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    Chapter 6 - Consolidated Financial Statements (Part 3)

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    misonim.e

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    Consolidated Financial Statements (Part 3) 243 ; Chapter 6 Consolidated Financial Statements (Part 3) Learning Objectives jy. Account for the effect of impairment of goodwill on the consolidated financial statements. 2, Determine the effects of changes in ownership interests that (a) result in loss of control and (b) does not result in loss of control. 3. Describe the importance of consolidation and the theories supporting consolidation. Impairment of Goodwill When NCI is measured at proportionate share, goodwill is attributed only to the owners of the parent. Therefore, any impairment of goodwill is also attributed only to the owners of the parent. When NCI is measured at fair value, goodwill is attributed to both the owners of the parent and NCI. Therefore, any impairment of goodwill is allocated to both the owners of the parent and NCT. Illustration: Impairment of goodwill On January 1, 20x1, ABC acquired 80% interest in XYZ, Inc. b: issuing 5,000 shares with fair value of P15 per share. : Information on acquisition date (Jan. 1, 20x1): * XYZ’s net identifiable assets have a carrying amount of P74,000 and fair value of P90,000. The difference is due to the following: Chapters 2A ee Carrying / amount value adjustinent (Fy4) 20,000 24,000 4,000 Inventor r Equi mm net 40,000 52,000 12,000 60,000 76;000 16,000 ~ Totals © The remaining useful life of the equipment is 6 years. ABC measured the investment in subsidiary at cost. Information on subsequent reporting date (Dec. 31, 20x1): ABC Co. XYZ Ine, Total assets 418,000 124,000 Total liabilities 73,000 30,000 Share capital 170,000 40,000 Share premium 65,000 10,000 Retained earnings 110,000 44,000 Total equity 345,000 94,000 Profit for the year 60,000 20,000 e There were no intercompany transactions during 20xl. However, it was determined that goodwill is impaired by P1,000. Requirement: Prepare the consolidated financial information 0" December 31, 20x1 under each of the following cases: » Case #1: NClis measured at proportionate share. > Case #2: NCI is measured at fair value. The NCV's fair value on acquisition date is P18,750, Solutions: Step 1: Analysis of effects None Of intercompany transaction Consolidated Financial Statements (Part 3) 245 Step 2: Analysis of subsidiary’s net assets XYZ, Inc. Jan. 1,20x1 Dec. 31, 20x11 _N* ‘ change Net assets at carrying amount 74,000 94,000 Fair value adjustments (FVA) 16,900 10,000 Net assets at fair value 90,000 104,000 14,000 Inventory 4,000 N/A 4,000 - Equipment ___12,000 6 yrs. 2,000 10,000 Totals 16,000 6,000 10,000 Step 3: Goodwill Case #1: Proportionate share Consideration transferred (5,000 sh. x P15) 75,000 Non-controlling interest in the acquiree (90K x 20%) - (Step 2) 18,000 Previously held equity interest in the acquiree o Total 93,000 Fair value of net identifiable assets acquired (Step 2) (99,000) Goodwill at acquisition date 3,000 Accumulated impairment losses since acquisition date (1,000) Goodwill, net — Dec. 31, 20x1 2,000 —= Case ‘air value Consideration transferred (5,000 sh. x P15) 75,000 Less: Previously held equity interest in the acquiree . Total 75,000 Less: Parent's proportionate’ share in the net assets of subsidiary (90K x 80%) (72,000) Goodwill attributable to owners of parent ~Jan. 1, 20x1 3,000. Less: Parent’s share in goodwill impairment (F1,000 x 80%) (800) Goodwill attributable to owners of parent — Dec. 31, 20x1 2,200 Fair value of NCI (see given) 18,750 Less: NCI's proportionate share in the net assets of Subsidiary (90K x 20%) (18,000) Goodwill attributable to NCI ~ Jan. 1, 20x1 750 ee _______ Chapters 26 a i <1] impairment (P1,000 x 20%) 0% Less: NCI's share in ood will im} a : 1, Goodwill attributable to NCI - Dec. 3: = 2759 Goodwill, net - Dec 31, 20x1 Goodwill impairment is attributed only to the owners o the parent if NCI is measured at proportionate share (Case :1) while it is allocated to both the owners of the parent and Ncy if NCT is measured at fair value (Case #2). Step 4: Non-controlling interest in net assets XYZ's net assets at fair value - Dec. 31, 20x] (Step 2) 104,000 104,000 Multiply by: NCI percentage 20% 20, Total 20,800 20,800 Ada: Goodwill attributable to NCI — Dec. 31, 20x1 (Step 3) - 350 Nore-controlling interest in net assets ~ Dec. 31, 2021 20,800 21,35) No goodwill is attributed to NCI if NCI is measured at proportionate share (Case #1), while there is if NCI is measured at fair value (Case #2). Step 5: Consolidated retained earnings Case#1 Case? ABC's retained earnings - Dec. 31, 20x1 110,000 — 110,000 ABC's sh. in the met change in XYZ's net assets @ 11,200 ‘11,200 Impairment loss on goodwill attributable to parent (Step 3) (1,000) (0) Consolidated retained earnings — Dec. 31, 20x1 120,200 _ 12000 @ Net change in XYZ’s net assets (See Step 2) ssl Multiply by: ABC’s interest in XYZ __& ABC's share in the net change in XYZ's net assets iy —— Consolidated Financial Statements (Part 3) Step 6: Consolidated profit or loss Profits of ABC & XYZ (60K + 20K) 4 80,000. Depreciation of FVA (sce Step 1) (6,000) Impairment of goodwill (1,000) Consolidated profit 73,000 — The consolidated profit is attributed to the owners of the _parent and NCI as follows: Case #1 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) Impairment of goodwill (1,000) (1,000) Totals 70,200 2,800 73,000 ee ‘© 0K x 80% = 16,000); (20K x 20% = 4,000) © (6K x 80% = 4,800); (6K x 20% = 1,200) Case #2 Owners of parent NCI Consolidated Parent's profit before FVA 60,000 N/A 60,000 Share in XYZ's profit beforeFVA® 16,000 4,000 20,000 Depreciation of FVA (® (4800) (1,200) (6,000) Impairment of goodwill (800)__(200) _(1,000) Totals 70,400 2,600 _73,000 Consolidated total assets Case #1 Case #2 (proportionate) (fair value) Total assets of ABC Co. 418,000 418,000 Total assets of XYZ, Inc. 124,000 124,000 Investment in subsidiary (75,000) (75,000) FVA, net (Step 2) 10,000 10,000 Goodwill, net (Step 3) 2,000 2,750 Consolidated total assets 479,000 479,750 Chapter ¢ ee i jabilities = Consolidated total lial Gea oe (proportionate) (fair Pale fair vay Total liabilities of ABC Co. B00) 73,00) > Consolidated total liabilities 103,000 103,009 ~ Consolidated total equity a Case #1 Case 32 (proportionate) (fair value) Share capital of ABC Co. 170,000 170,000 Share premium of ABC Co. 65,000 65,000 Retained earnings (Step 5) 120,200 120,400 Owners of the parent 355,200 355,400 Non-controlling interests (Step 4) 20,800 21,350 Consolidated total equity 3 76,000 376,750 intercompany items in-transit and restatements Each of the group members’ individual financial statements ar adjusted first for the following before consolidation: a, Accruals and deferrals of income and expenses ani corrections of errors; b. _ In-transit items — items arising from intercompany transactions that were already recorded by one party but not yet by the other (eg, intercompany deposits in transit, outstanding checks, credit memos, and debit memos). ¢. Hyperinflationary economy - the financial statements of a group member that reports in a currency of a hyperinflation} sconomy are restated first in accordance with PAS 29 befo® they are consolidated. This is discussed in Chapter 9. d._ Currency translations ~ the financial statements of a subsidia” ree currency is different from the gore ‘on currency are trans]; rarer nce wil PAS 21 before the lated first in accordance “ are i toe di Chapter 10. y consolidated. This is discuss Ge Consolidated Financial Statements (Part 3) 249 a ee a [llustration: Comprehensive problem On January 1, 20x1, Peter Co. acquired 90% ownership interest in simon Co. for P122,000. Peter measured the NCI at a fair value of P15,000. Simon’s assets and liabilities have the following fair values on January 1, 20x1: _ Simon Co. Carrying Fair Fair value amounts values adjustments aah 10,000 10,000 e ‘Accounts receivable io 15000 ° Payer, 25,000 31,000 6,000 Equipment, net (5 yrs. remaining life) 40,000 60,000 20,000 Patent (8 yrs. remaining life) . 20,000 20,000 Accounts payable (éo05y.___¥6.000} . Information on December 31, 20x1: Statements of financial position As at December 31, 20x1 PeterCo. Simon Co. ASSETS Cash 362,000 21,300 Accounts receivable 178,000 5,000 Inventory 110,000 67,000 Investment in bonds (at amortized cost) 59,500 Investment in subsidiary (at cost) 122,000 Equipment, net 644,000 27,200 TOTAL ASSETS F 1,416,000 180,000 LIABILITIES AND EQUITY Accounts payable 71,000 20,800 10% Bonds payable (issued at face amount) 100,000 ° Total liabilities 171,000 20,800 Share capital 800,000 50,000 Retained earnings 445,000 109,200 Total equity 1,245,000 159,200 TOTAL LIABILITIES AND EQUITY 1,416,000 180,000 0 haters Statements of profit or loss For the year ended December 31, 20x1 PeterCo. Simon Co Sales 932,000 255,09 “Costofgoodssold (425,000) yp, Gross profit 207000 137,09) Interest income 2,009 Distribution costs (64,000) (36,000) Depreciation expense (161,000) (6,800) Loss on sale of equipment (1,006) Interest expense (10,000) 2 Dividend income 18,000 Profit for the year 290,000 95,200 The transactions in 20x1 include the following: a. Peter has P3,000 accounts receivable from Simon, while Simon has P2,000 accounts payable to Peter. The difference is due toa P1,000 check deposited by Simon directly to Peter's bark account which the latter failed to record. The check has already cleared in Simon’s bank account. b. Peter sold goods costing P20,000 to Simon for P32,000. One- third of the goods remain unsold on December 31, 20x1. c. Simon sold goods costing P10,000 to Peter for