AC3102 Jan2018 Seminar 3 Three Consolidation Post Acquisition LKW 13jan2018

Consolidation: Post-Acquisition
Learning objectives
1 Understand the rationale for elimination of investment in subsidiary
1. subsidiary,
2. Understand the concept of non-controlling interests.
3. Appreciate the alternative measurement basis for non-controlling interests.
4. Prepare consolidation journal entries relating to goodwill, depreciation, and
amortization of differences between book values and fair values of
identifiable assets,
assets contingent liabilities of acquired subsidiaries
subsidiaries, and non-
controlling interests.
5. Prepare consolidation journal entries to allocate current and past income to
non-controlling interests.
6. Prepare consolidated statement of comprehensive income and
consolidated statement of financial position
position.
References
• TLK chapter 4
• FRS 110
• FRS 103
Lee Kin Wai 1
Why eliminate the Investment account?
•What is the parent paying for through its investment in a subsidiary?

1 Share of book value of subsidiary’s
1.Share subsidiary s net assets at acquisition date
2.Share of excess of fair value over book value of identifiable net assets
3 Goodwill
3.Goodwill
•Why
Why need to eliminate Investment account ?
A.To ensure that the investment account must be zero
B.Investment account is substituted with subsidiary’s
y identifiable net assets and
goodwill (residual) . Why? Avoid recognizing assets in two forms (investment in
parent’s statement of financial position and individual assets and liabilities of
subsidiary)
C.Pre-acquisition retained earnings or pre-acquisition reserves of subsidiary are not
included in consolidated equity. Why? Pre-acquisition retained earnings arose prior to
the acquisition of control by parent . The elimination process will result in residuals
comprising of Goodwill; and Excess or deficit of fair value over book value of
Lee Kin Wai 2
identifiable net assets.
Whyy eliminate the Investment account?
• Re-enactment of elimination of investment entry

i subsequent
in b t year
– Re-enacted as long as the investment exists
((i.e. as long
g as Parent controls the subsidiary)
y)
• Why?: parent’s legal entity financial
statements would include investment in
subsidiary balance
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Example 1 - consolidation - 100% ownership at book value

Case 1 - consolidation - 100% ownership at book value
Company P paid $600,000 to purchase 100% of the share capital of Company S on 31-12-20X1.
The balance sheet at acquisition date is given below.
Share capital of company S at acquisition date 100,000

Retained earnings of company S at acquisition date 500,000
Fair value differential of company S net assets at acquisition date 0
Fair value of identifiable net assets of subsidiary - 100% 600,000
Investment by P in S (given) 600,000

Fair value of net identifiable assets of subsidiary-
y 100% ((600,000)
, )
Goodwill on consolidation (P) 0
E1
Dr Share capital 100,000
Dr Retained earnings 500,000
D G
Dr Goodwill
d ill 0
Cr Investment in S 600,000
[ eliminate investment in S ]
600,000 600,000
Balance sheet as at 31-12-20X1 Company P Company S Dr Cr. Note Consolidated

Cash 340,000 250,000 590,000
Account receivable 60,000 180,000 240,000
Investment in company S at cost 600,000 0 600,000 E1 0
Building 900,000 200,000 1,100,000
Goodwill 0 0 0
Total assets 1,900,000 630,000 1,930,000
Accounts payable 800,000 30,000 830,000

0
Share Capital 200,000 100,000 100,000 E1 200,000
Retained earnings 900,000 500,000 500,000 E1 900,000
Non-controlling interests 0 0 0
Total liabilities and equity 1,900,000 630,000 600,000 600,000 1,930,000
Check : A = L + E 0 0 0 0
As acquisition date is on 31-12-20X1, the P group has no share of company S net profit in year ended 31-12-20X1 (ie 1-1-20x1 to 31-12-20x1).
The consolidated income statement of P Group consists of P's net profit for the year ended 31-12-20x1 (ie 1-1-20x1 to 31-12-20x1).
The consolidated income statement of P Group exclude company S net profit for the year ended 31-12-20x1 (ie 1-1-20x1 to 31-12-20x1).
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Company P paid $ 420,000 to purchase 70% of the share capital of Company S on 31-12-20X1.

Fair value differential of company S net assets at acquisition date 0
Fair value of identifiable net assets of subsidiary- 100% 600,000
Investment by P in S (given) 420,000

Fair value of identifiable net assets of subsidiary- 70% (420,000)
Goodwill on consolidation (P) 0
E1
Dr. Share capital 100,000
Dr. Retained earnings 500,000
Dr. Goodwill 0
Cr. Investment in S 420,000
Cr. Non-controlling Interests (B/S) 180,000
[ eliminate investment in S ] 600,000 600,000
Non-controlling Interests (B/S) has a 30% share of the fair value of the identifiable net assets of the subsidiary.

Cash 520,000 250,000 770,000
Building 900,000 200,000 1,100,000
Goodwill 0 0 0
Total assets 1,900,000 630,000 2,110,000

0
Share Capital 200,000 100,000 100,000 E1 200,000
Retained earnings
g 900,000
, 500,000
, 500,000
, E1 900,000
,
Non-controlling interests 0 0 180,000 E1 180,000
Check : A = L + E 0 0 0 0
As acquisition date is on 31-12-20X1,

31 12 20X1, the P group has no share of company S net profit in year ended 31-12-20X1
31 12 20X1 (ie 1-1-20x1
1 1 20x1 to 31-12-20x1).
31 12 20x1).
Lee Kin Wai 5
Example 3 - consolidation - (1) 70% ownership with fair value

differential in subsidiary net assets; (2) No goodwill
Example 3 - consolidation - (1) 70% ownership with fair value differential in subsidiary net assets; (2) No goodwill
Excess of fair value over book value of building of Company S as at acquisition date was $200,000.
Th balance
The b l sheet
h t att acquisition
i iti d
datet iis given
i b
below.
l T
Tax rate
t iis 20%
Assume NCI is measured based on its proportionate share of fair value of identifiable net assets of S.
Fair value differential of company S net assets at acquisition date 200 000
200,000
Deferred tax liability of fair value differentia; (40,000)
Fair value of identifiable net assets of subsidiary- 100% 760,000 A
Fair value of identifiable net assets of subsidiary- 70% x A 532,000 B
Fair value of identifiable net assets of subsidiary-
subsidiary 30% x A 228 000 C
228,000
Investment by P in S (given) 532,000 D

