BUSINESS COMBINATIONS

Prepared by: Camuar, Pantakan, Santos

 CONSOLIDATED
FINANCIAL STATEMENT
PART II
Learning Objectives

 Prepare consolidated financial statements

after eliminating the effects of intercompany
transactions.
Introduction

Intercompany transactions
These are transactions between a parent and
subsidiary but the effect of these transaction
are eliminated when preparing consolidated
financial statement.
The following are the common
intercompany transactions that are
eliminated when preparing consolidated
financial statement:

a. Intercompany sale of inventory

b. Intercompany sale of PPE
c. Intercompany dividends
Intercompany Sales Inventory
 Intercompany sales are either:

a. Downstream – the parent sales to the subsidiary.

b. Upstream – the subsidiary sales to the parent.

Parent
(Investor)
Downstream Upstream

Subsidiary (Investee)
 Intercompany Sales of Inventory

Types of Transaction Treatment

Downstream Sales Only parent recognizes the

profit. NCI is not affected.

Upstream Sales The subsidiary recognizes

the profit. This time, the
NCI is affected because the
profit pertains to both the
owners (parent and NCI).
ILLUSTRATION CONSOLIDATION – INTERCOMPANY SALE OF
INVENTORY
On Jan. 1, 2021, ABC Co. acquired 80% interest in XYZ, Inc.
Information on Jan. 1, 2021 (acquisition date):
• 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:
Carrying amount Fair value Fair value
adjustment (FVA)
Inventory 20,000 24,000 4,000
Equipment, net 40,000 52,000 12,000
Total 60,000 76,000 16,000

• The remaining useful life of the equipment is 6 years.

• ABC measured the NCI at “proportionate share”.
ILLUSTRATION CONSOLIDATION –
INTERCOMPANY SALE OF INVENTORY
ILLUSTRATION CONSOLIDATION –
INTERCOMPANY SALE OF
INVENTORY
ILLUSTRATION CONSOLIDATION – INTERCOMOANY
SALE OF INVENTORY
The following intercompany transaction occurred in 2021:
a. ABC Co. sold goods costing P12,000 to XYZ, Inc. for cash,
at a markup of 40% on selling price. XYZ held one-fourth of
the goods at year-end.
b. ABC Co. acquired inventory from XYZ, Inc. for P12,000
cash, XYZ, Inc. uses a normal markup of 25% above its
cost. ABC’s ending inventory included P4,000 from this
purchase.

Req: Prepare the December 31, 2021 consolidated financial

statements.
ILLUSTRATION CONSOLIDATION – INTERCOPMANY
SALE OF INVENTORY
Solutions: (Analyze the changes in the subsidiary’s net assets
since the acquisition date and this time we need to include in our
analysis the effects of intercompany transactions)
Step 1: Analysis of effect6 of intercompany transaction\
Transaction (a) is downstream because the seller is the
parent (ABC Co.), while transaction (b) is upstream because the
seller is the subsidiary (XYZ, Inc.).
The unrealized gross profits in ending inventory are
determined as follows:
ILLUSTRATION CONSOLIDATION –
INTERCOMPANY SALE OF INVENTORY
ILLUSTRATION CONSOLIDATION – INTERCOMPANY SALE OF
INVENTORY
 The consolidated ending inventory, sales, cost of sales and gross profit are
computed as follows:
ILLUSTRATION CONSOLIDATION – INTERCOMPANY
SALE OF INVENTORY
 Fair value adjustments and depreciation of FVA:
ILLUSTRATION CONSOLIDATION – INTERCOMPANY
SALE OF INVENTORY

(c) A subsidiary recognizes profit only from upstream sales.