P15,000. Half of the goods remain unsold on December 31, 20x1. On January 1, 20x1, Simon sold equipment with carrying amount of P6,000.and remaining useful life of 5 years to Petet for P5,000. e. Peter declared dividends of P40,000, while Simon declared dividends of P20,000. On July 1, 20x1, Simon purchased 50% of the outstanding bonds of Peter from the open market for P60,000, All accrueé interests on the bonds have been paid by year-end. §- Goodwill was impaired by P2,000. Requirement: Prep: are the consolidation worki pers December 31, 20x1. ene ted Financial Statements (Part 3) 251 Step 1: Analysis of effects of intercompany transaction @& Transaction (a); In-transit item Simon's P1,000 payment is a valid payment because the check has already cleared. Therefore, Simon’s accounts payable need not be adjusted. However, as to Peter, the P1,000 difference is an unrecorded collection — a bank credit memo, The adjusting journal entry (AJE) in Peter's books is as follows: Dec. | Cash in bank 1,000 31, : Accounts re 20x. ‘eceivable 1,000 The remaining balance of P2,000 in the intercompany accounts receivable/accounts payable are eliminated in the consolidation. >» Summary of effects on the consolidated financial statements: * Cash is increased by P1,000 (AJE). + Accounts receivable is decreased by P3,000 (1K AJE + 2K elimination). * Accounts payable is decreased by P2,000 (elimination) % Transactions (b) & (c): Intercompany sale of inventory Transaction (b) is downstream, while transaction (c) is upstream. The unrealized profits in ending inventory are determined as follows: Downstream Upstream Total Sale price of intercompany sale 32,000 15,000 Cost of intercompany sale (20,000) _ (10,000) Profit from intercompany sale 12,000 5,000 Multiply by: Unsold portion as of yr.-end 13 2 Unrealized gross profit 4,000 2,500 6,500 Ending inventory of Peter Co. 110,000 Ending inventory of Simon Co. 67,000 Less: Unrealized profit in ending inventory (6,500) Lonsolidated ending inventory 170,500 __ Chapters pen ~ Sales by Peter Co. 932,009 Sales by Simon Co. 25509 _Loss: intercompany sales during 20x! (2000+ 15000) _(47,0gn) Cost of sales of Peter Co. 425,009 Cost of sales of Simon Co. 118,09 Less: Intercompany sales during 20x1 (47,009) Add: Unrealized profit in ending inventory 6500 Add: Depreciation of FVA on inventory (see computation below) 6,000 Consolidated cost of sales 508,500 The fair value adjustments are computed as follows: FVA, 1/1/xi__Useful life_Depreciation _FVA, 12/31/x1 Inventory 6,000 N/A* 6,000 - Equipment — 20,000 5 yrs. 4,000 16,000 Patent 20,000 8 yrs. 2,500 17,500 Totals 46,000 12,500 33,500 * The entire inventory is assumed to have been sold during the year. * Transactions (d): Intercompany sale of PPE The sale is upstream. The effects of this transaction are analyzed follows: a) Unamortized balance of deferred gain (loss) on Dec. 31, 20x1: Sale price 5,000 Carrying amount of equipment on Jan. 1, 20x1 ___ (6,000). Loss on sale of equipment —Jan. 1, 20x1 (1,000) Multiply by: Ratio of useful life at beg, and end of yr. 48 Unamortized balance of deferred loss ~ Dec, 31, 20x1 (so, b)_Effect on the 20x1 depreciation: Bessie ofthe sale | Had there been no sale | Effect on combined IS recognized Simon should have Depreciation is depreciation of P1,000 recognized understated by £200. in 20x1 (P5,000 depreciation of P1,200 Consolidated Financial Statements (Part 3) e price +5 yrs.). | in 20x1 (P6,000 carrying [ pur amount +5 yrs) The related consolidated accounts are computed as follows Equipment, net ~ Parent 644,000 Equipment, net ~ Subsidiary 27,0 Unamortized balance of deferred loss* OL FVA, net (see computation above) 16,000 “Consolidated equipment - net - 658,000 “The deferred loss is added because both “loss” and “equipment” have a normal debit balance. Debit and debit results to addition. Depreciation Peter — 161,000 Depreciation — Simon 6,800 Understatement in depreciation 200 _Depreciation of FVA on equipment (see computation above) 4,000 Consolidated depreciation 172,000 The P1,000 Joss on sale recognized by Simon is eliminated in the consolidated statement of profit or loss. “ Transactions (e): Intercompany dividend The dividends declared by Simon are allocated as follows: (20,000 x 90% = 18,000 share of Peter); (20,000 x 20% = 4,000 share of NCI) The investment in subsidiary is measured at cost. Therefore, Peter recognized the 18,000 dividends in profit or loss (as dividend income). We will eliminate this in Step 5 (consolidated profit or loss) below. 7 No consolidation adjustment is needed for the dividends declared by Peter because the dividends pertain solely to the owners of the parent. * Transactions (f): Intercompany bond transaction a) Gain or loss on extinguishment of bonds: | Chapter g Qk ig Carrying amount of bonds payable acquired (100,000 x 50%) 50,09) Acquisition cost of bonds (assumed retirement price) 6st, Loss on extinguishment of bonds — 0009 b) Intercompany interest expense and interest income: Peter paid Simon interest of P2,500 (100K x 50% x 10% x 6/12). Howeve, Simor’s interest income is only P2,000 (see Statement of profit or loss aby) The P500 difference must be an amortization of the premium on the investment in bonds. Nonetheless, both Peter's interes expense of P2500 and Simon’s interest income of P2,000 are .climinated in the consolidated financial statements. » Summary of effects on the consolidated financial statements: Loss on extinguishment of bonds is increased by P10,000. e Interest expense is decreased by P2,500. ¢ Interest income of P2,000 is eliminated. ¢ Investment in bonds is eliminated. ¢ Bonds payable is decreased by P50,000. Step 2: Analysis of subsidiary’s net assets XYZ, Inc. Jan. 1, 20x1 Dec. 31, 20x1 hae Net assets at carrying amount 84,000 159,200 Fair value adjustments (FVA) 46,000 33,500 Unrealized profit (upsircam) (2,500) Deferred loss on sale (upstream) 800 Interest income (2,000) Net assets at fair value 130,000 7 189,000_ 59,000 ) (see computation above) Step 3: Goodwill computation Consideration transferred 122,00 Previously held equity interest in the acquiree Total Less: Parent's proportionate share in the net assets of subsidiary (130,000 x 90%) — Step 2 ‘ 117,0" Goodwill attributable to owners of the parent ae —nit Conolidated Financial Statements (Part 3) 255 Accumulated impairment losses (2,000 x 90%) (1,800) Goodwill attributable to owners of the parent, net 3,200 Fair value of NCI 15,000 Legs NCI’s proportionate share in the net assets of subsidiary (130,000 x 10%) - step 2 ____ (13,000) _ Gooduwill attributable to NCI 2,000 Accumulated impairment losses (2,000 x 10%) (200) Goodwill attributable to NCI, net 1,800 Goodwill - Dec. 31, 20x1 —__ 5,000 pe Le The P2,000 impairment of goodwill is shared between the parent and NCI because NCI is measured at fair value. Step 4: Non-controlling interest in net assets Subsidiary's net assets at fair value - Dec. 31, 20x1 (Step2) 189,000 Multiply by: NCI percentage 10% Total 18,900 Add: Goodwill attributable to NCI (Step 3) 1,800 Non-controlling interest in net assets - Dec. 31, 20x1 20,700 Step 5: Consolidated retained earnings Parent's retained earnings — Dec. 31, 20x1 445,000 Parent's share in the net change in subsidiary's net assets“ 53,100 Unrealized gross profit (downstream only) - (Step 1) (4,000) (10,000) Loss on extinguishment of bonds (Step 1) Intercompany interest expense (Step 1) Parent's share in the impairment. of goodwill (1,800) 800 Consolidated retained earnings — Dec. 31, 20x1 454, ‘ Net change in subsidiary’s net assets (Step 2) 59,000 Multiply by: Parent's interest in Subsidiary 90% Parent's share in the net change in sub.’s net assets 53,100 2,500 | 256 rs Chapter 6 maples Step 6: Consolidated profit or loss Parent Subsidiary Consolidany ted Profits before adjustments 290,000 95,200 385,205 Effects of intercompany transactions: Unrealized profits (Step 1.b8¢) (4,000) (2,500) (6,500) Deferred loss on PPE (Step 1.4) 800 ‘ 09 Dividend income (step 1.) (18,000) (18,000) Loss on bonds (Step 1,9 (10,000) (10,000) Interest income (Step 1,) (2,000) (2,000) Interest expense (step 1) 2,500 2,500 Profits before FVA 260,500 91,500 352,000 Depreciation of FVA © (11,250) (1,250) (12,500) Impairment of goodwill (Step 3) __ (1,800) (200) (2,000) © (12,500 x 90% = 11,250); (12,500 x 10% = 1,250). Owners of parent NCI Consolidated Parent's profit before FVA 260,500 N/A 260,500 Share in sub.'s profit before FVA © 82,350 9,150 91,500 Depreciation of FVA (ee stove) (11,250) (4,250) (12,500) | _Impairment of goodwill (se above) (1,800) (200) _(2,000) Totals 329,800__7,700 337,500 (8 (91.5K x 90% = 82,350); (91.5K x 10% = 9,150) Peter Group Consolidated statement of financial position As of December 31, 20x1 ASSETS Cash (362,000 + 21,300 + 1,000 AJE Step 1.a) 384,300 180,000 Accounts receivable (178,000 + 5,000 - 1,000 AJE ~ 2,000 Step 1.4) Inventory (Step 1.b6¢) 170,500 Investment in bonds (eliminated) Investment in subsidiary (eliminated) Equipment, net (Step 1.4) Patent, net (FVA net - Step 1.b) Goodwill, net (Step 3) TOTAL ASSETS Consolidated Financial Statements (Part 3) 257 | LIABILITIES AND EQUITY | | Accounts payable (91,800 +71,000 - 2,000 Step 1.a) 89,800. 