Lecture 5-Post

Consolidation Process-Recap
❑Consolidation involves adding together the financial statements of the parent

and subsidiaries and making a number of adjustments:
1. Business combination valuation entries: required to adjust the carrying amounts

of the subsidiary’s assets and liabilities to fair value
2. Pre-acquisitions entries: required to eliminate the carrying amount of the parent’s Combined:
investment in each subsidiary against the pre-acquisition equity of that subsidiary Consolidation
journal entries
3. Intragroup transactions: transactions between entities within the group

subsequent to acquisition date
Consolidation Process-Recap
• CJEs (Consolidation journal entries)
1. Elimination of investment account in a subsidiary
Consideration Share of book value of Share of excess of fair

transferred = subsidiary’s net assets at + value over book value + Goodwill
acquisition date of identifiable net assets
2. Depreciation and amortization of FV differentials
3. Tax effects
4. Allocation of current net profit after tax to NCI

ADVANCED FINANCIAL
ACCOUNTING STUDIES
Lecture 5
Group Reporting III
Angie Wang
School of Accountancy
Illustration 3:
Non-controlling interest
― P Co paid $6,200,000 and issued 1,000,000 of its own shares to acquire 80% of S Co
on 1 Jan 20X5.
― Fair value of P Co’s share is $3 per share.
― Fair value of net identifiable assets is as follows:
Book value Fair value Remaining useful life

Leased property 4,000,000 5,000,000 20 years
In-process R&D 2,000,000 10 years
Other assets 1,900,000 1,900,000
Liabilities (1,200,000) (1,200,000)
Contingent liability (100,000)
Net assets 4,700,000 7,600,000
Share capital 1,000,000

Retained earnings 3,700,000
Shareholders’ equity 4,700,000
Illustration 3:
Additional information:
―The contingent liability of $100,000 met the recognition criteria in IFRS 3. It was
recognized as a provision loss by the acquiree in legal entity financial statement in Dec
20X5.
―FV of NCI at acquisition date was $2,300,000.
―Net profit after tax of S Co for 31 Dec 20X5 was $1,000,000.
―No dividends were declared during 20X5.
―Shareholders’ equity as at 31 Dec 20X5 was $5,700,000.
―The tax rate was 20%.
Q : Prepare the consolidation adjustments for P Co for 20X5.

Illustration 3:
Consideration transferred = Cash consideration + Fair value of share issued
= $6,200,000 + (1,000,000 x $3)
= $9,200,000
Deferred tax liability = 20% x ($7,600,000 - $4,700,000)

= $580,000
Goodwill = Consideration transferred + NCI – Fair value of net identifiable assets, after-tax
= $9,200,000 + $2,300,000 – ($7,600,000 - $580,000)
= $9,200,000 + $2,300,000 – $7,020,000
= $4,480,000
Illustration 3:
P’s share of goodwill = Consideration transferred – 80% x Fair
value of net identifiable assets, after tax
= $9,200,000 – 80% x $7,020,000
= $9,200,000 – $5,616,000
= $3,584,000
NCI’s share of goodwill = Consideration transferred – 20% x Fair

= $2,300,000 – 20% x $7,020,000
= $2,300,000 – $1,404,000
= $896,000
Illustration 3:
Consolidation adjustments for 20X5
CJE 1: Elimination of investment in Subsidiary
Dr Share capital 1,000,000

Dr Opening retained earnings 3,700,000
Dr Leased property 1,000,000
Dr In-process R&D 2,000,000
Dr Goodwill 4,480,000
Cr Contingent liability 100,000
Cr Deferred tax liability (net) 580,000
Cr Investment in S 9,200,000
Cr Non-controlling interests 2,300,000
Illustration 3:
CJE 2: Depreciation and amortization of excess of FV over book value
Dr Depreciation of leased property 50,000
Dr Amortization of in-process R&D 200,000
Cr Accumulated depreciation 50,000
Cr Accumulated amortization 200,000
Under dep. by $50k Under amort. by

