Laud, Triechia

Bachelor of Science in Accountancy

Consolidated Financial Statements

IFRS 10: CONSILIDATED FINANCIAL STATEMENTS

Business combination may also be achieved when a company acquires a large enough interest in another
company’s voting common stock to obtain control of operations. The company owning the controlling
interest is called parent, while the controlled company is termed the subsidiary. Generally, a controlling
interest is achieved by ownership of 50% or more of the subsidiary’s voting stock. Any remaining interest
in the controlled company is referred to as the non-controlling interest (also called minority interest).

I. Consolidated Financial Statements

The consolidated statements present the financial statements of the parent (acquirer) and its subsidiary
(acquiree) as those of a single economic entity. These are prepared when one company has effective
control over another, consolidated statements must be prepared for the companies under common
control.

Although the parent and the subsidiary has remained to be separate legal entities and maintain their
own financial records and statements, but for the purpose of external financial reporting, consolidated
working papers are prepared to facilitate the consolidation of the separate statements of the parent
and its subsidiary(s) into a single set of consolidated statements.

II. Consolidation Procedures- Basic Principles

Consolidated financial statements are prepared by first combining the financial statements of the parent
and the subsidiary(s) on a “line-by-line basis” by adding together like items of assets, liabilities, equity,
income, and expenses.

The focal point of consolidation procedures are:

1. To eliminate any intercompany transactions occurred

2. To properly identify the measurement of non-controlling interests

Non-controlling Interest
It is defined as the equity in a subsidiary not attributable directly or indirectly, to a parent.

III. Preparation of Consolidated Statement of Financial Position at a Date of Acquisition-Wholly

Owned Subsidiary

A subsidiary is said to be a wholly owned subsidiary when the parent company acquires all of its
outstanding common stock from the present shareholders.

The accounting procedure for the preparation of consolidated statement of financial position for a
parent and its wholly owned subsidiary:

 The amounts of the consolidated assets and liabilities (except goodwill) are the parent company’s
book values and the subsidiary’s current fair values.
  Intercompany accounts (parent’s investment account and subsidiary’s equity accounts) are
excluded (eliminated) from the consolidated statement of financial position.
 The book value of the net asset is adjusted to their current fair values.
 Goodwill is recognized in the consolidated statement of financial position, if the consideration
given (price paid) exceeds the fair value of the subsidiary’s identifiable net assets. On the other
hand, of the consideration given is less than the fair value of the subsidiary’s identifiable net
assets, gain on acquisition (closed to parent’s retained earnings) is recognized.

IV. Preparation of Consolidated Statement of financial position at Date of Acquisition-Partially

Owned Subsidiary

The major difference of consolidation process between a wholly-owned subsidiary and a partially-
owned subsidiary is the recognition of non-controlling interest.

Non-controlling interest is recognized only in the consolidation process. It is not a result of any business
transaction or event of either the parent or subsidiary and therefore not recorded in the books of either
the parent or the subsidiary.

A. Measurement of Non-controlling Interest

IFRS 3 did not provide any requirement to measure non-controlling interest on a consistent basis,
therefore, an entity has a free choice between the two options for each transaction undertaken.

IFRS 3 provides two options of measuring non-controlling interest in an acquiree:

1. At Fair value, or
2. At the non-controlling interests proportionate share of the acquiree’s identifiable net assets
(Proportionate Method)

It is suggested that the fair value option is more appropriate than the non-controlling interest’s proportion
share of the acquiree’s identifiable net assets, since it results in the recognition of the non-controlling
interest’s share of goodwill.

B. Goodwill or Gain on Acquisition

 If the aggregate consideration given exceeds the fair value of the net assets of the acquiree, recognize
goodwill.