10% Bonds payable (100,000 - 50,000 Step Lp 50,000. Total liabilities 739,800 | | Share capital (Parent only) 800,000 | Retained earnings (Step 5) 484,800 | Equity attributable to owners of parent 1,284,800 | Non-controlling interest (Step 4) 20,700 | Total equity 1,305,500 | TOTAL LIABILITIES AND EQuity 1,445,300 Peter Group Statement of profit or loss For the year ended December 31, 20x1 Sales (Step 1.b&ec) 1,140,000 Cost of goods sold (Step 1.b&<) (508,500) Gross profit 631,500 Interest income (eliminated - Step 1.) - Distribution costs (100,000) Depreciation expense (Step 1.d) (172,000) | Loss on sale of equipment (eliminated - Step 1.4) u Interest expense (10,000 - 2,500 Step 1.) (7,500) Dividend income (eliminated - Step 1.2) a Amortization expense on patent (Step 1.b) (2,500) Loss on extinguishment of bonds (Step 1,9 (10,000) | Impairment loss on goodwill (Step 3) (2,000) Profit for the year 337,500 Reconciliation using formulas: Total assets of Peter Co. 1,416,000 Total assets of Simon Co. 180,000 Investment in subsidiary . (122,000) Fair value adjustments, net (46,000 beg, ~ 12,500 depreciation) 33,500 : 5,000 Goodwill - net Effects of intercompany transactions: ___ Chapter ¢ 8 eee Current accounts (elimination of accounts receivable) seid 2,099) Inventory transactions (unrealized profit in ending mn s ¥ (6,509) Equipment transaction (unamortized balance of on loss 80 Bond transaction (carrying amount of eestinent in bonds) (59,509) Total liabilities of Peter Co. 171,009 Total liabilities of Simon Co. 20,800 Fair value adjustments, net * Effect of intercompany transactions: Current accounts (elintination of accounts payable) (2.000) Bond transaction (carrying amount of bonds payable) 50,000) Consolidated total liabilities 139,800 Share capital of Peter Co. 800,000 Consolidated retained earnings (Step 5) 484,800 Equity attributable to owners of the parent 1,284,800 Non-controlling interest (Step 4) 20,700 Consolidated total equity 1,305,500 Continuous assessment An investor reassesses whether it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Changes in ownership interest not resulting to loss of control If the parent's ownership interest in a subsidiary changes but does not result to loss of control, the change is accounted for as at equity transaction, The carrying amounts of the controlling and _nom controlling interests are adjusted to reflect the changes in thet relative interests in the subsidiary. The difference between the adjustment to the NCI and the fair value of the consideration pad or received is recognized directly in equity and attributed to the owners of the parent. No gain ot loss is Tecognized in profit or 105s Consolidated Financial Statements (Part 3) 359 ae ceanents (Part Illustration 1: Changes in ownership interest - No loss of control Fact pattern On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. Goodwill under each of the available measurement options under PFRS 3 is computed as follows: Case #1 Case #2 (proportionate (fair value) share) Consideration transferred 75,000 75,000 NCI (90K x 20%); [(75K + 80%) x 20%] 18,000 18,750 Previously held equity interest in the acquiree - a Total 93,000 93,750 Goodwill - Jan. 1, 20x1 3,000 3,750 During 20x1, XYZ's net assets increased by P10,000 after fair value ” adjustments. The NCI is updated as follows: Case #1! Case #2 (proportionate) (fair value) NCl at acquisition date —Jan. 1, 20x1 18,000 18,750 2,000 2,000. 20,000 20,750 I | | | | | * | fair value of net identifiable assets acquired (90,000) _ (90,000) | | | | | | | | | | Share of NCI in change in net assets (LOK x 20%) | _NCI in net assets — Dec. 31, 20x2 | | Scenario #1: ‘Acquisition of all remaining NCI On January 1, 20x2, ABC Co. acquires all the remaining 20% NCI | iMXY2 for P30,000. — Requirements: | & How much is the 8} recognized in the consolida' b. Compute for the effect of th financial statements. ain or loss on the transaction to be ted financial statements? e transaction on the consolidated Solutions: 2 wal Chapter 6 —Tapter 6 ~~ Requirement (a): None. The transaction is accounted for as equity transact because it does not result to loss of control. mt Requirement (b): Case #1: Proportionate share Owners d % ___ofparent _% NCL Before the transaction 80% 80,000 20% * 20,000 After the transaction 100% 100,000, = Change = Inc./ (Decrease) 20,000 (20,000) oe This represents the fair value of XYZ's net assets on December 31, 20x1 (90K fap value on acquisition date + 10K increase during the year). © 100K fair value of net assets x 80% After acquiring the remaining 20% NCI, the parent's ownership interest is increased to 100%. Consequently, NCI is reduced to zero. Therefore, after the acquisition, the NCI in net assets is eliminated and attributed to the owners of the parent. Case #2: Fair value Owners Net assets % _ofparent _% _-NCI___ of XY Before the tansaction 80% 83,0004 20% © 20,750 103750" After the transaction. 100% 103,750 : - 103,750 Change — Inc./ (Decrease) 20,750 (20,750) sane © When NCI is measured at ifr value, the subsidiary’s net assets is grossed up'® reflect the goodwill attributable to the NCI (20,750 NCI + 20% = P103,750)- 4 103,750 x 80% = 83,000 % The effects of the transaction are determined as follows: a Case #1 Case # ) (proportionate) (uno Fair value of consideration 30,000 ce a Change in NCI (see tables above) (20,000) ae : 50 Direct adjustment to equity 10,000 Ja — | Consolidated Financial Statements (Part 3) 261 _Coneaielet CEO Sak u ‘The effects of the transaction may also be determined by preparing journal entries. The entry in ABC’s separate books is as follows: Jeni, | Investment in subsidiai po ry 30,000 Cash + | 30,000 to record the acquisition of remaining NCI in XYZ, Inc. The consolidation journal entries are as follows: Case #1: NCI measured at proportionate share Jan.1, | NCI (the decrease computed above) 20,000 20:2 | Retained earnings - ABC Co. (squeeze) 10,000 Investment in subsidiary 30,000 Case #2: NCI measured at fair value Jon.1, | NCI (the decrease computed above) 20,750 22 | Retained earnings - ABC Co, (squeeze) 9.250 Investment in subsidiary 30,000 The “squeezed” amounts in the CJE’s above represent the direct adjustments in equity, which are attributed to the owners of the parent. "Scenario #2: Acquisition of part of remaining NCI ; On January 1, pe ABC Co. acquires 12% out of the 20% NCI in | XYZ for 20,000. oo te tor 20.00 Case #1: Proportionate share ¥ Net assets co parent _—_‘% NCI of XYZ 20% 20,000 100,000 Before the wansaction 80% 80,000 100,000 7 92,000. 8% 8,000 4 After the transaction _ 92% 712,000) : Change — Inc./ (Decrease) 12,000 Mn be #2: Fair value ee ee ee a | Nea o, _ofparent _"e __ NCI y Xv Before the wansaction 80% — 83,000 20% 20,750 193757 95,450, 12,450 After the transaction 92% Change — Inc4 (Decrease) “The net assets is grossed up as follows (P20,750 NCI + 20% = P103,750), The direct adjustment in equity is determined as follows: Case #1 Cases = (proportionate) (fair value) Fair value of consideration 20,000 20,000 > Change in NCI (sxe tables above) (12,000) (12,450) Direct adjustment to equity 8,000 7,550 Scenario #3: Disposal of part of controlling interest - Control noi | lost | On January 1, 20x2, ABC Co, sold its 10% interest in XYZ, Inc. fo: P20,000. The 70% (80% - 10%) remaining interest still gives A3C | control over XYZ. Case #1: Proportionate share Owners Net assetsif % _ofparent _% NCI XYZ, Before the transaction 80% 80,000 20% 20,000 100,000 After the transaction 70% 70,000 30% 30,000 100,000 Change =Inc/ (Decrease) (10,000) 10,000 ie Case #2: Fair value Owners Net asses % _ofparent _% NCI xe Before the transaction 80% 83,000 20% 20,750 ub After the transaction 70% 72,625 30% 31,125 10720 Change - Inc (Decrease) (10,375) 10,375__ The direct adjustmentin equity is determined as follows: Consolidated Financial Statements (Part 3) 263 __fonsolignted Financial Statements (RoHS). 3 Case #1 Case #2 (proportionate) (fair value) Fair value of consideration 20,000 20,000 Change in NCI (sve tables above) (10,000) (10,375) Direct adjustment to equity 10,000 9,625 The entry in ABC's separate books is as follows: en. i] Cash 20,000 | 20rd Investment in subsidiary « 9,375 Gain on sale 10,625 to record the partial disposal of investment * Carrying amount of portion sold: (P75,000 cost x 10%/80%) The consolidation journal entries are: Case #1: NCI measured at proportionate share Jan. | Investment in subsidiary 9,375 | sng | Gain on sale 10,625 NCI (the increase computed above) 10,000 Retained earnings - ABC Co. (squeeze) 10,000 Case #2; NCI measured at fair value Jan. | Investment in subsidiary * 9,375 aig | Gain on sale 10,625 NCI (the increase computed above) 10,375 Retained earnings - ABC Co. (squeeze) 9,625 Scenario #4: Subsidiary issues additional shares - Control not lost The 80% interest acquired by ABC in XYZ on January 1, 20x1_ represents 40,000 of XY¥Z’s 50,000 outstanding shares as of that | | date. | | | [On January 1, 20x2, XYZ, Inc. issues additional 10,000 shares with | par value of P1 per share to other investors for P2.50 per share. | Although ABC acquires none of those shares, ABC still retains its | [control over XYZ. GSS SEES SE Chapter 6 mm ship interest in XYZ is determing, The change in ABC’s owne! iy follows: Before After issuance _% issuance — », “Charesheldby ABC 40.000, 40, Shares held by ABC 40,000__ go, _ 0, Outstanding shares of XYZ 50,000 + (50,000 + 10,000 additional shares issued to NCI = 60,000) Case #1: Proportionate share Owners of Net asses % parent *% NCI os xv Before the transaction 80% 80,000 20% 20,000 — 100,000 After the transaction 66.67% 83,333 33.33% 41,667 125,000 Change —Inc./ (Decrease) 3,333. 21,667 25,000 * 100,000 + 25,000 proceeds from issuance of additional shares. Case #2: Fair value Owners of Net assets of % parent % NCL XYZ Before the transaction 80% 83,000 20% 20,750 + 103,750« After the transaction 66.67% 85,833 33.33% 42,917 128.7504 Change - Inc. (Decrease) 2,833 “ 22,167 25,000. ©The net assets is grossed up as follows: (P20,750 NCI + 20% = 103,750). 