Dep exp: $200k
$50,000
Amort exp:
$200,000
Dep. of $200,000 $250,000 Amort. of
leased R&D
property
$0
Based on Based on
Based on FV Based on FV
book value book value
Illustration 3:
CJE 3: Reversal of entry relating to provision for loss
Effect: Increase net
earnings of the acquiree Dr Provision for loss 100,000
Cr Loss expense 100,000
Note: Contingent liability was already recognized in CJE 1. The recognition of a
provision by the acquiree in its legal entity financial statement results in double
counting; hence this reversal entry is necessary.
CJE 4: Tax effects on CJE 2 & CJE 3
Dr Deferred tax liability (net) 30,000 20% * (200k

+50k -100k)
Cr Tax expense 30,000
Illustration 3:
CJE 5: Allocation of current year profit to non-controlling interests (NCI)
Dr Income to NCI 176,000

Cr NCI 176,000
Net profit after tax 1,000,000

Excess depreciation (50,000)
Excess amortization (200,000)
Reversal of loss from contingent liability 100,000
Tax effects on FV adjustments 30,000
Adjusted net profit 880,000
NCI’s share (20%) 176,000
Illustration 3:
NCI balance:
NCI at acquisition date (CJE1) $2,300,000
Income allocated to NCI for 20x5 (CJE 5) 176,000
NCI as at 31 Dec 20x5 $2,476,000
Non-Controlling Interests’ Share of Goodwill
➢IFRS 3 Para 19 allows NCI to be measured in either of two ways:
Non-controlling interests
Measured at Fair value at Measured as a proportion of

acquisition date (include the recognized amounts of
goodwill) the identifiable assets as at
“ Fair value basis” acquisition date
➢Under the fair value basis (Full goodwill method):
– FV is determined by either the active market prices of subsidiary’s equity share at acquisition
date or other valuation techniques.
– FV per share of NCI may differ from parent because of control premium paid by parent
(e.g., 20% premium over market price to gain control)
– NCI comprises of 3 items:
Share of unamortized
Share of book value
FV adjustment Share of unimpaired goodwill
of net assets (FV - BV)
➢Under the fair value basis (Full goodwill method):
– Journal entry to record NCI at fair value (re-enacted each year):
Dr Share capital of subsidiary
Dr Retained earnings at acquisition date
Dr Other equity at acquisition date
Dr FV differentials (FV- BV)
Dr Goodwill (Parent & NCI)
Dr/Cr Deferred tax asset/ (liability) on fair value adjustment
Cr Investment in subsidiary
Cr FV differentials (BV – FV)
Cr Non-controlling interests (At fair value)
➢Under the alternative basis (Partial goodwill method):
– NCI is a proportion of the acquiree’s identifiable net assets (i.e., not full fair value)
– NCI comprises of 2 items:
Non – controlling
interests
Share of
Share of book value unamortized
of identifiable net assets of FV adjustments
(FV- BV)
➢Under the alternative basis (Partial goodwill method):
– Journal entry to record NCI (re-enacted each year):
Dr Share capital of subsidiary
Dr Retained earnings at acquisition date
Dr Other equity at acquisition date
Dr FV differentials (FV – BV)
Dr Goodwill (Parent only)
Dr/Cr Deferred tax asset/ (liability) on FV adjustment
Cr FV differentials (BV – FV)
Cr Investment in S subsidiary
Cr (NCI % x FV of identifiable net assets)
NCI measured as a
NCI measured at FV proportion of the
(Full goodwill) acquiree’s identifiable net
assets (Partial goodwill)
Book value of net assets
Fair value – Book value of

net assets
Goodwill
Illustration 4:
The FV of NCI that owned 10% of Subsidiary A as at 31 Dec 20x1(Acquisition date) was $25,000. The
financial statements of Subsidiary A as at acquisition date are as shown below. Subsidiary A had
unrecognized intangible assets with fair value of $40,000. Tax rate is 20%. Determine NCI’s goodwill as at
acquisition date.
Subsidiary A’s Statement of Financial Position as at 31 December 20x1:
Net assets 160,000
Share Capital 140,000