Fair value of identifiable net assets of subsidiary- 70% (532,000) B
Goodwill on consolidation (P) 0 E=D-B
E1
Dr
500 000
Dr. Building 200,000
Dr. Goodwill 0
Cr Deferred tax liability
Cr. 40 000
40,000
[ eliminate investment in S ] 800,000 800,000
Non-controlling
Non controlling Interests (B/S) is measured on proportionate share of net identifiable assets of subsidiary
Non-controlling Interests (B/S) has no share of goodwill
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Example 3 - consolidation - (1) 70% ownership with fair value differential
in subsidiary net assets; (2) No goodwill

Cash 380,000 250,000 630,000
Building 900,000 200,000 200,000 E1 1,300,000
Goodwill 0 0 0
Total assets 1,872,000 630,000 2,170,000

Deferred tax liability 40,000 E1 40,000
0
Share Capital 200,000 100,000 100,000 E1 200,000
Check : A = L + E 0 0 0 0
Lee Kin Wai 7
Example 4 - consolidation - (1) 70% ownership with fair value

differential in subsidiary net assets; (2) P goodwill
goodwill.
Example 4 - consolidation - (1) 70% ownership with fair value differential in subsidiary net assets; (2) P goodwill;
Th balance
The b l sheet
h t att acquisition
i iti ddate
t iis given
i b
below.
l T
Tax rate
t iis 20%
Assume NCI is measured based on its proportionate share of fair value of identifiable net assets of S.
Fair value differential of company S net assets at acquisition da 200 000
200,000
Deferred tax liability of fair value differentia; (40,000)
Fair value of identifiable net assets of subsidiary- 100% 760,000 A
Fair value of identifiable net assets of subsidiary- 70% x A 532,000 B
Fair value of identifiable net assets of subsidiary
subsidiary- 30% x A 228 000 C
228,000
Investment by P in S (given) 850,000 D

Fair value of identifiable net assets of subsidiary- 70% (532,000) B
Goodwill on consolidation (P) 318 000 E = D - B
318,000
E1
Dr
Dr. Retained earnings 500 000
500,000
Dr. Goodwill 318,000
Cr. Deferred tax liability 40,000
[ eliminate investment in S ] 1,118,000 1,118,000
Non-controlling
Non controlling Interests (B/S) is measured on proportionate share of net identifiable assets of subsidiary
Non-controlling Interests (B/S) has no share of goodwill
Lee Kin Wai 8
Example 4 - consolidation - (1) 70% ownership with fair value differential
in subsidiary net assets; (2) P goodwill.

Cash 380 000
380,000 250 000
250,000 630 000
630,000
Building 900 000
900,000 200 000
200,000 200 000
200,000 E1 1 300 000
1,300,000
Goodwill 0 0 318,000 E1 318,000
Total assets 2,190,000 630,000 2,488,000
Accounts payable 1,090,000 30,000 1,120,000

0
Share Capital 200,000 100,000 100,000 E1 200,000
N
Non-controlling
t lli iinterests
t t 0 0 228,000
228 000 E1 228 000
228,000
Total liabilities and equity 2,190,000 630,000 1,118,000 1,118,000 2,488,000
Check : A = L + E 0 0 0 0
Lee Kin Wai 9
Non‐controlling Interest
Non‐controlling Interest
• FRS 103 define Non Controlling Interest [NCI] as “The The equity in a
subsidiary not attributable, directly or indirectly, to a parent”
• NCI only
l arises
i iin consolidated
lid t d fifinancial
i l statements
t t t where:
h
– one or more subsidiaries are not wholly owned by the parent
• NCI are entitled to their share of retained earnings of the subsidiary
from incorporation
– No distinction between pre-acquisition and post-acquisition
retained earnings for NCI
• Same applies to OCI
– NCI collectively have a share of accumulated OCI arising from
incorporate date to the current date
• NCI are normally a credit balance
– Share of residual interests in the net assets of a subsidiary
– Total equity (parent’s and NCI) = Assets – Liabilities
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A l i f N C t lli I t
Analysis of Non‐Controlling Interests
t
Share of book
Balance of Share of book value of
Unimpaired
non‐ value of remaining (FV
= + + goodwill
g
controlling y
subsidiary’s – BV) of
)
attributable
attributable
interests at equity at identifiable net
to NCI
reporting date reporting date assets at
reporting date
reporting date
• The analysis of non‐controlling interests enables us to efficiently assess the
balance of non‐controlling interests
• Another method of arriving at the non‐controlling interests is to build up the
balance chronologically through the consolidation process
Lee Kin Wai 11
Reconstructing NCI on Statement of Financial Position
IIncorporation
ti Date of
Date of Beginning of current year E d f
End of current year
t
date acquisition
NCI h
NCI have a share of
h f NCI h
NCI have a share of
h f NCI h
NCI have a share of
h f
1. Share capital 1. Change in share capital 1. Profit after tax
2. Retained earnings 2. Change in retained 2. Current amortization of
earnings fair value differential
3. Other equity
3. Change in other equity 3. Current impairment of
4. Fair value differentials goodwill
4. Past amortization of fair
5
5. Goodwill value differential 4. Dividends as a repayment
of profits
5. Past impairment of
goodwill 5. Change in other equity
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Accounting for NCI
Accounting for NCI
•Equity on the consolidated statement of financial
position must include both the interests of equity
owners of the parent company and NCI of partially
owned subsidiaries.
subsidiaries
•NCI
NCI iis an equity
it ititem and
d mustt b
be separately
t l
shown from the equity of the owners of the parent
company.
•Asset and liabilities of the subsidiary must be