4 (P103,750 + ¥25,000 proceeds from issuance of additional shaves «= P128,750) The direct adjustment in equity is determined as follows: Case #1 Case #2 (proportionate) (fair value) Fair value of consideration 25,000 25,000 Change in NCI (ee tabiés above) (21,667) (22,167) Direct adjustment to equity 3,333 2,833 The entry in XYZ’s separate books is: Jan, | Cash 20s? 3 25,000 Pl share capital (10,000 sh. x P1 par) 10) Share pretium 1500 | 0 record the svc of shares Consolidated Financial Statements (Part 3) 265 ee mencmets Part 3) 5 The consolidation journal entries are as follows Case #1: NCI measured at proportionate share jan. | Share capital - XYZ, Inc. “] 10,000 1 - | r ag | Share premium — XYZ, Inc. 15,000 | NCI (the increase computed above) 21,667 Retained earnings ~ ABC Co. (squeeze) | 3,333 Case #2: NCI measured at fair value {len ] Share capital — XYZ, Inc. 10,000 sa Share premium ~ XYZ, Inc. 15,000 iz NCI (the increase computed above) 22,167 Retained earnings - ABC Co. (squeeze) 2,833 Notice in all the ‘scenarios’ above that no adjustment is made to goodwill because control is not lost. Instead, all adjustments are made directly in equity (ie, NCI and parent's retained earnings). Loss of control A parent can lose control of a subsidiary in much the same way it can obtain control. That is, with or without a change in absolute or relative ownership levels and with or without the investor being involved in that event. Examples: a. Control is lost even without a change in the parent's ownership interest when the subsidiary becomes subject to the control of a government, court, administrator or regulator, or as a result of contractual agreement. : b. Control is lost even without the parent being involved in that event if decision-making rights are given to another party or the decision-making rights previously granted to the parent have elapsed. © Control is lost tetums.. d. Control is lost if the pare changes to an agent. if the parent ceases to be entitled to receive nt’s previous status as a principal 7 6 er er loses control over a subsidiary, the parent shall a. Derecognize the assets and liabilities of the former subsig., from the consolidated statement of financial position, ¥ b. Recognize any investment retained in the former Subsidiary . its fair value at the date control is lost and subsequeny, account for the investment in accordance with relevant Peps, c. Recognize the gain or loss associated with the loss of Contro} in profit or loss. This is attributed to the former Controlling When a parent | interest. The gain or loss on disposal of controlling interest is computed 3. follows: Consideration received (at fair value) x Investment retained in the former subsidiary (at fair value) 7 NCL (carrying amount) Xx Total a Less: Former subsidiary’ net identifiable assets (carrying amount) (xx) Goodwill (carrying amount) (oy) Gain or loss on disposal of controlling interest a OR Date] Cash or other assets (Consideration received) xx, | Investment account (Investment retained) me NCI xx Liabilities of former subsidiary x Assets of former subsidiary 3 Goodwill |e Gain on disposal of controlling interest (squeeze) & Illustration: Loss of control - Deconsolidation On January 1, 20x2, ABC Co. sells 60% out of its 80% XYZ, Inc, for P100,000. ABC's remaining 20% interest in 126 fair value of P25,000. This gives ABC significant influe"™ a 2 Zi. " if XYZ. Financial information immediately before the sale ston below: interest” a | Consolidated Financial Statements (Part 3) se ABC Co. _ XYZ, Inc, Consolidated ASSETS Other assets 343,000 124,000 473,000 Investment in subsidiary 75,000 : : Goodwill : 2 3,000 TOTAL ASSETS 418,000 124,000 476,000 LIABILITIES AND EQUITY Accounts payable 73,000 30,000 103,000 Total liabilities 73,000 30,000 103,000 Share capital 235,000 50,000 235,000 Retained earnings 110,000 44,000 118,000 Non-controlling interest ¥ - 20,000 Total equity 345,000 94,000 373,000 TOTAL LIAB. &EQTY. _418,000 124,000 476,000 Requirement: Prepare the deconsolidated financial information after the sale. Solution: Step 1: Determine the carrying amounts of XYZ's assets and liabilities in the consolidated financial statements as at the date control was lost. The carrying amounts in the consolidated financial statements may not be equal to the carrying amounts in the individual financial statements because of fair value adjustments (vA). Consoli- Carrying amount of ABCCo. XYZ/Inc. “igteg _XYZ's net assets (a) ete esse MO a). "343,000 124,000 473,000 130,000 Investment in subsidiary 75,000 © é Goodwill 2 = 3,000 124,000, 476,000 130,000 TOTAL ASSETS 418,000 4 ee Chat erg PE no By LIABILITIES AND EQUITY Accounts payable ° 73,000 30,000 __103,000__3 0099 Total liabilities 73,000 30,000 103,000 3,69. Share capital 735,000 50,000 235,000 2 Retained earnings 110,000, 44,000 118,000 “ToteLequity 345,000 _94,000_373.000 _100,095 ~ 413,000 _124,000_476,000 TOTAL LIAB. & EQTY. Step 2: Remove (deconsolidate) the subsidiary’s assets and liabilities from the consolidated financial statements. ASSETS Cash (consideration received from sale ~ see given) 100,000 Other assets (473,000 - 130,000) 343,000 Investment in subsidiary (eliminated) : Investment in associate (at fair value ~ see given) 25,000 |_Goodwill (eliminated) 3 | TOTAL ASSETS 468,000) LIABILITIES AND EQUITY Accounts payable (103,000 - 30,000) 73,000, Total liabilities 73,000 | Share capital (Parent only) 235,000 Retained earnings (118,000 + 42,000 gain on disposal *) 160,000) Non-controlling interest (eliminated) 4 Total equit 395,000, TOTAL LIABILITIES AND EQUITY ses «The gain or loss on disposal is computed as follows: oe Cash - ABC Co. (Consideration received) 100,000 Investment in associate (investment retained) 25,000 Accounts payable - XYZ, Inc. 30,000 Non-controlling interest 20,000 Other assets - XYZ, Inc, woe Goodwill as Gain on disposal (squeeze) ot dated Financial Statements (Part 3) 269 OR Consideration received (at fair value) 100,000 Investment retained in the former Subsidiary (at fair value) 25,000 NCI (carrying amount - see consolidated financial statements) 20,000, Total 145,000 Less: XYZ’s net identifiable assets at fair value (130K ~ 30K) (100,000) Good will (see consolidated financial statements) (3,000) Gain or loss on disposal of controlling interest 42,000 Notice that the loss of control is accounted for prospectively. No retrospective adjustments are made to the consolidated retained earnings, Derecognition of other comprehensive income When control is lost, the parent derecognizes amounts previously recognized in other comprehensive income (OCI) as follows: Type of OCI Accounting a. Revaluation surplus directly in equity b. Actuarial gains or losses on defined benefit plans directly in equity c Unrealized gains or losses on FVOCI investments — directly in equity profit or loss d. Translation gains or losses on foreign operations e profit or loss .. Effective portion of cash flow hedges The first three are accounted for directly in equity (i.e., transferred directly to retained earnings) because PAS 1 Presentation of Financial Statements prohibits the reclassification adjustment for these items. The last two are transferred to profit or loss as reclassification adjustments. Illustration: Loss of control - Derecognition of OCI / On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. On this date, XYZ’s net identifiable assets have a fair value of 90,000, NCI is measured at proportionate share. The business combination resulted to goodwill of P3,000. ” Chapter mo During the year, XYZ’s net assets increased by P13,000, after fair value adjustments. The details of this increase are shown below. Net assets (at fair value) - Jan. 201 9007 Subsequent changes: ~ Profit or loss after fair value adjustments 10.0% Other comprehensive income: Gain on property revaluation 20m Gain on translation of foreign operation 1,000 Increase in net assets in 20%1 B00 Net assets (at fair value) - Dec, 31, 20x1. 103,006 The NCI in net assets is updated as follows: NCI at acquisition date (P90,000x 20%) 18,000 NC's share in the increase in net assets (P13,000 x 20%) 260 NCL at Dec. 31, 20x1 20,600 Accordingly, the accumulated OCI attributable to the owners of the parent in the consolidated financial statements comprises the following: Gain on property revaluation (P2,000 x 80%) 1,600 Gain on translation of foreign operation (P1,000 x 80%) 800 Consolidated other components of equity ~ Dec. 31, 20x1 240) On January 1, 20x2, ABC Co. sells 60% out of its 80% interest in XYZ, Inc. for P100,000. ABC's remaining 20% interest in XYZ hes* fair value of P25,000. This does not give ABC significant influex® over XYZ. Requirements: a Compute for the gain or loss on disposal of controll interest. b. Prepare the deconsolidation journal entries fot & accumulated OCI in the consolidated financial statement® a Consolidated Financial Stateme — (Part 3) 271 Solutions: Requirement (a): Gain or loss on disposal of controlling interest fjan. 2.