Retained Earnings 20,000
Equity 160,000
Illustration 4:
Fair value of NCI 25,000
Fair value of identifiable net assets
Book value of equity 160,000
Fair value of intangible assets 40,000
Deferred tax on intangible assets (8,000) 192,000
NCI's share of FV of identifiable net assets (10%) 19,200
NCI's goodwill (25,000 - 19,200) 5,800
Under alternative basis (partial goodwill method) where NCI are measured as a
proportion of the recognized amounts of the identifiable assets as at acquisition date:
✓ NCI’s goodwill is zero
✓ Amount to be recognized as NCI is $19,200 only
Reconstructing NCI
on Statement of Financial Position
➢At each reporting date, group will re-create NCI account in the consolidated financial
statement by recognizing the sequential build up:
―As of acquisition date
―From acquisition date to beginning of the current period
―During the current period
➢ Known as the “re-enactment process” of the attribution of equity to NCI.

Reconstructing NCI
on Statement of Financial Position
Incorporation Date of Beginning of End of current
date acquisition current year year
NCI have a share of NCI have a share of NCI have a share of

1. Share capital 1. Change in share capital 1. Profit after tax
2. Retained earnings 2. Change in retained earnings 2. Current amortization of
fair value differential
3. Other equity 3. Change in other equity
3. Current impairment of
4. Fair value differentials 4. Past amortization of fair goodwill
value differential
5. Goodwill 4. Dividends as a repayment
5. Past impairment of of profits
goodwill
5. Change in other equity
Allocation to Non-controlling Interests
1. Allocation of the change in equity from date of acquisition to the beginning of the
current period
Dr Retained earnings (NCI % x in RE from acquisition date to
beginning of current period)
Cr NCI
➢ No distinction between pre-acquisition or post-acquisition profits

➢ To transfer the NCI’s share of subsidiary’s retained earnings to NCI
2. Allocation of current profit after tax to NCI
Dr Income to NCI
Cr NCI
➢ Without attribution, retained earnings of the group would be over-stated and NCI’s
share of equity would be under-stated.
➢ The same attribution principle applies to Other Comprehensive Income (OCI) –

NCI are attributed their share of OCI arising during a period.
✓ Examples: Revaluation surplus or deficit on PPE and intangible assets etc.

3. Allocation of dividends to NCI
➢ Reverses the profit and loss effects of dividends in consolidated income
statement
➢ A repayment of profits by a subsidiary
➢ Reduces the NCI’s residual stake in the net assets of the subsidiary
Dr Dividend income (Parent)

Dr NCI (Equity)
Cr Dividends declared (Subsidiary)
Can NCI be a debit balance?
➢ Opposing views on NCI being a debit balance
―Parent who has control of subsidiary should bear the responsibility of supporting an
insolvent subsidiary.
―Limited liability argument: NCI stand to lose only their investment and have no legal
obligation to bear any further losses.
➢ IASB’s support for NCI to be a debit balance:

―NCI participate proportionally in the risks and rewards of a subsidiary.
―Limited liability argument: Parent stand to lose only their investment and have no legal
obligation to bear any further losses in the absence of guarantees.
Can NCI be a debit balance?
➢IFRS 10 paragraph B94 (Appendix B) requires NCI to have a debit balance if:
―NCI share of losses > NCI existing share of the subsidiary’s share capital, retained
earnings and other equity items.
➢ Departure from an earlier version of IAS 27 that requires NCI to be carried at zero balance
―Losses being borne by majority shareholders unless the NCI have binding obligation to
make further investments to make good the losses.
Any questions?
Goodwill Impairment Tests
➢IAS 36: Goodwill has to be reviewed annually for impairment loss.
– Reviewed as part of a cash-generating unit (CGU)
-CGU is the lowest level at which the goodwill is monitored for internal
management purposes; and
-Not larger than a segment determined under IFRS 8 Operating Segments.
– Goodwill will be allocated to each of the acquirer’s CGU, or group of CGUs.