reported in full
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Non‐Controlling Interests’ Share of Goodwill
•FRS 103.19 For each business combination, the acquirer shall measure at the
acquisition date components of non-controlling interests in the acquiree that are
present ownership interests and entitle their holders to a proportionate share of
the entity’s net assets in the event of liquidation at either:
•(a)
( ) fair value;; or
•(b) the present ownership instruments’ proportionate share in the recognised
amounts of the acquiree’s identifiable net assets.
Non‐controlling interests
Measured at Fair value at Measured as a proportion of the
acquisition date (include recognized amounts of the
ggoodwill)
) identifiable assets as at
acquisition date
“ Fair value basis”
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Non‐Controlling Interests’ Share of
g
Goodwill
Components NCI measured as a
NCI measured at FV proportion of the
acquiree’s identifiable
net assets
Book value of net assets of

subsidiary
((Fair value – Book value)) of

net assets of subsidiary
Goodwill (on consolidation)
Lee Kin Wai 15
Illustration 4.2 Non-Controlling

g Interests’
Share of Goodwill (TLK, p.172)
The FV of NCI that owned 10% of Subsidiary A as at 31 Dec
20×1(Acquisition date) was $25 000 The financial statements of
20×1(Acquisition date) was $25,000. The financial statements of
Subsidiary A as at acquisition date are as shown below. Subsidiary A
had unrecognized intangible assets with fair value of $40 000 Tax
had unrecognized intangible assets with fair value of $40,000. Tax
rate is 20%. Determine NCI’s good will as at acquisition date.
Subsidiary A’ss Statement of Financial Position as at 31 December 20
Subsidiary A Statement of Financial Position as at 31 December 20×1:
1:
Net assets 160,000
Share Capital 140,000
Retained Earnings 20,000
Equity 160,000
Lee Kin Wai 16
Illustration 4.2 Non-Controlling
Non Controlling Interests’
Interests Share
of Goodwill (TLK, p.172)
Fair value of NCI 25,000
Fair value of identifiable net assets
Book value of equity
Book value of equity 160,000
160 000
Fair value of intangible assets 40,000
Deferred tax on intangible assets
g ((8,000)
, ) 192,000
,
NCI's share of FV of identifiable net assets (10%)
( ) 19,200
,
NCI's goodwill (25,000 – 19,200)
(if NCI is measured based on fair value at acq. Date)
NCI i db d f i l t D t ) 5 800
5,800
Under alternative basis where NCI are measured as a proportion of the

recognized amounts of the identifiable assets as at acquisition date:
 NCI’s goodwill is zero
 Amount to be recognized as NCI (B/S) is $19
$19,200
200 only
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Example 5 - (1) 100% ownership ; (2) goodwill; (3) deferred tax

liability on FV differential
Example 5 - (1) 100% ownership ; (2) goodwill; (3) deferred tax liability on FV differential
Company P paid $1,555,000 to purchase 100% of the share capital of Company S on 31-12-20X1.
Excess of fair value over book value of building of Company S as at acquisition date was $200
$200,000.
000
Fair value of company S (100%) is $1,000,000 based on its share price.
Tax rate is 20%.
Fair value differential of S identifiable net assets 200,000
200 000
Deferred tax liability on fair value differential (40,000)
Fair value differential of S identifiable net assets (after tax) 160,000 A

100 000 given
Retained earnings of company S at acquisition date 500,000 given
Fair value of identifiable net assets of subsidiary- 100% 760,000 B
Investment by P in S (given) 1,555,000

Less : Fair value of identifiable net assets of subsidiary- 100% (760,000) B
Goodwill on consolidation (P) 795,000
E1
Cr. Investment in S 1,555,000
Lee Kin Wai 18
Example 5 - (1) 100% ownership ; (2) goodwill; (3) deferred tax liability on
FV differential .

Cash 380 000
380,000 250 000
250,000 630 000
630,000
Investment in company S at cost 1,555,000 0 1,555,000 E1 0
Building 900 000
900,000 200 000
200,000 200 000
200,000 E1 1 300 000
1,300,000
Goodwill 0 0 795,000 E1 795,000
Total assets 2,895,000 630,000 2,965,000

Share Capital 200,000 100,000 100,000 E1 200,000

Non controlling interests
Non-controlling 0 0 0
Check : A = L + E 0 0 0 0
Th consolidated
The lid t d iincome statement
tt t off P Group
G exclude
l d company S nett profit
fit for
f the
th year ended
d d 31-12-20x1
31 12 20 1 (i(ie 11-1-20x1
1 20 1 tto 31
31-12-20x1).
12 20 1)
Lee Kin Wai 19
Example 6 - (1) 70% ownership ; (2) NCI at Fair Value of subsidiary; (3) P
did not pay a control premium.
Example 6 - (1) 70% ownership ; (2) NCI at Fair Value of subsidiary; (3) P did not pay a control premium.
Fair value of non-controlling interest on acquisition date is $300,000. NCI measured at fair value at acquistion date.
Tax rate is 20%.
Th balance
The b l sheet
h t att acquisition
i iti d
date
t iis given
i b
below.
l

Share capital of company S at acquisition date 100,000 given

Investment by P in S (given) 700,000 given

Fair value of non-controlling interest (FVNCI) on acquisition date 300,000 given
Total consideration paid by P and FVNCI 1,000,000
Less : Fair value
al e of identifiable net assets of subsidiary-
s bsidiar 100% (760 000)
(760,000) B
Goodwill on consolidation (P and NCI ) 240,000 C
Consideration paid by P to buy 70% of S 700,000

Less : 70% x Fair value of identifiable net assets of subsidiary (532,000)
Goodwill on consolidation (P ) 168 000 D
168,000 0 7000
0.7000
Fair value of non-controlling interest (FVNCI) on acquisition date 300,000

Goodwill on consolidation (NCI ) 72,000 E 0.3000
Check goodwill Ratio

Goodwill on consolidation (P ) 168,000 D 70.00%
Goodwill on consolidation (NCI ) 72,000 E 30.00%
Goodwill on consolidation (P and NCI ) 240,000 D + E = C 100.00%
Ratio of P goodwill to S goodwill is 70% to 30%, same as ratio of P shares to S shares of 70% to 30%.
Why? P did NOT pay a control premium to buy 70% of the shares (voting rights) in S.
Lee Kin Wai 20
Example 6 - (1) 70% ownership ; (2) NCI at Fair Value of subsidiary; (3) P
did not pay a control premium.
E1
Dr
Dr. Goodwill 240 000
240,000
Non-controlling Interests (B/S) is measured based on its fair value at acquisition date.