| Cash — ABC Co. (Consideration received) 100,000 20x2| Held for trading securities (Investment retained) 25,000 | Non-controlling interest 20,600 Net identifiable assets # (see given) 103,000 Goodwill 3,000 Gain on disposal (squeeze) 39,600 “Net identifiable assets is also excess of total assets over total liabilities. OR Consideration received (at fair value) 100,000 Investment retained in the former subsidiary (at fair value) 25,000 Non-controlling interest (see given) 20,600 Total 145,600 Less: XYZ's net identifiable assets (see given) (103,000) Goodwill (see given) (3,000) Gain or loss on disposal of controlling interest 39,600 Requirement ®: Deconsolidation entry for accumulated OCI DJE #1: To transfer directly to retained earnings the parent's share in the subsidiary’s revaluation surplus yn, | Revaluation surplus 1,600 — Retained earnings - ABC Co. 1,600 DJE #2: To record the reclassification adjustment of parent's share in cumulative gain on translation of foreign operation ee Cumulative exchange difference 800 Gain on translation (profit or loss) 800 © The total effect of the sale transaction on profit or loss is as follows: Gain on disposal of controlling interest 39,600 Gain on translation (reclassification adjustment) 800 Total effect on profit or loss —_40400_ te _— 4 Chapters 4 Remember the following: Change in ownership interest Does stot result to loss of Accounting treatment - Asan equity transaction: a e —Nogain or loss is recognizeg — © Consideration less Change in NCI= pa) adjustment ner Results to loss of control As sale of subsidiary: e Deconsolidate as follows: Cash (consideration received) xx Investment retained xx NCI Xx Goodwill x Netidentifiable assets 3 Gain on disposal x Sale of a subsidiary to an associate or joint venture Ifa parent loses control of a subsidiary by selling its interest in the subsidiary to an associate or a joint venture, the gain or loss from the transaction is recognized in the parent's profit or loss only to the extent of the unrelated investors’ interests in that associate or joint venture. The remaining part of the gain is eliminated agains the carrying amount of the investment in that associate or join! venture. Former subsidiary becomes an associate or Joint venture > If the parent retains an investment in the former subsidiat} and the former subsidiary is now an associate or a joi venture, the parent recognizes the part of the gain or los resulting from the Temeasurement at fair value of th investment retained in that former subsidiary in its proft © loss only to the extent of the unrelated investors’ interests the new associate or joint ventuy gain is eliminated against investment retained in the former re. The remaining part of oe the carrying amount of subsidiary. Consolidated Financial Statements (Part 3) a Former subsidiary becomes an associate or joint venture » If the parent retains an investment in the former subsidiary that is now accounted for in accordance with PERS 9, the part of the gain or loss resulting from the remeasurement at fair value of the investment retained in the former subsidiary is recognised in full in the parent’s profit or loss Illustration: Sale of a subsidiary to an associate ABC Co. owns 100% interest in XYZ, Inc. On January 1, 20x1, ABC Co. sells 70% interest in XYZ, Inc. to DEF Co, an associate of ABC Co. in which ABC Co. owns 20% interest. Details on the sale are as follows: Sale price 210,000 Carrying amount of the subsidiary's net assets 100,000 Fair value of investment retained in the former subsidiary 90,000 The investment retained in the former subsidiary (XYZ) is classified as investment in associate to be accounted for under the equity method. Step 1: Compute for the total gain The total gain before the required eliminations is computed as follows: 210,000 J.) Cash (Consideration received) 90,000 iia Investment in associate (investment retained) | Net assets of former subsidiary* 100,000 200,000 Gain (squeeze) "Net assots = Excess of assets over liabilities (i.,, debit balance). This is credited in order to derecognize it. The 200,000 gain above is the amount before the eliminations required by PFRS 10. 2, Chapter ¢ aS Step 2: Segregate the components of the gain and perfor, FS a eliminations The total gain computed above consists of the following: 1. Gain on remeasurement of the retained investment 2. Gain on sale (pertaining to the portion sold) The two components are segregated for purposes g applying the elimination requirements of PFRS 10. > The gain on remeasurement at fair value is computed as follows: Fair value of investment retained in former subsidiary 90,000 Carrying amount of retained investment (100K x 30%) 30,000 Gain on remeasurement before elimination 60,000 Multiply by: Unrelated interest in the former subsidiary* 56% Gain to be recognized in profit or loss 33,600 Excess to be eliminated against carrying amount of investment in the former subsidiary (60,000 — 33,600) 26,400 + The unrelated interest in the former subsidiary is computed as follows Total interest in XYZ 100% Direct interest retained by ABC Co. over XYZ (0%) Indirect interest of ABC Co. through the DEF Co. (the buyer) 14%) (20% x 70%) Unrelated interest in the former subsidiary Eu > The gain on sale is computed as follows: Total gain before eliminations (see journal entry above) 2a) Gain on remeasurement before elimination sn Gain on sale before elimination mone Multiply by: Unrelated interest in the existing associate, 0% ie, DEF Co,, the buyer (1 -20%) pl Gain to be recognized in profit or loss Consolidated Financial Statements (Part 3) 275 ee Ha Excess to be eliminated against carrying amount of investment in the existing associate (140K - 112K) 28,000 The elimination entries are as follows: \Jan. 1,| Gain 20%2 Gain on “ue remeasurement ~ P/L 33,600 Investment in associate - XYZ, Inc. 26,400 ljan.1,| Gain ay a 140,000 ain on sale ~ P/L 112,000 Investment in associate - DEF Co. 28,000 The total amount of gain recognized in ABC's profit or loss is P145,600 (33,600 + 112,000). Importance of consolidation Lk Consolidated financial statements provide true and fair view of the financial position and performance of the group. Users are provided with a clearer view of the risks and rewards surrounding the group of entities. It would be burdensome for users to gather together all the individual financial statements of a parent and its many subsidiaries in order to get an idea of the financial position and performance of the group, so parent entities are required to prepare consolidated financial statements. Consolidated financial statements lessen the temptation of hiding certain activities in the subsidiary's or special purpose ate financial statements. Although, a entity’s (SPE) separ: possible loophole in consolidated financial statements is that certain activities of subsidiaries or SPEs may be buried or obscured in the notes. SPEs will be discussed momentarily. Consolidated financial statements eliminate the effects of transactions with related entities making the consolidated financial statements more useful than the aggregate of each of the group members’ separate financial statements. Chapter¢ We i Theories of consolidation Consolidation accounting hi supporting this evolutior a as evolved over the years. The theories n are outlined below: Proprietary theory ~ this theory focuses on the parent's ih interest in the subsidiary. Advocates of this concept belioy, that since the parent acquires only a portion of the Subsidiary only that portion should be shown on the consolidateg financial statements. Consequently, non-controlling interegs (NCI) are excluded from the consolidated financial statements, This concept supports the “proportionate consolidation,” wherein the consolidated financial statements include the parent's net identifiable assets plus the parent's share in the net identifiable assets of the subsidiary. Similar procedure is applied for income and expenses. Parent company theory - this theory focuses on the parent's ability to control the subsidiary as a whole and not only up to the extent of its legal interest in the subsidiary. Advocates of this concept believe that the subsidiary is an extension of the parent company. Therefore, the consolidated finandal statements should be prepared from the viewpoint of the owners of the parent. All of the subsidiary’s net identifiable assets are included in the consolidated financial statements, irrespective of the parent’s ownership interest in the subsidiary. Accordingly, NCI is included in the consolidated financial statements bu not as part of equity. The following are peculiar characteristics of the para company theory: i. 100% of the subsidiary’s net identifiable assets ar included in the consolidated financial statemen'’s carrying amounts plus the parent’s share in the fait ¥ “a adjustments (FVA) at acquisition date. The NCI’s share FVA is not presented, i $ Nene ncttuTed et proportionate share and presented ® 'y in the consolidated financial statements: ii, 4 _ Consolidated Financial Statements (Part 3) 277 The subsequent evolution of the parent company thecky changed the presentation from liability to a “mezzanine” line item, i.e., between liabilities and equity, but neither part of liabilities nor equity. iii, Goodwill pertains only to the owners of the parent (also called ‘partial goodwill’), iv. Consolidated profit includes only the parent’s own profit plus the parent's share in the subsidiary’s profit. The NCI’s share in the subsidiary’s profit is deemed an expense. In other words, consolidated profit pertains only to the owners of the parent. v. Unrealized gains and losses from upstream sales are eliminated only up to the extent of the parent's ownership interest in the subsidiary. Entity theory (Contemporary theory) — similar to the parent company theory, the entity theory is also based on “control.” However, advocates of this concept believe that the parent and the subsidiary are members of a group (the consolidated entity). Therefore, consolidated financial statements should be prepared from the viewpoint of the group rather than of the owners of the parent. All of the subsidiary’s net identifiable assets are included in the consolidated financial statements, irrespective of the parent's ownership interest in the subsidiary. Accordingly, NCI is included in the consolidated financial statements within equity but separate from the equity of the owners of the parent. The following are peculiar characteristics of the entity theory: i 100% of the subsidiary’s net identifiable assets are included in the consolidated financial statements at carrying amounts plus the total FVA at the acquisition date. rtionate share or faiy Value I is measured at either