1. Carrying amount:
– Net assets of the cash-generating unit
– It includes entity goodwill attribute to parent and NCI

2. Recoverable amount (IAS 36 allows the higher of the below two metrics
to determine recoverable amount):
➢ Higher of FV less cost to sell (an arms-length measure)

― Uses market based inputs or market participants’ assumptions in
the valuation process
➢ Value-in-use (VIU)
― Present value of future net cash flows
― Uses internal or entity-specific input to determine the future cash
flows
― VIU likely to be more discretionary as assumptions about future
cash flows are required
3. If carrying amount > recoverable amount
―Impairment loss is first allocated to goodwill;

―Then to other assets in proportion to their individual carrying amounts.
―Impairment tests to be carried out on annual basis; regardless of whether

indications of impairment exists.
―Impairment once made is not reversible, as it may result in the recognition of

internally-generated goodwill which is prohibited under IAS 38.
Steps for impairment test
Determine the carrying amount of the CGU
Determine the recoverable amount of the CGU
Recoverable amount: Higher of fair value or value in use
If carrying amount ≤ If carrying amount ≥

recoverable amount recoverable amount
Allocate impairment loss

No impairment loss
to goodwill first and
balance to other net assets
NCI as a proportion of
NCI at FV at the acquisition date identifiable net asset at
acquisition date
Goodwill on consolidation Includes NCI’s goodwill Excludes NCI’s goodwill
Goodwill is allocated to cash- Goodwill has to be grossed up to
generating unit without further include NCI’s share
Carrying amount of cash- adjustment
generating unit Notionally adjusted goodwill
= Recognized goodwill/ parent’s
interest
Impairment loss is shared between Impairment loss is borne only by
Impairment loss of
parent and NCI on the same basis parent as goodwill for NCI is not
goodwill
on which profit or loss is allocated. recognized.
Illustration 5:
Company X has 80% ownership in a CGU with identifiable net assets of $6 million as at
31 Dec 20x1. The recoverable amount of the CGU as an entity was $5 million as at that
date. Determine the impairment loss of goodwill in the CGU under two alternative
measurement basis:
(a) NCI measured at FV at acquisition date. Goodwill recognized by CGU was $1.2
million.
(b) NCI measured as a proportion of FV of identifiable net assets at acquisition date.
Goodwill recognized by CGU was $1 million.
Illustration 5:
Question (a)
Goodwill Identifiable net assets Total

Carrying amount 1,200,000 6,000,000 7,200,000
Recoverable amount 5,000,000
Impairment loss 1,200,000 1,000,000 2,200,000
Impairment loss borne by Parent

and NCI 1,200,000 1,000,000 2,200,000
Explanatory notes:
― Goodwill allocated to a CGU to enable comparison between carrying amount of all
assets of the unit and recoverable amount.
― Goodwill attributable to NCI is included under recognized goodwill (no further
adjustment is required).
Illustration 5:
Question (b)
Carrying amount 1,000,000 6,000,000 7,000,000
NCI's stet share of
goodwill 250,000 (20% x $1million/0.8) 250,000
Notionally adjusted
carrying amount 1,250,000 6,000,000 7,250,000
Impairment loss 1,250,000 1,000,000 2,250,000
Impairment loss 1,000,000
recognized by Parent (80% x $1.25 million) 1,000,000 2,000,000
Explanatory notes:
― Since comparison is done against the carrying amount of assets of a CGU, goodwill is
regrossed under alternative (b) to show theoretical goodwill as at date of acquisition.
― NCI unrecognized share of goodwill is included.
Illustration 5:
Question (b)
Assuming the recoverable amount of the CGU as an entity was $7 million.