Cash 380 000
380,000 250 000
250,000 630 000
630,000
Building 900,000 200,000 200,000 E1 1,300,000
Goodwill 0 0 240,000 E1 240,000
Total assets 2,040,000 630,000 2,410,000

Share Capital 200,000 100,000 100,000 E1 200,000

Check : A = L + E 0 0 0 0
The consolidated income statement of P Group consists of PP's
s net profit for the year ended 31-12-20x1
31 12 20x1 (ie 1-1-20x1
1 1 20x1 to 31-12-20x1)
31 12 20x1).
Lee Kin Wai 21
Example 7 - (1) 70% ownership ; (2) NCI at Fair Value of subsidiary;

(3) P paid a control premium.
Example 7 - (1) 70% ownership ; (2) NCI at Fair Value of subsidiary; (3) P paid a control premium.
Fair value of non-controlling interest on acquisition date is $300,000. NCI measured at fair value at acquistion date.
Tax rate is 20%.
20%


Fair value of identifiable net assets of subsidiary-
subsidiary 70% 532 000
532,000

Total consideration ppaid byy P and FVNCI 1,188,000
, ,

Goodwill on consolidation (P ) 356,000 D 0.8318


Ratio of P goodwill to S goodwill = 83.18% to 16.82%, which differ from ratio of P shares to S shares of 70% to 30%.
Why? P paid a control premium to buy 70% of the shares (voting rights) in S.
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Example 7 - (1) 70% ownership ; (2) NCI at Fair Value of subsidiary;
(3) P paid a control premium.
E1
C IInvestment
Cr. t t in
i S 888,000
888 000
Non controlling Interests (B/S) is measured based on its fair value at acquisition date
Non-controlling date.
Balance sheet as at 31-12-20X1 Company P Company S Dr Cr. NoteConsolidated

Cash 380,000 250,000 630,000
Building 900,000 200,000 200,000 E1 1,300,000
Goodwill 0 0 428,000 E1 428,000
T t l assets
Total t 2 228 000
2,228,000 630 000
630,000 2 598 000
2,598,000

Share Capital 200,000 100,000 100,000 E1 200,000

Check : A = L + E 0 0 0 0
Lee Kin Wai 23
Effects of Amortization, Depreciation and Disposal of Undervalued

or Overvalued Assets and Liabilities Subsequent to Acquisition
• At acquisition
i iti date,
d t we recognize:
i
– Fair value of identifiable net assets of acquiree as at acquisition date,
– Intangibles assets
assets, contingent liabilities
liabilities,
– Deferred tax assets or liabilities on the above, and
– Goodwill as a residual
• In subsequent years:
– Subsequent extinguishment of assets and liabilities of subsidiary must be
determined based on the fair values at acquisition date.
– Therefore, subsequent amortization, depreciation and cost of sales of acquired
assets are determined based on fair
f value as at acquisition date
– Elimination of consideration transferred, recognition of fair value adjustments and
amortization entries must be repeated until:
i. Date of disposal of the investment in subsidiary; or
ii. Date when control is lost
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Effects of Amortization, Depreciation and Disposal of Undervalued
or Overvalued
O l dA
Assets t andd Li
Liabilities
biliti S Subsequent
b t tto A
Acquisition
i iti
• In subsequent years (Continued)

– Acquisition method only recognizes fair value at critical event:
acquisition date
• New internally-generated goodwill or subsequent
appreciation
i ti iin ffair
i values
l are nott recognized
i d subsequent
b t tto
acquisition date
– Si
Since nett assets
t are carried
i d att b
book
k value
l (carrying
( i amount)
t) iin
the separate financial statements, the subsequent
amortization/depreciation/disposal
p p are adjusted
j in the
consolidation worksheet
BV of expense in (FV – BV) adjustment to FV of expense in
separate financial
separate financial expense consolidated
consolidated
statements
+ = financial
Adjusted in consolidation worksheet
statements
Lee Kin Wai 25
Amortization of Fair Value Differentials

TLK illustration 4.5A page 186
• P Co. paid $6,200,000 and issued 1,000,000 of its own shares to acquire
80% of S Co. on 1 Jan 20×5
• Fair value of P Co’s share is $3 per share
• Fair value of net identifiable assets on acquisition date is:
Book value Fair value Remaining useful life

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

Retained earnings 3,700,000
Shareholders’ equity 4,700,000
Lee Kin Wai 26
TLK illustration
ill t ti 4 4.5A
5A page 186
Additional information:
•Contingent liability of $100,000 was recognized as a provision loss by the
acquiree in legal entity financial statement on Dec 20×5
•FV of NCI at acquisition
q date was $2,300,000
, ,
•Net profit after tax of S Co. for 31 Dec 20×5 was $1,000,000
•No dividends were declared during 20×5
•Shareholders’ equity as at 31 Dec 20×5 was $5,700,000
Required
1) Prepare the consolidation adjustments for P Co. for 20×5
2)) Perform analytical
y check on balance of NCI as at 31 Dec 20×5
Lee Kin Wai 27
Fair value differential of leased property 1,000,000

Fair value differential of in process R&D 2,000,000
Fair value differential of in contingent liability (100 000)
(100,000)
Fair value differential of S identifiable net assets 2,900,000
Fair value differential of S identifiable net assets (after tax) 2,320,000 A
Share capital of company S at acquisition date 1,000,000 given

Retained earnings of company S at acquisition date 3,700,000 given
Fair value differential of S identifiable net assets (after tax) 2,320,000 A
Fair value of identifiable net assets of subsidiary- 100% 7,020,000 B
subsidiary- 80 5 616 000
5,616,000
Fair value of identifiable net assets of subsidiary- 20% 1,404,000
Investment by P in S (given) 9,200,000 given

