Fair Value

Which ever is Latest

Suppose an Investment FAFVPL-Debt FAFVOCI- Debt Amortized Cost

was acquired at 2015
What amount should be Fair Value Ending Not Reported Not Reported it is
used in recording for Less: measured at Amortized
Unrealized G/L for Initial recognition or Cost
2020? Latest Fair Value at the
Beg of the Year
FV 2020 Unrealized G/L
Less:
FV2019
Unrealized G/L What is to be reported in Statement of Other Comprehensive Income in Change in Fair Value

FAFVPL FAFVOCI Amortized Cost

Not Reported it is
measured at Amortized
Not Reported
Fair Value Ending Cost
Less:
Initial recognition or
Latest Fair Value at the
Beg of the Year
Unrealized G/L

What is to be reported as cummulative unrealized gain or loss in the Equity Section of the Balance
Sheet or Changes in Equity?

OCI Amortized Cost

FAFVPL
Yr 1
FV Beg (Initial Recognition) Not Reported it is
Less: Fair Value End (Latest FV-Considered the Beg of Yr 2) measured at Amortized
Not Reported Cost
Unrealized Gain or Loss -BS- Begining

Yr 2
FV Beg
Less: Fair Value End (Latest-FV Considered the Beg of Yr 3)
Unrealized Gainr or Loss Yr 2

To Get the Amount Reported in the Equity section of the BS

Unrealized Gain or Loss Beg

+/- Unrealized Gain or Loss
Cummulative Unrealized G/L

Illustrative Problem:

On January 1 20x0 Lester Company Purchased a 5 Yr Bonds with Face Amount of P6m
and a Stated Rate of 10% per Year Payable every December 31. The Bonds were acquired
for 105. Comission Paid o the acquisition amounted to P179,125. After considering the
transaction cost the effective rate of the bond on initial recognition is computed at 8%
the objective of Lester is as follows:

PNL- sell the financial Asset

OCI- Sell and Collect Contractual Cash flow
AC - Collect Contractual Cash flow

FV is as follows:
20x0 - 110 Amortized Cost
20x1-108
20x2-103
20x3-101
20x4-105

Initial Recognition FAFVPNL

Initial Recognition = 6m x 1.05=6,300,000

Initial Recognition FAFVOCI

Purchase Price = 6m x 1.05=6,300,000

Add: Transaction Cost 179,125
Initial Recognition 6,479,125

Requirements:
FAFVPL FAFVOCI
1. Interest Income to Be Reported in Each Method
2. CV in Each Method per Year 1. Interest Income -600,000 for 5 yrs 1. Interest Income
3. Unrealized Gain (Loss)- Equity 2. CV PNL 20x0-518,330
4. Unrealized Gain or Loss- OCI 20x0 -6,600,000 20x1-511,796
5. Unrealized Gain or Loss -PNL 20x1-6,480,000 20x2-504,740
20x2-6,180,000 20x3-497,119
20x3-6,060,000 20x4-488,889
20x4-6,300,000
2.. CV OCI
3. 0 20x0 -6,600,000
4. 0 20x1-6,480,000
5. 20x2-6,180,000
20x0- FV End 6,600,000-6,300,000= Unrealized Gain 300,000 20x3-6,060,000
20x1-FV End 6,480,000-6,600,000=Unrealized Loss 120,000 20x4-6,300,000
20x2-FV End 6,180,000-6,480,000=Unrealized Loss 300,000
20x3-FV End 6,060,000-6,180,000=Unrealized Loss 120,000 3.
20x4-FV End 6,300,000-6,060,000= Unrealized Gain 240,000 20x0-6,600,000-CV20x0 6,397,455=202,545 Cummulative Unreazlied Gain
20x1-6,480,000-CV20x1 6,309,251=170,749 Cummulative Unrealized Gain
20x2 -6,180,000-CV20x2 6,213,992=(33,992) Cummulative Unrealized Loss
20x3-6,060,000-CV20x3 6,111,111=(51,111) Cummulative Unrealized Loss
20x4 - 6,300,000-CV20x4 6,000,000=300,000 Cummulative Unrealized Gain
Alternative Approach:
4.
20x0-6,600,000-CV20x0-Amortized 6,397,455=202,545 Unrealized Gain 20x0 Cummulative gain 20x0 202,545
20x1-6,480,000-(CV20x0 6,600,000-Amortization 88,204) =31,796 Unrealized Loss 20x1 Cummulative Gain 170,749 -Cummulative Gain 20x0 202,545 = 31,796 UL
20x2-6,180,000-(CV20x1 6,480,000-Amortization 95,260)=204,740 Unrealized Loss 20x2 Cummulative Loss (33,992)-Cummulative Gain 170,749=204,740 UL
20x3- 6,060,000-(CV20x2 6,180,000-Amortization 102,881)= 17,119 Unrealized Loss 20x3 Cummulative Loss (51,111) - Cummulative Loss (33,992)= 17,119 UL
20x4 - 6,300,000-(CV20x3 6,060,000-Amortization 111,111) = 351,111 Unrealized Gain 20x4 Cummulative Gain 300,000 - Cummulative Loss (51,111)=Unrealized Gain 351,111

5. 0