Carrying amount 1,000,000 6,000,000 7,000,000
NCI's stet share of
goodwill 250,000 (20% x $1million/0.8) 250,000
Notionally adjusted
carrying amount 1,250,000 6,000,000 7,250,000
If no notional adjustment, no
Impairment loss 250,000 impairment loss is recognized. 250,000
Impairment loss
recognized by Parent 200,000 (80% x $250,000) 200,000
More practice:
Full vs. Partial goodwill method
On 1 July 20X3, H Ltd acquired 60% of the shares (cum div.) of P Ltd for $45 600 when
the equity of P Ltd consisted of:
At acquisition date, the liabilities of P Ltd included a dividend payable of $1000. All the
identifiable assets and liabilities of P Ltd were recorded at fair value except for equipment
and inventory:
The tax rate is 30%. The fair value of the NCI in P Ltd at 1 July 20X3 was $28 000.
More practice:
Full goodwill method
Net fair value of identifiable assets and liabilities of P
=$40,000 + $2,000 + $2,000 + $20,000(1 − 30%) + $10,000(1 − 30%)
=$65,000
(a) Consideration transferred = $45,600 − (60% × $1000) = $45,000

(b) Non-controlling interest in P = $28,000
Aggregate of (a) and (b)=$73,000
Goodwill = $73,000 − $65,000 = $8,000

More practice:
H’s share of goodwill = Consideration transferred – 60% x Fair
= $45,000 – 60% x $65,000
= $6,000

= $28,000 – 40% x $65,000
= $2,000
More practice:
Goodwill of P = Fair value of P– Net fair value of identifiable assets and liabilities of P
=$28,000/40% - $65,000
=$5,000
Goodwill of H - control premium = $8,000 - $5,000 = $3,000
Total H’s share of goodwill = Control premium + Share of goodwill from P

= $3,000 + 60% x $5,000
= $6,000
More practice:
July 1, 20X3
Worksheet entries:
Business combination valuation entries
Dr Inventory 10,000
Cr Deferred tax liability 3,000
Cr Business combination valuation reserve 7,000
Dr Accumulated depreciation - equipment 70,000

Cr Equipment 50,000
Dr Goodwill 5,000
More practice:
July 1, 20X3
Worksheet entries:
Pre-acquisition entries related to H (60%)
Dr Retained earnings (1/7/X3) 1,200
Dr Share capital 24,000
Dr General reserve 1,200
Dr Business combination valuation reserve 15,600
Dr Goodwill – control premium 3,000
Cr Investment in P 45,000
Pre-acquisition entries related to NCI (40%)
Dr Retained earnings (1/7/X3) 800
Dr General reserve 800
Cr NCI 28,000
More practice:
Consolidation journal entries:

Dr Opening retained earnings 2,000
Dr Goodwill (Parent&NCI) 8,000
Dr Inventory 10,000
Cr Equipment 50,000
Cr Non-controlling interests 28,000
CJE 2: Elimination of intragroup dividend payment
Dr Dividend payable 600

Cr Dividend receivable 600
More practice:
Partial goodwill method
Net fair value of identifiable assets and liabilities of P
=$40,000 + $2,000 + $2,000 + $20,000(1 − 30%) + $10,000(1 − 30%)
=$65,000
(a) Consideration transferred = $45,600 − (60% × $1000) = $45,000

(b) Non-controlling interest in P = 40% × $65,000 = $26,000
Aggregate of (a) and (b)=$71,000
Goodwill = $71,000 − $65,000 = $6,000

More practice:
H’s share of goodwill = Consideration transferred – 60% x Fair
= $45,000 – 60% x $65,000
= $6,000

= $26,000 – 40% x $65,000
= $0
More practice:
July 1, 20X3
Worksheet entries:
Business combination valuation entries
Dr Inventory 10,000

