ACP 312 – Accounting for Business Combinations – Handout 5.

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Topic: Consolidated Financial Statements Subsequent to Date of Acquisition – Stock Acquisition
Instructor: Leenuel M. Bernarte, CPA
Source: MAY2020-AFAR-06-DISCUSSION NOTES-Brian Christian S. Villaluz

CONSOLIDATION PERIOD
➢ Consolidation begins from the date the investor obtains control of the investee and ceases when
the investor loses control of the investee.

Examples:
✓ If an investor obtains control of an investee on July 1, 2019, the group’s consolidated financial
statements for the year ended December 31, 2019 shall include only the investee’s results of
operations from July 1 to December 31, 2019.
✓ If a parent loses control over its subsidiary on August 31, 2020, the group’s consolidated financial
statements for the year ended December 31, 20200 shall include only the investee’s results of
operations from January 1 to August 31, 2020.

MEASUREMENT
1. Income and expenses
➢ For purposes of presenting items in the consolidated financial statements, income and
expenses of the subsidiary are based on the amounts of the assets and liabilities recognized
in the consolidated financial statements at the acquisition date (i.e., depreciation expense in
the consolidated financial statements is based on the related asset’s fair value on the date of
acquisition rather that its carrying amount in the subsidiary’s accounting records.
2. Investment in subsidiary
➢ Investment in subsidiary are accounted for in the parent’s separate financial statements either:
a. At cost;
b. In accordance with IFRS 9 Financial Instruments; or
c. Using the equity method

Measurement at cost
✓ INITIAL MEASUREMENT: The value assigned to the consideration transferred at the acquisition
date.
✓ SUBSEQUENT MEASUREMENT: The value assigned to the consideration transferred at the
acquisition date unless the investment becomes impaired.
Measurement in accordance with IFRS 9 Financial Instruments
✓ INITIAL MEASUREMENT: The value assigned to the consideration transferred at the acquisition
date.
✓ SUBSEQUENT MEASUREMENT: Fair value every year-end
Measurement using the equity method
✓ INITIAL MEASUREMENT: The value assigned to the consideration transferred at the acquisition
date.
✓ SUBSEQUENT MEASUREMENT: Carrying value adjusted for the investor’s share in the changes
in the investee’s equity.

NON-CONTROLLING INTERESTS (NCI)

1. NCI in the net assets of the subsidiary
✓ Presented in the consolidated financial statement of financial position within equity,
separately from the equity of the owners of the parent.
✓ It consists of:
a. The amount determined at the acquisition date in accordance with IFRS 3 Business
Combinations; and
b. The NCI’s share of changes in equity since the acquisition date.
2. NCI in the comprehensive income
✓ The profit or loss and each component of OCI in the consolidated financial statement of
comprehensive income are attributed to the following:
a. Owners of the parent
b. Non-controlling interests
✓ Total comprehensive income is attributed to the owners of the parent and NCI even if the
results int the non-controlling interests having a deficit balance.

ACP 312 – Handout 5.0 Page 1 of 3

 ILLUSTRATIVE PROBLEM NO. 1
Subsequent to Date of Acquisition

On January 1, 2019, Powell Company acquires 80% of the common stock of Scarlett Company for P372,000.
At that time, Scarlett Company’s shareholders’ equity is composed of common stock (P10 par), P240,000
and retained earnings, P120,000. On the other hand, Powell Company’s shareholders’ equity is composed
of common stock (P10 par), P600,000 and retained earnings, P360,000. Also, the fair value of the non-
controlling interest is P98,200. On the same date, the following assets of Scarlett Company had carrying
values that were different from their respective fair values:

(6,000)
Carrying value Fair value
Inventory 24,000 30,000
Land 48,000 55,200 (7,000)
Equipment, net
Building, net
84,000
168,000
180,000
144,000 (96,000)
24,000
Other assets and all liabilities of Scarlett Company had carrying values approximately equal to their
respective fair values.

On January 1, 2019, the equipment and building had a remaining life of 8 and 4 years, respectively. The
inventories on January 1, 2019 were all sold during 2019 and FIFO inventory costing is used. Goodwill, if
any, is impaired by P5,000 during 2019. No goodwill impairment occurred during 2020. The investment is to
be accounted for using the cost method.

The net income and dividends paid for 2019 and 2020 are as follows:
POWELL COMPANY SCARLETT COMPANY
2019 2020 2019 2020
Net income 196,800 234,200 60,000 60,000
Dividends paid 72,000 72,000 36,000 48,000

REQUIREMENT
Determine the following:
1. Goodwill arising from business combination on January 1, 2019 is
2. How much of the goodwill is attributable to the parent and non-controlling interest, respectively?
3. How much is the consolidated net income for the year 2019?
4. How much of the 2019 consolidated net income is attributable to the parent and non-controlling
interest, respectively?
5. What amount of retained earnings shall be presented on the consolidated statement of financial
position on December 31, 2019?
6. What amount of non-controlling interest shall be presented on the (1) separate statement of financial
position and (2) consolidated statement of financial position on December 31, 2019?
7. How much is the consolidated net income for the year 2020?
8. How much of the 2020 consolidated net income is attributable to the parent and non-controlling
interest, respectively?
9. What amount the retained earnings shall be presented on the consolidated statement of financial
position on December 31, 2020?
10. What amount of non-controlling interest shall be presented on the consolidated statement of financial
position on December 31, 2020?

INDEPENDENT ASSUMPTION: Non-controlling interest is to be measured at its proportionate share basis.

11. Goodwill arising from business combination on January 1, 2019 is
12. How much of the goodwill is attributable to the parent and non-controlling interest, respectively?
13. How much of the 2019 consolidated net income is attributable to the parent and non-controlling
interest, respectively?
14. What amount of retained earnings shall be presented on the consolidated statement of financial
position on December 31, 2019?
15. What amount of non-controlling interest shall be presented on the consolidated statement of financial
position on December 31, 2019?

ACP 312 – Handout 5.0 – Bernarte Page 2 of 3

 ILLUSTRATIVE PROBLEM NO. 2

PAZZO Corporation acquired 75% of the outstanding shares of SCHNEIDER Company on January 2, 2020
for a consideration transferred of P8,640,000. The price paid includes a control premium amounting to
P240,000. On January 2, 2020, SCHNEIDER Company’s stockholders’ equity accounts were common stock,
P11,400,000 and retained earnings, P3,720,000. An appraisal of the acquired company’s assets and
liabilities on the date of acquisition revealed that there were assets with book values different from their fair
values. The merchandise inventory of SCHNEIDER is overstated by P360,000; land, which was undervalued
by P1,800,000; equipment, which was overvalued by P1,440,000 and patent was undervalued by
P1,080,000. Inventories were all sold in 2020. The equipment had a remaining life of 8 years while patent
had a remaining life of 5 years.

For the year ended 2020, the following were reported by Pazzo and Schneider:
PAZZO Corporation SCHNEIDER Company
Reported net income 7,500,000 4,680,000
Dividends paid 2,000,000 750,000

1. How much is the consolidated net income for the year ended is attributable to the parent?
A. 10,690,500
B. 11,941,500
C. 14,200,500
D. 15,421,500

2. How much is the non-controlling interest in the net assets of subsidiary on December 31, 2020?
A. 3,863,500
B. 4,051,000
C. 5,113,500
D. 5,301,000

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