propo’ ‘ ae ed in the consolidated financial state Men ocean but separate from the equity of the Chee of the parent. Goodwill pertains to both the owners of the parent anq NCI (also called ‘full goodwill’), particularly when Ncj ;, measured at fair value. Consolidated profit combines the parent's ang subsidiary's profits in total, irrespective of the Parent's ownership interest in the subsidiary. The consolidate profit is then attributed to the (a) owners of the parent and (b) NCI. Similar treatment is made fo; comprehensive income. In other words, consolidated profit or comprehensive income pertains to both the owners of the parent and NCL. Unrealized gains and losses from upstream sales are eliminated in full. d. Hybrid theory (Traditional theory) — like the parent company and entity theories, the hybrid theory is also based on “control.” As the name implies, the hybrid theory incorporates characteristics of both the parent company theory and the entity theory. However, the hybrid theory has the following peculiarities: i. ii, 100% of the subsidiary’s net identifiable assets a included in the consolidated financial statements 3! carrying amounts plus the total FVA at the acquisition date. NCI is measured at proportionate share (ie., no fair value option) and presented in the consolidated finard#l statements within equity but separate from the equity of the owners of the Parent, Goodwill pertains onty to the owners of the parent (a called ‘partial Soodzvill’), Consolidated Profit combines the parent's an’ Subsidiary’s profits jn total, irrespective of the pares Consolidated Financial Statements (Part 3) 279 ownership interest in the subsidiary. However, the profit attributable to the NCI is deducted from the combined profits but not reported as expense. In other words, consolidated profit pertains only to the owners of the parent, v. Unrealized gains and losses from upstream sales are eliminated in full. ‘The current standards require the use of the entity theory. Allour previous discussions are based on this theory. Historical background « PAS 31 Interests in Joint Ventures, the predecessor of PFRS 11 Joint Arrangements, required the use of the “proprietary theory” in accounting for investments in jointly controlled entities. This theory was eliminated in PFRS 11 and PAS 28 Investments in Associates and Joint Ventures. « PAS 22 Business Combinations, which became effective on January 1, 1985, supported the “parent company theory.” PAS 22 is the predecessor of PFRS 3 which became effective on April 1, 2004. * The original PFRS 3 Business Combinations and PAS 27 Consolidated and Separate Financial Statements initially supported the “hybrid theory.” * However, on July 1, 2009, PFRS 3 and PAS 27 were revised. The revised standards discarded the “hybrid theory” and requires the use of the “entity theory.” * PERS 10 Consolidated Financial Statements and PFRS 12 Disclosure of interests in other entities which became effective on January 1, 2013 also support the “entity theory.” Accounting theories evolve primarily in response to user’s needs. This is in order for financial statements to continually Provide useful information. Despite the various changes in consolidation accounting over time, the basic objective remains 280 ch eprer¢ the same, and that is to combine the assets, liabilities, ¢, g 4 ry cI income, and expenses of a parent and its subsidiaries, ‘ulty, Advantages and disadvantages of the entity theory ‘tee primary advantage of the entity theory over the other theory, is that the entity theory provides more relevant i representationally faithful information to users because of ie following reasons: * a. The entity theory focuses on the parent's ability to contro) the subsidiary as a whole and not only up to the extent of its legal interest in the subsidiary (substance over form). This is in contrast with the proprietary view. b. The entity theory adheres better with fair value measurement because all the fair value adjustments ate incorporated in the consolidated financial statements. This avoids parti measurement at fair value and partial measurement at book value. This is in contrast with the parent company view. c. Many critics believe that the consideration transferred by the parent company for its controlling interest is not a valid basis in valuing NCI. Thus, a measurement choice between proportionate share and fair value. The entity theory is consistent with this view. It supports the ‘acquisition method,’ wherein control is obtained with or without any consideration transferred and with or without the parent involved in the transaction. The parent company and hybrid theories suppor the ‘purchase method,’ wherein control is primarily obteit® through a purchase transaction. d. In contrast with the other three theories, theory, the consolidated financial statements pert group and not just primarily to the parent. Accordingly: i Assets, abilities, equity, income and expenses consolidated financial statements pertain to controlling interest and NCI. ii, Profit or loss and comprehensive income consolidated financial statements pertain ad under the ent! ain to te i _ Consolidated Financial Statements (Part 3 281 EES Soaereveeoeaes ie controlling interest and NCI. These items are then attributed to the controlling interest and NCI. A disadvantage of the entity theory is that many critics believe that measuring goodwill at fair value is unreliable and irrelevant. Goodwill is an unidentifiable asset, which makes its measurement inherently difficult. Additional illustrations: The succeeding illustrations aim to provide the CPA examinee additional learning materials, Ilustration 1: Intercompany receivables and payables On January 1, 20x1, Horse Co. acquired 80% interest in Colt Co. by issuing bonds with fair value of P250,000. NCI is measured at proportionate share. The following information was determined immediately before the acquisition: Horse Co. Colt Co. Colt Co. Carrying amount Carrying amount Fair value Total assets 1,000,000 400,000 430,000 Total liabilities (600,000) (200,000) (200,000) Net assets 400,000 200,000 230,000 Included in Colt’s liabilities is an account payable to Horse amounting to P20,000. Requirements: Compute for the following: a Total assets in Horse’s separate financial _ Statements immediately after the combination. >. Total assets in the consolidated financial statements. Solutions: Requirement (@): Total assets in separate financial statements Total assets of Horse before the combination 1,000,000 Envestment in subsidiary ____250,000_ Total assets'of Horse after the combination 1,250,000 za i 282 pee Requirement (b): Total assets in consolidated financial sta Total assets of Horse after the combination (see above) 12s Total assets of Colt (carrying amount) “90,0 tements Investment in subsidiary am FVA on assets (430K fair value - 400K carrying amount) 0.9 Goodwill - net (250K + (230K x 20% NCD]-230K D0; Effect of intercompany transactions (intercompany receivable) oe Consolidated total assets ‘Le a eraser Illustration 2.1: Fair value adjustment — Decrement ' Lion Co. acquired 80% of Cub Co. on January 1, 20x1 for P1090 The following information was determined at acquisition date. Lion Co. Cub Co. Cub Ge Carrying amt. Carrying amt. Fair value Equipment 1,000,000 500,000 400,00 Accumulated depreciation (200,000) (100,000) (80,00, Net 800,000, 400,000 __ 320,001 Remaining useful life, 1/1/x1 10 yrs. Syrs. 5 yrs. Question #1: How much is the consolidated “Equipment = net? in the December 31, 20x2 financial statements? Solution: 40/00! Equipment, net - Lion Co. (800,000 x 8/10) mao Equipment, net - Cub Co. (carrying amount) (400,000 x 315) sso FVA on equipment, net - decrement (320,000 - 400,000) x 3/51 eal Consolidated equipment, net — Dec. 31, 2022 ed Alternative solution: Equipment, net — Lion Co. (600,000 x 8/10) 60s (fa Se Equipment, net - Cub Co. (fair value) (320,000 x 3/5) i Consolidated equipment, net ~ Dec. 31, 20x2 SS = Consolidated Financial Statements (Part 3) 283 Question #2: What is the consolidation journal entry for the depreciation of the fair value adjustment on December 31, 20x2? Solution: | Be Accumulated depreciation (80,000 x 2/5) 32,000 | 3 Depreciation expense (80,0005) 16,000 Retained earnings ~ Lion Co,* 12,800 | Retained earnings—CubCo* | 3,200 “These are the shares of Lion and Cub in the depreciation of the FVA in the prior year, i.e., 20%1 (16,000 x 80% & 20%). Illustration 2.2: Fair value adjustment - Increment On January 1, 20x1, Kangaroo Co. acquired 75% of Joey Co. At that time, Joey’s equipment has a carrying amount of P100,000 and a fair value of P120,000. The equipment has a remaining useful life of 10 years. On December 31, 20x2, Kangaroo and Joey reported equipment with carrying amounts of P500,000 and 300,000, respectively. Question: How much is the consolidated “equipment - net” in the December 31, 20x2 financial statements? Solution: Equipment, net - Kangaroo 500,000 Equipment, net - Joey 300,000 FVA on equipment, net - increment [(120,000 - 100,000) x 8/10] 16,000 Consolidated equipment, net - Dec. 31, 20x2 816,000 Illustration 3; NCI in net assets Owl Co. paid P150,000 for its 75% interest in Owlet Co. Owl elected to measure NCI at fair value, Owlet’s net identifiable assets approximated their fair values at acquisition date. The acquisition resulted to P10,000 goodwill attributable to NCI. oo’ 284 Chapter 6 Since the acquisition date, Owlet has made accumulated Profit 200,000. ‘There have been no changes in Owlet’s share eas since acquisition date, The group determined that goody, been impaired by P8,000. Information at reporting, date is shown, below: Owl Co. Owler ca” Total assets 1,000,000. ETI Total liabilities 200,000 120,09 Share capital 