Fair value of non-controlling interest (FVNCI) on acquisition date 2,300,000 given
Total consideration paid by P and FVNCI 11,500,000
Less : Fair value of identifiable net assets of subsidiary- 100% (7,020,000) B
Goodwill on consolidation (P and NCI ) 4,480,000 C
Consideration paid by P to buy 80% of S 9 200 000

9,200,000
Less : 80% x Fair value of identifiable net assets of subsidiary (5,616,000)
Goodwill on consolidation (P ) 3,584,000 D 0.8000
Fair value of non-controlling

g interest ((FVNCI)) on acquisition date 2,300,000
Less : 20% x Fair value of identifiable net assets of subsidiary (1,404,000)

Goodwill on consolidation (P ) 3,584,000
3 584 000 D 80 00%
80.00%
Goodwill on consolidation (P and NCI ) 4,480,000 D + E = C 100.00%
Ratio of P g
goodwill to S goodwill
g is 80% to 20%,, same as ratio of P shares to S shares of 80% to 20%
Why? P did not pay a control premium to buy 80% of the shares (voting rights) in S.
Lee Kin Wai 28
Consolidation journal entries in year ended 31 31-12-20x5
12 20x5
CJE 1
D Sh
Dr. Share capiitall 11,000,000
000 000
Dr. Retained earnings 3,700,000
Dr. leased property 1,000,000
Dr. In process R&D 2,000,000
Dr. Goodwil 4,480,000
Cr. Investment in S 9,200,000
, ,
Cr. Contingent liability 100,000
Cr Deferred tax liability
Cr. 580 000
580,000
Cr. Non-controlling Interests (B/S) 2,300,000
[ eliminate investment in S ] 12 180 000 12,180,000
12,180,000 12 180 000
Lee Kin Wai 29
CJE2
Dr. Depreciation expense - leased property = 1,000,000 / 20 years 50,000
Cr. Accumulated depreciation 50,000
Dr Amortization of in-process R&D= 2,000,000 / 10 years 200,000

Cr. Accumulated amortization 200,000
Depreciation and amortization of excess of fair value over book value for the year 20x5
CJE3
Dr. Provision for Loss (liability) 100,000
C LLoss expense (P/L)
Cr. 100 000
100,000
Reversal of entry relating to provision for loss
Note:- Subsidiary S separate account recognizes a liability in 31-12-20x5 (given in case data):
SSA 1
Dr. Loss expense (P/L) 100,000
Cr. Provision for Loss (liability) 100,000
Since a contingent liability was already recognized on 1 January 20x5 in the consolidated financial
statements, the recognition of a provision by the acquiree in its legal entity financial statements in 31-12-20x5
results in double
double-counting;
counting; hence
hence, this reversal entry is necessary
necessary. The contingent liability expense should not be
recognized as a post-acquisition expense. The effect of the reversal entry is to increase net earnings of
the acquiree by $100,000.
Thus CJE 3 (in consolidated accounts) reverses the separate entry SAA 1 in S separate accounts
Thus, accounts.
Lee Kin Wai 30
Depreciation of excess of fair value over book value of leased property 50,000 CJE2
p
Amortization of in-process R&D. . 200,000
, CJE2
Reversal of loss from contingent liability (100,000) CJE3
Total - Subsequent amortization of fair value adjustments 150,000
Tax rate 20%
Reduction in tax expense arising from amortization 30,000
CJE 4
D D
Dr Deferred
f d ttax liliability
bilit ((net)
t) 30 000
30,000
Cr. Tax expense (P/L) 30,000
Tax effects on amortization of fair value adjustments (CJE 2) and entry relating to provision for lawsuit (CJE 3)
Net profit of S - 100% as reported 1,000,000

p
Depreciation of excess of fair value over book value of leased pproperty
p y ((50,000)) CJE2
Amortization of in-process R&D. . (200,000) CJE2
Reversal of loss from contingent liability 100,000 CJE3
Tax effect of CJE 2 and CJE 3 30,000 CJE4
Adjusted net profit after tax of subsidiary S 880,000
NCI 20% share 176,000
CJE 5
Dr. Non-controlling interests (P/L) 176,000
Cr. Non-controlling interests (B/S) 176,000
[allocate net income of S to non-controlling
non controlling interests ]
Lee Kin Wai 31
Listing of CJE method to compute NCI (B/S)

Fair value of NCI at acquisition date - given 2,300,000 CJE1
adjusted Net income of S allocated to non-controlling interests 176,000 CJE5
NCI (B/S) at 31-12-20x5 under the listing of CJE method 2,476,000
Analytical check (independent proof of balances) of NCI (B/S) at 31-12-20x5

Share capital of S at 31-12-20x5 as reported - 100% 1,000,000 a
Retained earning of of S at 31-12-20x5 as reported - 100% 4,700,000 b
Book value of net assets of S as reported - 100% 5,700,000 c= a+ b
Unamortized fair value differential of leased property = 1,000,000 x (19 years left / 20 useful years) 950,000 d
Unamortized fair value differential of in process R&D = 2,000,000
2 000 000 x (9 years left / 10 useful years) 1,800,000
1 800 000 e
Total - Unamortized fair value differential - before tax 2,750,000 f=d+e
tax rate = 20%
Total - Unamortized fair value differential - after tax = (1 -0.2 tax rate) x f 2,200,000 g
Fair value of identifiable net assets of S - 100% 7,900,000 h = c + g
NCI 20% share of Fair value of identifiable net assets of S 1,580,000 i= 20% x h
goodwill attributable to NCI - see ## below 896,000 j
NCI (B/S) at 31-12-20x5 under the analytical check method 2,476,000 k = i + j
Fair value of non-controlling