Cr Equipment 50,000
More practice:
July 1, 20X3
Worksheet entries:
Pre-acquisition entries related to H (60%)
Dr Retained earnings (1/7/X3) 1,200
Dr Goodwill 6,000
Pre-acquisition entries related to NCI (40%)
Dr Retained earnings (1/7/X3) 800
Dr General reserve 800
Cr NCI 26,000
More practice:
Consolidation journal entries:

Dr Opening retained earnings 2,000
Dr Goodwill (Parent only) 6,000
Dr Inventory 10,000
Cr Equipment 50,000
Cr Non-controlling interests 26,000
CJE 2: Elimination of intragroup dividend payment
Dr Dividend payable 600

Cr Dividend receivable 600
Any questions?
For next time…
• Read McGraw Hill Ch5, Wiley Ch15&23

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Consolidation Process-Recap

❑Consolidation involves adding together the financial statements of the parent

1. Business combination valuation entries: required to adjust the carrying amounts

3. Intragroup transactions: transactions between entities within the group

1. Elimination of investment account in a subsidiary

Consideration Share of book value of Share of excess of fair

2. Depreciation and amortization of FV differentials

4. Allocation of current net profit after tax to NCI

Book value Fair value Remaining useful life

Share capital 1,000,000

Q : Prepare the consolidation adjustments for P Co for 20X5.

Deferred tax liability = 20% x ($7,600,000 - $4,700,000)

NCI’s share of goodwill = Consideration transferred – 20% x Fair

CJE 1: Elimination of investment in Subsidiary

Dr Share capital 1,000,000

Under dep. by $50k Under amort. by

CJE 4: Tax effects on CJE 2 & CJE 3

Dr Deferred tax liability (net) 30,000 20% * (200k

Dr Income to NCI 176,000

Net profit after tax 1,000,000

Measured at Fair value at Measured as a proportion of

Book value of net assets

Fair value – Book value of

Subsidiary A’s Statement of Financial Position as at 31 December 20x1:

Net assets 160,000

Share Capital 140,000

NCI's share of FV of identifiable net assets (10%) 19,200

NCI's goodwill (25,000 - 19,200) 5,800

➢ Known as the “re-enactment process” of the attribution of equity to NCI.

NCI have a share of NCI have a share of NCI have a share of

➢ No distinction between pre-acquisition or post-acquisition profits

➢ The same attribution principle applies to Other Comprehensive Income (OCI) –

✓ Examples: Revaluation surplus or deficit on PPE and intangible assets etc.

Dr Dividend income (Parent)

➢ IASB’s support for NCI to be a debit balance:

– Reviewed as part of a cash-generating unit (CGU)

management purposes; and

-Not larger than a segment determined under IFRS 8 Operating Segments.

– Goodwill will be allocated to each of the acquirer’s CGU, or group of CGUs.

– Net assets of the cash-generating unit

– It includes entity goodwill attribute to parent and NCI

➢ Higher of FV less cost to sell (an arms-length measure)

―Impairment loss is first allocated to goodwill;

―Impairment tests to be carried out on annual basis; regardless of whether

―Impairment once made is not reversible, as it may result in the recognition of

Determine the carrying amount of the CGU

Determine the recoverable amount of the CGU

Recoverable amount: Higher of fair value or value in use

If carrying amount ≤ If carrying amount ≥

Allocate impairment loss

Goodwill Identifiable net assets Total

Impairment loss borne by Parent

Assuming the recoverable amount of the CGU as an entity was $7 million.

Goodwill Identifiable net assets Total

(a) Consideration transferred = $45,600 − (60% × $1000) = $45,000

Goodwill = $73,000 − $65,000 = $8,000

NCI’s share of goodwill = Consideration transferred – 40% x Fair

Goodwill of H - control premium = $8,000 - $5,000 = $3,000

Total H’s share of goodwill = Control premium + Share of goodwill from P

Dr Accumulated depreciation - equipment 70,000

Dr Share capital 40,000

Dr Dividend payable 600