300,000 100,009 Retained earnings 289,009 Total liabilities and equity 1,000,000 500,009" Requirements: Compute for the following: a. Fair value assigned to NCL at the acquisition date b. Goodwill at the end of reporting period c. NCTin net assets d, Consolidated retained earnings e. Consolidated total assets f. Consolidated total equity Solutions: Step 1: Analysis of effects of intercompany transaction None Step 2: Analysis of subsidiary’s net assets Owlet Co. ‘Acquisition Consolidation Net date date change Net assets at carrying amount — 180,000 +——--380,000'"” Fair value adjustments (FVA)_ = = Net assets at fair value 130,000 380,000 200,000 1) (100K share capital +280K retained earnings) (©) 80K retained earings, end, - 200K accumulated profits since acquisition date 80K retained earnings at acquisition date, + (80K retained earnings at acquisition date + 100K share capital whi changed’ = 180K net assets at acquisition date) 19“ Qwlet’s net identifiable assets approximated theie fair values at acquisition ch “never date” a, Consolidated Financial Statements (Part 3) oe aS ee Step 3: Goodwill | | | ge } 1 Place given information on the formula & compute for missing amounts Consideration transferred (given) 150,000 Less: Previously held equity interest in the acquiree : Total 150,000 Less: Parent's proportionate share in the net assets of subsidiary (180K x 75%) - see Step 2 (135,000) Goodwill attributable to owners of parent ~ acquisition date 15,000 | _Less: Parent’s share in goodwill impairment (28,000 x 75%) (6,000) Goodwill attributable to owners of parent — current repig. date 9,000 Fair value of NCI . ? Less: NCI's proportionate share in the net assets of subsidiary (180K x 25%) ~ see Step 2 (45,000) Goodwill attributable to NCI — acquisition date (given) 10,000 | Less: NCI’s share in goodwill impairment (F8,000 x 25%) (2,000) Govdtwill attributable ta NCI - current reporting date 8,000, Goodwill, net — current reporting date Requirement (b) 17,000 2, Squeeze Consideration transferred (given) 150,000 Lass: Previously held equity interest in the acquiree - Total S008 Less: Parent's proportionate share in the net assets of subsidiary (180K x 75%) ~ see Step 2 (135,000) 15,000 Goodwill attributable to owners of parent — acquisition date Less: Parent's share in goodwill impairment (F 8,000 x 75%) (6,000) Gocduill attributable to owners of parent — current reptg. date 9,000 55,000 Fair value of NCI - Requirement (a) i Less: NCT: te share in the net assets 0! NCI's proportionate s! sas Subsidiary (180K x 25%) - see Step 2 : Goodwill attributable to NCI ~ acquisition date (given) oun Less: NCI’s share in goodwill impairment, (8,000 x 25%) ¢ zs us 2 Goodwitl attributable to NCI — current reporting date , a6 —_——_— _—_—————— - - Requirement (b) Goodwill, net — current reporting date net assets Step 4: Non-controlling interest in i Owl's net assets at fair value ~ current year (Sp 2) Multiply by: NCI percentage Total 5 Add: Goodwill attributable to NCI- current yr. (Sep 3) 8,000 Non-controlling interest in net assets — Requirement (c) 103,000 Step 5: Consolidated retained earnings Parent's retained earings — current year 500,000 Parent's share in the net change in subsidiary’s net assets “150,000 Parent's share in impairment of goodwill (8K x 75%) (6,000) Consolidated retained carnings ~ Requirement (da) 644,000 ‘@) Net change in subsidiary’s net assets (See Step 2) P200,000 x 75% = P150,000 Total assets of Owl 1,000,000 Total assets of Owlet 500,000 Investment in subsidiary (consideration transferred) (150,000) Fair value adjustments - net - Goodwill - net (Step 3) 17,000 Consolidated total assets — Requirement (e) 1,367,000 Share capital (Parent only) 300,000 Consolidated retained earnings (Step 5) O44, 00 Equity attributable to owners of the parent 944,000 | Non-controlling interests (Step 4) 103,000, Consolidated total equity - Requirement 1,047,000, Illustration 4: Group accounting policy On June 30, 20x1, Cockroach Co. acquired 75,000 of Nymph Co's 100,000 outstanding shares with Par value per share of PI for P4 per share. On this date, Nymph’s shares had a quoted price of 3.50 per share and Nymph’s retained earnings were P80,000. Additional information: Consolidated Financial Statements (Part 3) 287 + Nymph’s total assets include land classified as investment property at a cost of P180,000. The land’s fair values are 200,000 on acquisition date and P320,000 on June 30, 20x3. Nymph uses the cost model for its investment properties. However, the group uses the fair value model « On acquisition date, Nymph's building classified as property, plant, and equipment had a fair value of P30,000 in excess of its carrying amount. The building's remaining useful life is 5 years. The group uses the straight-line method of depreciation. « Theinvestment in subsidiary is measured at cost. « The current accounts on June 30, 20x3 include intercompany receivables and payables of P10,000. « An impairment test on June 30, 20x3 concluded that goodwill is impaired by P20,000. « NCI is measured at fair value. The quoted price of the shares on acquisition date reflects the fair value of the NCI. « There are no subsequent changes in Nymphs outstanding shares. The June 30, 20x3 individual financial statements of the entities show the following information: Cockroach Co. Nymph Co. Total assets 1,000,000 500, pg 200,000 120,000 Total liabilities . M Share capital ped ened Retained earnings 500,00 sane Total liabilities and equi 1,000,000 , ui for the following: eed inthe June. 30, 20:9 sonacidated_fnancal statements . NCI in net assets * Consolidated retained earnings ' Consolidated total assets * Consolidated total liabilities panos _hapters Chapter 288 a tS f, Consolidated equity Solutions: Step 1: Analysis of effects of intercompany transaction Eliminate 10,000 intercompany accounts receivable/accouns, payable. Step 2: Analysis of subsidiary’s net assets Nymph Co. June 30, 20%1 June 30, 20x3 Net change Net assets at carrying amount — 180,000 380,000 © Fair value adjustments (FVA) 50,000 158,000 Net assets at fair value 230,000 538,000 308,000 ‘@) (100K share capital + 280K retained eamings) (©) (100K share capital + 80K retained earnings) ® EVA, 6/30/x1 Useful life Depreciation _ FVA, 6/30/x3 Inv.Prpty. 20,000" N/A -@ 140,000" Building _30,000 Syrs. 12,000 @ 18,000 Totals 50,000 12,000 158,000 tS +* (200,000 fair value ~ 180,000 cost) * (320,000 fair value ~ 180,000 cost) The investment property is remeasured to fair value at each reporting dat because the group uses the fair value model, while the subsidiary uses the cot model. (@ Land is not depreciable. Moreover, an investment property that is measured urdet the fair value model is not depreciated. (6) (30,000 + 5) = 6,000; 6,000 x 2 years = 12,000 Step 3: Goodwill Consideration transferred (75,000 shares x #4) 300,000 Less: Previously held equity interest in the acquiree - Total 300,000 Less: Parent's proportionate share in the net assets of subsidiary (230K x 75%) ~ see Step 2 172,500 127,500 Goodwill attributable to owners of parent - acquisition date Less: Parent's share in goodwill impairment (#20,000x75%) 150 2 Goodwill attributable to owners of parent — current reptg.date__} | “aa Consolidated Financial Statements (Part 3) 289 Fair value of NCI (25,000 sh. x 3.50) 87,500 Less: NCI's proportionate share in the net assets of subsidiary (230K x 25%) — p2 (57,500) Goodwill attributable to NCI — acquisition date (given) 30,000 Less: NCI's share in goodwill impairment (20,000 x 25%) (5,000) Goodwill attributable to NCI ~ current reporting date 25,000 Goodwill, net - current reporting date - Requirement (a) 137,500, Step 4: Non-controlling interest in net assets Sub.'s net assets at fair value - current year (Step 2) 538,000 Multiply by: NCI percentage 25% Total 134,500 Add: Goodwill attributable to NCI - current yr. (Step 3) 25,000 Non-controlling interest in net assets - Requirement (b) 159,500, Step 5: Consolidated retained earnings Parent's retained earnings — current year 500,000 Parent's share in the net change in subsidiary's net assets — 231,000 Parent’s share in impairment of goodwill (20K x 75%) (15,000) Consolidated retained earnings — Requirement (c) 716,000 (4 Net change in subsidiary’s net assets (see Step 2) P308,000 x 75% = #231,000 Total assets of parent . 