ILLUSTRATION:

P Company acquired S company in two stages as follows:

 In 2012, P Company acquired a 30% equity interest for cash consideration of P160, 000
when the fair value of S Company’s identifiable net assets was P500, 000.
 In 2013, P Company acquired a further 50% equity interest for cash consideration of
P375,000. On the acquisition date, the fair value of S Company’s identifiable net assets
was P600, 000. The fair value of P Company’s original 30% holding was P200, 000 and the
fair value of the 20% non-controlling interest is assessed as P140, 000.
Using the two options, goodwill is calculated as follows:

PROPORTIONATE REASON FAIR VALUE REASON

METHOD METHOD
375, 000 Given 375, 000 Given
Fair Value of
Consideration
(50% equity
interest)
120, 000 S Company’s total 140, 000 Given
Non-Controlling identifiable assets
Interest multiply by its
non-controlling
interest (20 %;
100% - 80%).
600,000 * .20
200, 000 Fair value given at 200, 000 Fair value given at
Previously-Held acquisition date in acquisition date in
interest (30% 2013. 2013.
equity interest)
695, 000 Aggregate of Fair 715, 000 Aggregate of Fair
TOTAL value of value of
(consideration consideration, consideration,
given) non-controlling non-controlling
interest, and interest, and
previously-held previously-held
interest. interest.
600, 000 Given fair value at 600, 000 Given fair value at
Fair value of acquisition date acquisition date
identifiable net
assets
Total less the fair Total less the fair
value of value of
95, 000 115, 000
GOODWILL identifiable net identifiable net
assets. assets.

If the business combination results to the recognition of a goodwill, the goodwill shall be allocated by:

Under Fair Value Option: goodwill is allocated between the parent and the NCI.

Under Proportionate Method: goodwill is assigned only to the parent.

 If the aggregate consideration given is lower than the fair value of the net assets of the acquiree,
recognize a gain on acquisition (bargain purchase). The gain is to be recognized only by the acquirer
(Parent).
 C. Determination and Allocation of Excess Schedule
It is used to compare the company fair value with the recorded book value of the subsidiary. It also
schedules the adjustments that will be made to all subsidiary accounts in the consolidated worksheet
process. And

V. Preparation of Consolidated Financial Statement on a Date Subsequent to Acquisition, IFRS

10 requires that all intercompany transactions must be eliminated before the preparation
of consolidated financial statement.

The elimination procedures to prepare consolidated financial statements on a date subsequent to

acquisitions are summarized below:

1. Eliminate dividends declared by the subsidiary against dividend income and NCI share.
2. Eliminate subsidiary equity accounts against the investment account and the NCI as of the date of
acquisition.
3. Allocate excess between the aggregate f NCI, price paid by the parent, and previously-held
interest the book value of the identifiable net assets of the subsidiary. This is done by adjusting
the book value of the net assets to their current fair value.
4. Amortized allocated excess.
5. Recognize NCI in net income of subsidiary.

In the consolidated financial statements, candidates should verify the following items:

1. NCI in comprehensive income of subsidiary.

2. NCI in net assets of subsidiary.
3. Consolidated total comprehensive income attributable to parent shareholders.
4. Consolidated retained earnings.
5. Consolidated stockholders equity.

VI. Intercompany Profit in Inventory

Intercompany profit in inventory exists when there is intercompany sale of merchandise between
affiliates.

Downstream Sale of Inventory

Downstream intercompany sale of
merchandise are those from a parent
PARENT company to its subsidiaries. For
consolidation purposes, profits recorded
on an intercompany inventory sale are
Sells to

realized in the period in which the

inventory is resold to outsiders. Until the
point of resale, all intercompany profits
must be deferred.
SUB-
SIDIARY
Upstream Sale of Inventory
Upstream intercompany sale of
merchandise are those sales from
PARENT subsidiaries to the parent company. When
an upstream sale of inventory occurs and
the inventory is resold by the parent to
Sells to

outsiders during the same period, all the

parent entries and the eliminating entries
in the consolidated working papers are
identical to those in downstream case.
SUB-
SIDIARY

Intercompany profit in inventory transfer between affiliates is computed by multiplying the inventory
held by the buying affiliate which was acquired from the selling affiliate by the gross profit rate based
on sales of the selling affiliate.