non controlling interest (FVNCI) on acquisition date 2 300 000
2,300,000
Less : 20% x Fair value of identifiable net assets of subsidiary at acquisition date (1,404,000)
goodwill attributable to NCI at acquisition date 896,000
Less impairment of goodwill (NCI share) 0
NCI share of unimpaired goodwill at 31-12-20x5 = 896,000 ##
Lee Kin Wai 32
TLK illustration
ill t ti 4 4.5A
5A page 186
NCI (B/S) has 3 components:‐
Non-controlling
interests
Sh
Share off
Share of book value Unamortized Share of
of net assets unimpaired goodwill
FV adjustment
$5,700,000 × 20%
$5,700,000 ($1,000,000 × 19/20
($1,000,000 19/20 × $896,000 = $2,476,000
= $2 476 000
+ 80% × 20%) +
+
= $1,140,000
($2,000,000 × 9/10 ×
) $ ,
80% × 20%) = $440,000
Lee Kin Wai 33
Allocation to Non‐controlling
Allocation to Non controlling Interests
Interests
FRS 110. B98:-
An entity shall attribute the profit or loss and each component of other
comprehensive income to the owners of the parent and to the non-
controlling interests
interests. The entity shall also attribute total comprehensive
income to the owners of the parent and to the non-controlling interests
even if this results in the non-controlling interests having a deficit balance.
1. Allocation of the change in equity from date of acquisition to the

beginning of the current period
Dr Retained earnings (NCI % × change in RE from acquisition date to
beginning of current period)
Cr NCI (B/S)
• No distinction between pre-acquisition or post-acquisition profits.

• y retained earnings
To transfer the NCI’s share of subsidiary’s g to
NCI (consolidated B/S)
Lee Kin Wai 34
All ti t N
Allocation to Non‐controlling Interests
t lli I t t
2. Allocation of current profit after tax to NCI
Dr Income to NCI (P/L)
Dr Income to NCI (P/L)
Cr NCI (B/S)
• Income to NCI (P/L) is an attribution /allocation of subsidiary profit

to NCI.
• Income to NCI (P/L) is not expense item and should not be shown
above the profit after tax line.
• Without attribution,
attribution retained earnings of the group would be over-
stated and NCI’s share of equity would be under-stated
• The same attribution principle applies to Other Comprehensive
Income (OCI) – NCI are attributed their share of OCI arising during
a period (e.g. Revaluation surplus or deficit on PPE and intangible
assets).
Lee Kin Wai 35
Allocation to Non‐controlling Interests
g
3. Allocation of dividends to NCI
• Reverses the profit and loss effects of dividends in
consolidated income statement
• A repayment of profits by a subsidiary.
• Reduces the NCI’s
NCI s residual stake in the net assets of the
subsidiary.
Dr. Dividend income (Parent – P/L)

Dr NCI (B/S)
Dr.
Cr. Dividend declared (by Subsidiary) – SCE *
[eliminate dividend declared by Subsidiary]
* Dividend is declared out of Subsidiary’ retained earnings
and reflected in statement of change
g in equity
q y ((SCE).
)
Lee Kin Wai 36
Can NCI be a debit balance?
•FRS 110. B98 : An entity shall attribute the profit or loss and each component of other
comprehensive income to the owners of the parent and to the non-controlling interests. The
entity
y shall also attribute total comprehensive
p income to the owners of the p parent and to the
non-controlling interests even if this results in the non-controlling interests having a deficit
balance.
•NCI can have a debit balance if:

–NCI share of losses > NCI existing share of the subsidiary’s share capital, retained
earnings and other equity items.
•On 1-1-20x1, P owns 90% of S and NCI=10%. Suppose retained earnings of S at

acquisition date = $100,000 and retained earnings of S on 1-1-20x5 = $40,000 and net loss
after
ft tax
t ini year 20x5
20 5 = 33
33,000.
000 what
h t are CJE in
i 20x5?
20 5?
CJE1
Dr. NCI (B/S) = 10% x (40,000 -100,000) =6,000
Cr retained earnings (S) 6,000
Cr. 6 000
NCI share of decrease in retained earnings of S from acquisition date to start of current
year.
CJE2
Dr. NCI (B/S) = 10% x 33,000 = 3,300
Cr NCI (P/L) 3,300
Cr. 3 300
[NCI share of subsidiary’s current year net loss after tax]
Lee Kin Wai 37
A l ti l Ch
Analytical Check
k on N
Non-controlling
t lli IInterests’
t t ’ balance
b l
NCI’s share of (NCI % multiply by):

a) Book value of net assets of subsidiary at
year-end +/− remaining unrealized
profit/loss from upstream sale.
sale
NCI’s balance
at year-end =
(B/S) b) Unamortized balance of FV adjustments
at year-end
c) Unimpaired balance of goodwill at year

end ([Acquisition-date FV of NCI – NCI %
× acquisition-date FV of identifiable net
assets] less any cumulative impairment)
Lee Kin Wai 38
Analytical Check on Non-controlling
Non controlling Interests’
Interests balance
• If the fair value basis is adopted to measure NCI

– NCI in a subsidiary have a share in the same three components
that the parent has under the acquisition method
• If NCI are recognized

g as p
proportion
p of FV of identifiable net assets
– Only two components apply to non-controlling interests
• Share of book value of net assets or shareholders’ equity
q y of a
subsidiary
• Share of the balance of unamortized fair value adjustments
• If NCI have both present ownership interests (e.g. ordinary shares)

andd potential
t ti l ownership
hi iinterests
t t ((e.g. options)
ti )
– Only present ownership interests may be measured as a
proportion of identifiable net assets
Lee Kin Wai 39
Example 8 - consolidation in year 20x1 (acquisition year)

consolidation - (1) 70% ownership; (2) NCI at fair value; (3) P and NCI have goodwill; (4) Deferred tax liability
Assume remaining useful life of building is 10 years and zero salvage value.
Fair value of non-controlling interest on acquisition date is $300,000.
Tax rate is 20%.
Financial statements of P (100%) and S (100%) for year ended 31 December 20x1 are given below.


