NAME: SEÑIDO, SARAH JANE BOTER.

DATE: MARCH 21, 2023

ACCOUNTING FOR BUSINESS COMBINATIONS

CONSOLIDATED FINNACIAL STATEMENTS (PART 4)
REVIEWER
Complex Group Structure
Learning objective:
 Prepare the consolidated financial statements when the investment in subsidiary
is measured at other than cost.
Measurement of investment in subsidiary
In the parent’s separate financial statements, the investment in subsidiary may be
measured, subsequent to acquisition date, either:
a. at cost;
b. in accordance with PFRS 9 Financial Instruments; or
c. using the equity method.
Regardless of the measurement basis, the consolidated accounts should result to the
same amounts. This is because the investment in subsidiary and the effects of its
measurement basis are eliminated in the consolidated financial statements.

Investment in Subsidiary-Equity Method

Under equity method, the investment is initially recognized at cost and subsequently
adjusted for changes in the equity of the investee and depreciation of any
undervaluation or overvaluation in the identifiable assets and liabilities of the investee.
Dividends received from the investee are not recognized as income but as deduction to
the carrying amount of the investment.

Identifying the Acquisition Date

The acquisition date is the date the acquirer obtains control of the acquiree.
 For a sub-subsidiary, it is the date the sub-subsidiary becomes a member of the
parent group.
 Goodwill from each subsidiary and sub-subsidiary are computed separately on their
respective acquisition dates.
Consolidation of a Vertical Group
A parent entity is required to consolidate all entities it controls, whether through direct or
indirect holdings. Therefore, the parent shall consolidate both the subsidiary and the
sub-subsidiary.
 When P owns 80% of S1 and S1 owns 60% of S2, there are two separate
groups:
1. The S1 Group - where S1 prepares consolidated FS to include S2
2. The P Group - where P prepares consolidated FS to include both S1 and S2

Consolidation of a D-shaped Group

The consolidation procedures for a D-shaped group are similar to a Vertical group.
However, in a D-shaped group, the parent holds both a direct and an indirect interest in
a sub-subsidiary.

Push-down Accounting
Another approach to assigning fair value adjustments (FVA) to a subsidiary's net
identifiable assets is push-down accounting. Under this, FVA are directly recorded in
the subsidiary's books. Therefore, FVA are reflected in the subsidiary's individual
Financial Statements.

Arguments on the use push-down accounting

Proponent’s view

Proponents of push-down accounting argue that a substantial change in ownership

creates a new basis of accounting for the subsidiary's assets and liabilities.
Since the subsidiary's financial statements are viewed as extension of the parent's
statements (parent company theory), the basis of accounting for the subsidiary's net
identifiable assets should parallel the parent's accounting basis for newly purchased
assets and liabilities, i.e., at fair values. Therefore, the acquisition-date fair values of
the subsidiary's net identifiable assets should be "pushed-down" to the subsidiary's
separate financial statements.
Opposition’s view

Those oppose push-down accounting argue that a new basis of accounting should not
arise irrespective of the ownership change in a subsidiary.