Thus, only upstream sales affect the subsidiary’s net assets,
and consequently the NCI.
ILLUSTRATION CONSOLIDATION – INTERCOMPANY
SALE OF INVENTORY
ILLUSTRATION CONSOLIDATION – INTERCOMPANY SALE OF
INVENTORY
ILLUSTRATION CONSOLIDATION – INTERCOMPANY SALE OF
INVENTORY
ILLUSTRATION CONSOLIDATION – INTERCOMPANY SALE OF
INVENTORY
 The consolidated financial statements are prepared as follows:
ILLUSTRATION CONSOLIDATION – INTERCOMPANY SALE OF
INVENTORY
INTERCOMPANY SALE OF PPE

Accounting Procedures:
a. Any gain or loss is deferred and
• Amortized over the asset’s remaining life, if
the asset is depreciable
• Not amortized, if the assets is non-0depreciable
b. If the asset is subsequently sold to an unrelated
party or otherwise derecognized, the unamortized
balance of the deferred gain or loss is recognized in
profit or loss.
INTERCOMPANY SALE OF PPE

c. In a downstream sale, the gain or loss is

adjusted to the controlling interest only.
Therefore, NCI is not affected.
d. In an upstream sale, the adjustment for the
gain or loss are shared between the controlling
interest and NCI. Therefore, NCI is affected.
e. The unamortized balance of the deferred gain
or loss is eliminated when consolidated
financial statements are prepared.
ILLUSTRATION CONSOLIDATION – INTERCOMPANY SALE OF
INVENTORY
On Jan. 1, 2021, ABC Co. acquired 80% interest in XYZ, Inc.
Information on Jan. 1, 2021 (acquisition date):
• 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:
Carrying amount Fair value Fair value
adjustment (FVA)
Inventory 20,000 24,000 4,000
Equipment, net 40,000 52,000 12,000
Total 60,000 76,000 16,000

• The remaining useful life of the equipment is 6 years.

• ABC measured the NCI at “proportionate share”.
ILLUSTRATION CONSOLIDATION – INTERCOMPANY OF PPE
TRANSACTION
 Information on Dec. 31, 2021 (consolidation date)
ILLUSTRATION CONSOLIDATION – INTERCOMPANY OF PPE
TRANSACTION

 On January 1, 2021, ABC Co. sold equipment with, a historical cost of

P10,000 and accumulated depreciation of P2,000 tp XYZ, Inc. for P12,000
on cash basis. The equipment’s remaining useful life is 4 years.
Req: Prepare the December 31, 2021 consolidated financial statements.
ILLUSTRATION CONSOLIDATION – INTERCOMPANY OF PPE
TRANSACTION
ILLUSTRATION CONSOLIDATION – INTERCOMPANY OF PPE
TRANSACTION
ILLUSTRATION CONSOLIDATION – INTERCOMPANY OF PPE
TRANSACTION
ILLUSTRATION CONSOLIDATION – INTERCOMPANY OF PPE
TRANSACTION
ILLUSTRATION CONSOLIDATION – INTERCOMPANY OF PPE
TRANSACTION
ILLUSTRATION CONSOLIDATION – INTERCOMPANY OF PPE
TRANSACTION
ILLUSTRATION CONSOLIDATION – INTERCOMPANY OF PPE
TRANSACTION
ILLUSTRATION CONSOLIDATION – INTERCOMPANY OF PPE
TRANSACTION

 The P3,000 deferred gain that is eliminated is equal to the net

overstatement of profit – (P4,000 overstatement due to the gain – P1,000
overstatement due to the overstated depreciation). The P1,000 amortized
portion in the accounts.
ILLUSTRATION CONSOLIDATION – INTERCOMPANY OF PPE
TRANSACTION
 The consolidated profit is attributed to the owners of the parent an NCI as
follows:
ILLUSTRATION CONSOLIDATION – INTERCOMPANY OF PPE
TRANSACTION
 The consolidated financial statements are prepared as follows:
ILLUSTRATION CONSOLIDATION – INTERCOMPANY OF PPE
TRANSACTION
 The consolidated financial statements are prepared as follows:
INTERCOMPANY DIVIDENDS

Investment in subsidiary measured at:

• Cost OR in accordance to PFRS 9, dividend
received recognized at P/L.
• Using equity method, dividends received
recognized as reduction to the carrying
amount of the investment.
INTERCOMPANY DIVIDENDS