subsidiary- 100% 760,000 B

Total consideration paid by P and FVNCI 1 225 000
1,225,000



R ti off P goodwill
Ratio d ill tto S goodwill
d ill iis 84
84.52%
52% tto 15
15.48%,
48% which
hi h diff
differ ffrom ratio
ti off P shares
h tto S shares
h off 70% tto 30%
30%.
Lee Kin Wai 40
Example
p 8 - consolidation in y
year 20x1 ((acquisition
q year)
y )
CJE 1
Dr Retained Earnings
Dr. 500 000
500,000
Dr. Goodwill ,
465,000
Cr. Deferred Tax liability 40,000
[eliminate investment in S ]
1 265 000 1,265,000
1,265,000 1 265 000
CJE 2
Dr. Depreciation expense 20,000
Cr. Accumulated depreciation - Building 20,000
[depreciation of excess fair value over book value of building = 200,000 / 10 years = 20,000
Lee Kin Wai 41
Example
year 20x1 ((acquisition
q year)
y )
CJE 3
Dr. Deferred tax liability = 20% x 20,000 4,000
Cr. Tax expense [P/L] 4,000
[ tax effect of CJE 2 ]
Subsidiary S 100% net profit after tax - as reported 104,000

104 000
Less : depreciation of excess fair value of building (20,000) CJE 2
add : tax effect of depreciation
p of excess fair value 4,000
, CJE 3
Adjusted net profit of subsidiary 88,000
Non-controlling interest (P/L) = 26,400
CJE 4
Dr Non-controlling interests (P/L)
Dr. 26 400
26,400
[allocate net income of S to non-controlling interests ]
Lee Kin Wai 42
Company P
Company S Consolidation entries Consolidated
Dr Cr Note Total
Profit and Loss for the period 1-1-20x1 to 31-12-20x1
Sales 800,000 250,000 1,050,000
Cost of goods sold (300,000) (110,000) (410,000)
Depreciation (100,000) (10,000) 20,000 2 (130,000)
Profit before tax 400 000
400,000 130 000
130,000 510 000
510,000
tax expense (80,000) (26,000) 4,000 3 (102,000)

Profit after tax 320,000 104,000 408,000
Non-controlling interests (P/L) 26,400 4 (26,400)
Profit attributable to shareholders 381,600
Opening retained earnings 1,180,000 500,000 500,000 1 1,180,000

Less dividends 0 0 0
Closing Retained earnings 1,500,000 604,000 1,561,600
Balance Sheet as at 31-12-20x1

Cash 60,000 12,000 72,000
Receivables 900,000 670,000 1,570,000
Investment in Subsidiary at cost 925,000 925,000 1 0
G
Goodwill
d ill 465,000
465 000 1 465 000
465,000
Plant and equipment 700,000 100,000 200,000 1 980,000
20,000 2
Total assets 2,585,000 782,000 3,087,000
Accounts payable 485 000

485,000 78 000
78,000 563 000
563,000
Deferred tax liability 40,000 1 36,000

4,000 3
Share capital
S p 600,000 100,000
00,000 100,000
00,000 1 600,000
Retained earnings 1,500,000 604,000 1,561,600
Non-controlling interests (B/S) 300,000 1 326,400

26,400 4
0
Lee Kin Wai 43
Example 9 - consolidation in year 20x2 (post-acquisition)

Example 9 - basic consolidation in year 20x2 (post-acquisition)
Assume remaining useful life of building is 10 years and zero salvage value.
Fair value of non-controlling interest on acquisition date is $300,000.
Tax rate is 20%
20%.
All divIdend is declared and paid out of current year net income.
Financial statements of P (100%) and S (100%) for year ended 31 December 20x2 are given below.


y 100%
Fair value of identifiable net assets of subsidiary- % 760,000
, B

Total consideration paid by P and FVNCI 1 225 000
1,225,000

y
Less : 70% x Fair value of identifiable net assets of subsidiary ((532,000))


Ratio of P goodwill to S goodwill is 84.52% to 15.48%, which differ from ratio of P shares to S shares of 70% to 30%.
Lee Kin Wai 44
Example
year 20x2 (p
(post-acquisition)
q )
CJE 1
Dr. Retained Earnings 500,000
Cr. Deferred Tax liability 40,000
[eliminate investment in S ]
1,265,000 1,265,000
Opening retained earnings 1-1-20x2 604,000

Less Retained earnings at acquisition date (500,000)
Increase in retained earnings post
post-acquisition
acquisition 104 000
104,000
Non-controlling interests - 30% = 31,200
CJE2
Dr. Retained Earnings 31,200
[ Non-controlling interests share of change in retained earnings post-acquisition ]
Lee Kin Wai 45
Example
year 20x2 (p
(post-acquisition)
q )
CJE 3
Dr. Opening Retained earnings 14,000
Dr. Non-controlling interests (b/s) 6,000
Cr. Accumulated depreciation
p - Building
g 20,000
,
[prior year depreciation of excess fair value of building = 200,000 / 10 years = 20,000 ]
CJE 4
D D
Dr. Deferred
f d ttax liliability
bilit = 20% x 20
20,000
000 = 4 000
4,000
Cr. Opening Retained earnings = 70% x 4,000 = 2,800
Cr. Non-controlling interests (b/s) = 30% x 4,000 = 1,200
CJE 5
Dr. Depreciation expense 20,000
Cr. Accumulated depreciation - Building 20,000
[current year depreciation of excess fair value of building = 200,000 / 10 years = 20,000 ]
CJE 6
Dr. Deferred tax liability = 20% x 20,000 = 4,000
Cr. Tax expense [P/L] 4,000
Lee Kin Wai 46
Example
year 20x2 (p
(post-acquisition)
q )
Subsidiary S 100% net profit after tax - as reported 136,000

136 000
Less : depreciation of excess fair value of building (20,000) CJE 5
add : tax effect of depreciation of excess fair value 4,000 CJE 6
Adjusted net profit of subsidiary 120,000
Non-controlling interests (P/L) = 36,000
CJE 7
Dr. Non-controlling interests (P/L) 36,000
C N
Cr. Non-controlling
t lli interests
i t t (B/S) 36 000
36,000
[allocate net income of S to non-controlling interests ]
CJE8
Dr. Dividend income (P) 35,000
Dr Non-controlling
Dr. Non controlling interests (B/S) 15 000
15,000
Cr. Dividend declared by S 50,000
[eliminate dividend declared by subsidiary]
Lee Kin Wai 47
Example
year 20x2 (p
(post-acquisition)
q )
Parent Subsidiary Consolidation entries Consolidated