1,000,000 Total assets of subsidiary 500,000 Investment in subsidiary (consideration transferred) (300,000) Fair value adjustments - net (Step 2) 158,000 137,500 Goodwill - net (Step 3) Effect of intercompany transaction (Intercompany receoabe) £10,000) Consolidated total assets - Requirement @ 1,485,500 Total liabilities of parent / a Total liabilities of subsidiary } Fair value adjustments - net = Effect of is ny trangaction (Intercompany payable) (10,000) of intercompany iaage Consolidated total liabilities — Re irement (¢) Lh L016 yy, h Consolidated total equity - Requirement (fp 1175544 Illustration 5: Bus. com. achieved in stages (‘Step acquisition’, Rabbit Co. acquired 40% in Bunny Co. for ?10,000 many year, ago. The interest was classified as investment in associate, On January 1, 20x3, Rabbit acquired additional 35% interest ir, Bunny for P200,000. On this date, Bunny’s net assets have a fair value of P180,000, same as the carrying amount. Rabbit measured the NCI at a fair value of P55,000. Rabbit’s investment in associate account has a carrying amount of ?120,000 and a fair value of P100,000. Rabbit measured the investment in subsidiary at cost. Financial information on December 31, 20x3 follows: Rabbit Co. Bunny Co. Total assets 1,000,000 500,000 Total liabilities 200,000 120,000 Share capital 300,000 100,000 Retained earnings 500,000, 280,000 Total liabilities and equity 1,000,000 500,000 Requirements: Compute for the amounts of following in the December 31, 20x3 consolidated financial statements: Goodwill NCI in net assets Consolidated retained earnings Consolidated total assets e. Consolidated total equity eo rE Solutions: | Step 1: Analysis of effects of intercompany transaction None. Non-controlling interest in net assets — Requirement ()_105,000 Consolidated Financial Statements (Part 3) $6) Step 2: Analysis of subsidiary's net assets "Net Bunny C Jan. 1 20x1 Dec. 31, 20x1 ea a es change Net assets at carrying amount 180,000 380,000 » - Fair value adjustments (FV A) - Net assets at fair value 180,000 38 ta (100K share capital + 280K retained earnings) Step 3: Goodwill Consideration transferred 200,000 Less: Previously held equity interest in the acquiree 100,000 Total 300,000 Less: Parent's proportionate share in the net assets of subsidiary (180K x 75%) — see Step 2 (135,000) Goodwill attributable to owners of parent — acquisition date 165,000 Less: Parent's share in goodwill impairment « Goodwill attributable to owners of parent — current reptg. date 165,000 Fair value of NCI 55,000 Less: NCI's proportionate share in the net assets of subsidiary (180K x 25%) — see Step 2 (45,000) 10,000 Goodwill attributable to NCI — acquisition date (given) Less: NCI’s share in goodwill impairment Goodwill attributable to NCI - current reporting date 10,000 Goodwill, net — current reporting date -Requirement (a) __ 175,000 Step 4: Non-controlling interest in net assets Sub.'s net assets at fair value - current year (Step 2) mes Multiply by: NCI percentage 2 Total 95,000 10,000 Add: Goodwill attributable to NCI - current yr. (Sty) Step 5: Consolidated retained earnings 500,000 Parent's retained earnings ~ current year Y ‘diary’s netassets ® — 150,000 ‘arent’s share in the net change in. subsidiary S 650,000 Consolidated retained earnings — Reguirement (0 Chaptey MA (i Net change in subsidiary’s net assets (see Step 2) 200,000 x 75% = P150,000 Total assets of parent 1,000,009 Total assets of subsidiary 500,000 Investment in subsidiary (200K + 100K) - (Step 5) (300,000) Fair value adjustments - net - Goodwill - net (Step 3) 175,000 | Consolidated total assets ‘equirement 375,000 Share capital (Parent only) 300,000 Consolidated retained earnings (Step 5) 650,000 Equity attributable to owners of the parent 950,000 Non-controlling interests (Step 4) 105,000 Consolidated total equity — Requirement (e) 1,055,000 Ilustration 6: NCI in profit and comprehensive income On January 1, 20x1, Rooster Co. acquired 75% interest in Cockerel Co. for 150,000. On this date, Cockerel's net identifiable assets have a carrying amount of P180,000, which approximates fair value. NCI was assigned a fair value of P55,000. During 20x1, Rooster sold goods to Cockerel for 150,000, having bought them for P120,000. A quarter of these goods remain unsold at year-end. During the year, goodwill has been tested for impairment and found to be impaired by 8,000. The individual statements of profit or loss and other comprehensive income of the entities for the year ended December 31, 20x1 are shown below: Rooster Co, Cockerel Co. Revenue 1,000,000 700,000 Cost of sales . (400,000) (300,000). Gross profit 600,000 £00,000 Dividend income from Cockerel Co, 10,000 Distribution costs 200,000) (200,000) Consolidated Finan Statements (Part 3) 293 5 a Administrative costs _ (80,000) 50,000) Profit before tax 330,000 seer: Income tax expense (96,000) (75,000) Profit after tax 234,000 175,000 Other comprehensive income 74,000 25,000 Cor hensive income 308,000 200,000 Requirements: Compute for the following: a. Consolidated sales and cost of sales. b. Consolidated profit and comprehensive income. c. Profit and comprehensive income attributable to owners of the parent and NCI. Solutions: Requirement (a): Consolidated sales and cost of sales The intercompany sale of inventory is. downstream. Sale price of intercompany sale 150,000 Cost of intercompany sale (120,000) Profit from intercompany sale 30,000 Multiply by: Unsold portion as of yr.-end 1/4 Unrealized gross profit in ending inventory 7,500 Sales by Rooster Co. 1,000,000 Sales by Cockerel Co. . 700,000 Less: Intercompany sales during the current period (150,000) | Lonsolidated sales 1,550,000 Cost of sales of Rooster Co. 400,000 Cost of sales of Cockerel Co. ’ 300,000 Less: Intercompany sales during the current period (150,000) Add: Unrealized, gross profit in ending inventory 7,500 Less: Realized profit in beginning inventory. ae Consolidated cost of sales eo i hensive ir is : Consolidated profit and compre es Requirement (b): Cor pei seni 234,000 175,000 ~ ‘Ome Profits before adjustments P _(7,500)_(_-_) (7,500 pee 216,500 175,000 Oisay “Impairment of goodwill __(6,000)_(2,000)_(8,09) Consolidated profit + 383,509 Other comprehensive income _74,000 25,000 99,000 Comprehensive income 482,509 (©) Share in goodwill impairment: (P8,000 « 75%); (P8,000 x 25%) Requirement (c): Profit and Comprehensive income attributable to owners of parent and NCI Owners of parent_NCI_ Consolidate Parent's profit before FVA 216500 N/A 216,509 Share in sub.'s profit before FVA © 131,250 43,750. 175,000 Impairment of goodwill (see above) (6,000) (2,000) (8,009) Profit attributable to 341,750 41,750 383,500 Parent’s OCI 74,000 N/A 74,000 Share in sub.’s OCI 18,750 6,250 25,000 Comprehensive income attributable to _ 434,500 _ 48,000 482,500 (0 (175K x 75% = 131,250); (175K x 25% = 43,750) (4) (25K x 75% = 18,750); 25K x 25% = 6,250) Illustration 7: Acquisition during the year On September 1, 20x1, Pig Co. acquired 75% interest in Piglet Co. On this date, Piglet’s net identifiable assets have a carrying amount of P180,000, which approximates fair value. In December 20x1, Piglet sold goods to Pig for P81,000. Piglet had marked up these goods by 50% based on cost. One-third of these goods remain unsold at year-end. The group assessed that there is no impairment loss on goodwill for the current year, The individual statements of Profit or loss of the entities for the year ended December 31, 20x1are shown below: Consolidated Financial Statements (Part 3) 295 ip Ae re ee = Pig Co. Piglet Co. Revenue 1,000,000 720,000 Cost of sales (400,000) (300,000) Gross profit 600,000 «420,000 Distribution costs tab, 00) aoa Administrative costs (80,000) (45,000) Profit before tax 320,000 275,000 Income tax expense (96,000) (95,000) Profit after tax Zrci00 Ce aad All of Piglet’s income and expenses (including profit from intercompany sale) were earned and incurred evenly during the year. Requirements: Compute for the following: a. Consolidated sales and cost of sales. b. Consolidated profit. c. Profit attributable to owners of the parent and NCI. Solutions: The intercompany sale transaction is upstream. Sale price of intercompany sale 81,000 Cost of intercompany. sale (P81,000 + 150%) (54,000) 27,000 Profit from intercompany sale Multiply by: Unsold portion as of year-end 13 Unrealized gross profit 9,000 Sales of Pig Co. Ty (720K x 4/12) nie Sa : : Sept. 1 to Dec. 31 only x e les of Piglet Co. from Sep (81,000) Less: Intercompany sales during the year Sunn) Consolidated sales ————— 1594 400,000 G i % ‘ost of sales of Pig Co. (@300K x 4/12) 100,000, COS of Piglet Co. from Sept. 1 to Dec: 31-only Chapter 6 296 __ Less: Intercompany sales during the year (81,09) Add: Unrealized gross profit in ending inventory 9.001 Less: Realized profit in beginning invento! Consolidated cost of sales 928,064 Requirement (b): Consolidated profit Parent Subsidiary Consolidated Profits before adjustments 224,000 60,000" 284,000 Unrealized profit : (9,000) (9,000) Profits before FVA 224,000 51,000 275,000 Depreciation of FVA Consolidated profit 275,000 @) (P180,000 x 4/12 = P60,000) Consolidation begins from the date the investor obtains control of an investee. Thus, the consolidated profit for the year includes Piglet’s profit from Sept. 1 to Dec. 31, 20x1 only. Requirement (c): Profit attributable to Owners of parent and NCI Owners of parent NCI Consolidated: Parent's profit before FVA 224,000 N/A 224,000 Share in sub.'s profit before FVA © 38,250 12,750 51,000 Profit attributable to 262,250 12,750 275,000 (0 (S1K x 75% = 38,250); (51K x 25% = 12,750) Illustration 8: Reconstruction of financial information On January 1, 20x1, Sheep Co. acquired 75% interest in Lamb Co. for P150,000. On this date, Lamb's net identifiable assets have 4 carrying amount of P180,000, which approximates fair value. NCI was assigned a fair value of P55,000. There were no intercompany transactions during the ye@™ However, goodwill was impaired by P8,000. Sheep's separate financial statements reported profit of 216,500 for the year ende December 31, 20x1. Profit attributable to NCI was appropriately determined at P41,750. Consolidated Financial Statements (Part 3) ay Requirements: Compute for the following: a. Profit of Lamb for the year ended December 31, 20x1 b. Consolidated profit c. Profit attributable to owners of the parent Solutions: 1, Place given information on the formula & compute for missing amounts Owners of parent NCI Consolidated Parent's profit before FVA 216,500 N/A 216,500 Share in sub.'s profit before FVA. 2 2 ? Impairment of goodwill (8k x 75% & 25%) __ (6,000) _ (2,000) (8,000) Profit attributable to z 41,750 2 2. Analyze then squeeze Owners of parent NCI Consolidated Parent's profit before FVA 216,500 N/A 216,500 Share in sub.'s profit before FVA 2 43,750 — 175,000° _Impairment of goodwill (8K x 75% & 25%) (6,000) __(2,000) (8,000) Profit attributable to 2 41,750__ 383,500 ‘(41,750 + 2,000) = 43,750 (143,750 + 25% = 175,000 (216,500 + 175,000 — 8,000 = 383,500 3. Squeeze some more ‘till you can squeeze no more @ Owners of parent NCI

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