In any case, the dividends must be eliminated

when the consolidated financial statements are
prepared. It is as if the parent never received the
dividends. Therefore:
a. If the dividends were recognized in profit or
loss, eliminate the dividend income in the
consolidated statement of profit or loss.
b. If the dividends were recognized as reduction
to the investment account, add back to the
dividends to the investment account.
ILLUSTRATION CONSOLIDATION – INTERCOMPANY
DIVIDEND TRANSACTION
On Jan. 1, 2021, ABC Co. acquired 80% interest in XYZ, Inc.
Information on Jan. 1, 2021 (acquisition date):
• 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:
Carrying amount Fair value Fair value
adjustment (FVA)
Inventory 20,000 24,000 4,000
Equipment, net 40,000 52,000 12,000
Total 60,000 76,000 16,000

• The remaining useful life of the equipment is 6 years.

• ABC measured the NCI at “proportionate share”.
• The business combination resulted to goodwill of P3,000.
ILLUSTRATION CONSOLIDATION –INTERCOMPANY DIVIDEND
TRANSACTION
Information on subsequent reporting date (Dec. 31, 2021)
ILLUSTRATION CONSOLIDATION –INTERCOMPANY DIVIDEND
TRANSACTION
Information on subsequent reporting date (Dec. 31, 2021)

 XYZ, Inc. declared and paid dividends of P6,000 in 2021.

Req: Prepare the December 31, 2021 consolidated FS.
ILLUSTRATION CONSOLIDATION – INTERCOMPANY
DIVIDEND TRANSACTION

STEP 1: |ANAYSIS OF EFFECTS OF INTEWRCOMPANY

TRANSACTIONS
 Allocate the P6,000 dividends declared in XYZ:
4,800 ABC (parent); 1,200 NCI
 Take note, ABC recognized the inventory at cost. So, the P4,800
recognized as dividends is recorded in P/L as dividend income.
ILLUSTRATION CONSOLIDATION – INTERCOMPANY DIVIDEND
TRANSACTION

STEP 3: GOODWILL
 The problem states that the goodwill is P3,000. this is the amount reported in
ILLUSTRATION CONSOLIDATION – INTERCOMPANY
DIVIDEND TRANSACTION
ILLUSTRATION CONSOLIDATION – INTERCOMPANY
DIVIDEND TRANSACTION
ILLUSTRATION CONSOLIDATION – INTERCOMPANY
DIVIDEND TRANSACTION
ILLUSTRATION CONSOLIDATION – INTERCOMPANY
DIVIDEND TRANSACTION
INTERCOMPANY BONDS

When a parent or a subsidiary acquires bonds issued by the

other, both the investment in bonds and the bonds payable are
eliminated in the consolidated FS.
The bonds payable are consolidated extinguished from the
point of view of the group. Therefore:
a) The difference between acquisition cost of the investment
in bonds and the carrying amount of the bonds payable on
the acquisition date is recognized as gain or loss in the
consolidated statement pf P/L; and
b) Any interest expense and interest income recognized after
the intercompany transaction are eliminated in the
consolidated FS.
ILLUSTRATION CONSOLIDATION – INTERCOMPANY
BONDS TRANSACTION
ILLUSTRATION CONSOLIDATION – INTERCOMPANY
BONDS TRANSACTION
ILLUSTRATION CONSOLIDATION – INTERCOMPANY
BONDS TRANSACTION
ILLUSTRATION CONSOLIDATION – INTERCOMPANY
BONDS TRANSACTION
ILLUSTRATION CONSOLIDATION – INTERCOMPANY
BONDS TRANSACTION
ILLUSTRATION CONSOLIDATION – INTERCOMPANY
BONDS TRANSACTION
ILLUSTRATION CONSOLIDATION – INTERCOMPANY
BONDS TRANSACTION
ILLUSTRATION CONSOLIDATION – INTERCOMPANY
BONDS TRANSACTION
ILLUSTRATION CONSOLIDATION – INTERCOMPANY BONDS
TRANSACTION
ILLUSTRATION CONSOLIDATION – INTERCOMPANY BONDS
TRANSACTION
ILLUSTRATION CONSOLIDATION – INTERCOMPANY BONDS
TRANSACTION
ILLUSTRATION CONSOLIDATION – INTERCOMPANY BONDS
TRANSACTION