Dr Cr Note Total
Profit and Loss for the period 1-1-20x2 to 31-12-20x2
Sales 700,000 400,000 1,100,000
Cost of goods sold (320 000) (220,000)
(320,000) (220 000) (540 000)
(540,000)
Dividend income 35,000 35,000 8 0
Depreciation (100,000) (10,000) 20,000 5 (130,000)
Profit before tax 315,000
, 170,000
, 430,000
,
tax expense (63,000) (34,000) 4,000 6 (93,000)

Profit after tax 252,000 136,000 337,000
N controlling
Non t lli interests
i t t (P/L) 36 000
36,000 7 (36 000)
(36,000)
Profit attributable to shareholders 301,000
Opening retained earnings 1,500,000 604,000 500,000 1 1,561,600

31,200 2
14,000 3
2 800
2,800 4
Less dividends declared and paid 0 (50,000) 50,000 8 0

Closing Retained earnings 1,752,000 690,000 1,862,600
Lee Kin Wai 48
Example 9 - consolidation in year 20x2 (post-acquisition)
Parent Subsidiary Consolidation entries Consolidated
Dr Cr Note Total
Balance Sheet as at 31-12-20x1
Cash 325 000
325,000 110 000
110,000 435 000
435,000
Receivables 776,000 500,000 1,276,000
Investment in Subsidiary (at cost) 925,000 925,000 1 0
Goodwill 465,000 1 465,000
p y, Plant & Equipment
Property, q p 600,000
, 190,000
, 200,000
, 1 950,000
,
20,000 3
20,000 5
total assets 2,626,000 800,000 3,126,000
deferred tax liability 40,000 1 32,000

4,000 4
4,000 6
Share capital 600,000 100,000 100,000 1 600,000
Retained earnings 1,752,000 690,000 1,862,600
Non-controlling interests (B/S) 300,000 1 347,400

31 200
31,200 2
6,000 3
1,200 4
36,000 7
15 000
15,000 8
total liabilities and equity 2,626,000 800,000 1,430,200 1,430,200 3,126,000
Lee Kin Wai 49
Global Logistic Properties – Consolidated Income Statement

Annual report 2017
Lee Kin Wai 50
Global Logistic Properties – consolidated statement of comprehensive income
Annual report 2017
Lee Kin Wai 51
Global Logistic Properties – consolidated statement of financial position

Annual report 2017
Lee Kin Wai 52
Global Logistic Properties
Note 18 : Non Controlling Interests
Annual report 2017
Lee Kin Wai 53
Global Logistic Properties

Note 18 : Non Controlling Interests
Annual report 2017
Lee Kin Wai 54

AC3102 Jan2018 Seminar 3 Three Consolidation Post Acquisition LKW 13jan2018

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AC3102 Jan2018 Seminar 3 Three Consolidation Post Acquisition LKW 13jan2018

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Consolidation: Post-Acquisition

Why eliminate the Investment account?

•What is the parent paying for through its investment in a subsidiary?

• Re-enactment of elimination of investment entry

Example 1 - consolidation - 100% ownership at book value

Share capital of company S at acquisition date 100,000

Investment by P in S (given) 600,000

Balance sheet as at 31-12-20X1 Company P Company S Dr Cr. Note Consolidated

Accounts payable 800,000 30,000 830,000

Share capital of company S at acquisition date 100,000

Investment by P in S (given) 420,000

Balance sheet as at 31-12-20X1 Company P Company S Dr Cr. Note Consolidated

Accounts payable 800,000 30,000 830,000

As acquisition date is on 31-12-20X1,

Example 3 - consolidation - (1) 70% ownership with fair value

Investment by P in S (given) 532,000 D

Balance sheet as at 31-12-20X1 Company P Company S Dr Cr. Note Consolidated

Accounts payable 772,000 30,000 802,000

Example 4 - consolidation - (1) 70% ownership with fair value

Investment by P in S (given) 850,000 D

Balance sheet as at 31-12-20X1 Company P Company S Dr Cr. Note Consolidated

Accounts payable 1,090,000 30,000 1,120,000

Reconstructing NCI on Statement of Financial Position

•Asset and liabilities of the subsidiary must be

Book value of net assets of

((Fair value – Book value)) of

Goodwill (on consolidation)

Illustration 4.2 Non-Controlling

Under alternative basis where NCI are measured as a proportion of the

Example 5 - (1) 100% ownership ; (2) goodwill; (3) deferred tax

Share capital of company S at acquisition date 100,000

Investment by P in S (given) 1,555,000

Balance sheet as at 31-12-20X1 Company P Company S Dr Cr. Note Consolidated

Accounts payable 1,795,000 30,000 1,825,000

Share Capital 200,000 100,000 100,000 E1 200,000

Fair value differential of S identifiable net assets 200,000

Share capital of company S at acquisition date 100,000 given

Investment by P in S (given) 700,000 given

Consideration paid by P to buy 70% of S 700,000

Fair value of non-controlling interest (FVNCI) on acquisition date 300,000

Check goodwill Ratio

Balance sheet as at 31-12-20X1 Company P Company S Dr Cr. Note Consolidated

Accounts payable 940,000 30,000 970,000

Share Capital 200,000 100,000 100,000 E1 200,000

Example 7 - (1) 70% ownership ; (2) NCI at Fair Value of subsidiary;

Fair value differential of S identifiable net assets 200,000

Share capital of company S at acquisition date 100,000 given

Investment by P in S (given) 888,000 given

Consideration paid by P to buy 70% of S 888,000

Fair value of non-controlling interest (FVNCI) on acquisition date 300,000

Check goodwill Ratio

Balance sheet as at 31-12-20X1 Company P Company S Dr Cr. NoteConsolidated

Accounts payable 1,128,000 30,000 1,158,000

Share Capital 200,000 100,000 100,000 E1 200,000

Effects of Amortization, Depreciation and Disposal of Undervalued

• In subsequent years (Continued)

Amortization of Fair Value Differentials

Book value Fair value Remaining useful life

Share capital 1,000,000

Fair value differential of leased property 1,000,000

Share capital of company S at acquisition date 1,000,000 given

Investment by P in S (given) 9,200,000 given