CHAPTER 15

CONSOLIDATED
FINANCIAL STATEMENTS-
SUBSEQUENT TO DATE OF
ACQUISITION
IFRS 10
IFRS 10

– According to IFRS 10 the procedures needed to prepare consolidated

statement of comprehensive income, retained earnings statement and
statement of financial position periods in periods subsequent to acquisition of a
subsidiary.
 UNIFORM ACCOUNTING POLICIES
– According to IFRS 10 parent shall prepare consolidated financial statement using uniform accounting
policies for like transactions and other events in similar circumstances. Thus, all entities in the group shall
ideally use the same accounting policies for like transactions and other events.
– For example:
*on the measurement of property, plant and equipment, if the group is using a revaluation model, then
all the entities in the group shall use the same valuation model to measure their property, plant and
equipment.
– Sometimes subsidiary have to adopt an accounting policy that is different from those used by the parent.
In such cases for the purpose of consolidation, appropriate adjustments shall be made to the financial
statements of the subsidiary to align its policy to those used in the consolidated financial statement.
– For example:
*if the subsidiary is using a cost model to measure biological assets because they didn’t adopt IAS 41, If
the parent and its subsidiaries is using a fair value model to measure biological assets in accordance of IAS
41. the financial statement of subsidiaries shall be adjusted to cost model to fair value model for biological
assets before they can be included in consolidated financial statements.
 THE CONSOLIDATION PROCESS
– The approach followed to prepare a complete set of consolidated financial statements subsequent to acquisition that is quite
similar to that used to prepared consolidated of financial position as of the date of acquisition. However in addition to the
statement of Financial Position, Statement of Comprehensive Income and Retained Earnings, Statement of the consolidating
companies must be combined.

ACCOUNTING PROCEDURES
- When preparing consolidated financial statements, an entity must use uniform accounting policies for reporting like transactions
and other events in similar circumstances. Any adjustment is needed if the one of group is using a different kind of accounting
procedure.
• Consolidated financial statement are prepared using the following basic accounting procedures.
• combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent with those of its subsidiaries.
• Eliminate the carrying amount of the parent’s investment in each subsidiary and the parent’s portion of equity of each
subsidiary (IFRS3)
• Eliminate in full intercompany assets and liabilities, equity, income, expenses and cash flows relating to transactions between
entities of the group (profit or loss) resulting from intercompany transactions that are recognized in assets such as inventory
and fixed assets. Intercompany losses may indicate an impairment requires recognition in the consolidate financial statement.
CONSOLIDATED
COMPREHENSIVE INCOME
– Computed using two approaches
• Parent company approach
• Entity approach
The statement of comprehensive income and retained earnings, consolidated
comprehensive income is allocated to non-controlling interest and controlling
interest (equity holders of the parent company).
PARENT COMPANY APPROACH

– Consolidated comprehensive income is the part of the total enterprise’s income that is
assigned to the parent company’s stockholders. For wholly owned subsidiary, all income
of the parent and its subsidiaries accrue to its parent company. For partially owned
subsidiary, a portion of its income accrues to its non-controlling shareholders and is
excluded from consolidated net income.
• ILLUSTRATION
• Assume that P Company owns 80% of the stock of S Company which was purchased at
book value. In 2017, S Company reported comprehensive income of P50,000, while P
Company reported comprehensive income of P120,000 including dividend income from S
Company of P20,000. consolidated comprehensive income for 2017 is computed as
follows:
ILLUSTRATION
Assume that P Company owns 80% of the stock of S Company which was purchased at book value. In
2017, S Company reported comprehensive income of P50,000, while P Company reported comprehensive
income of P120,000 including dividend income from S Company of P20,000. consolidated comprehensive
income for 2017 is computed as follows:

P Company comprehensive income P120,000

Dividend income (20,000)
Comprehensive income from own operation 100,000
S Company comprehensive income from own operation 50,000
Total 150,000
Less: NCI comprehensive income (P50,000X20%) 10,000
Consolidated comprehensive income 140,000
ENTITY APPROACH

– When a subsidiary is wholly owned by the parent, the consolidated CI is

computed similarly as that of the parent company approach. When subsidiary is
partially owned by the parent, the portion of its income accruing to NCI is
included in the consolidated comprehensive income.
– Comprehensive income under entity approach equals to total earnings of all
companies consolidated, less any income recorded by the parent from the
consolidating companies.
– IFRS 3 provides that NCI is to be presented in the consolidated statement of
financial position as part of equity, then the entity concept will be used
throughout the chapter unless stated.
Using bthe data in the illustration for P Corporation and S Company, consolidated
comprehensive income (CI) is computed and allocated as follows:

P Company CI P120,000
Dividend income (20,000)
CI from own operation 100,000
S Company CI from own operation 50,000
Consolidated CI 150,000
Attributable to NCI (50,000X20%) 10,000
Attributable to parent 140,000
 ACCOUNTING FOR
INVESTMENT IN A SUBSIDIARY
– IAS 27 provides that in the separate financial statements of an entity who have investment in
subsidiaries, joint ventures and associates it may elect to account for its investment either
1. At cost- It is used when the acquirer owns directly or indirectly more than half of the voting
power of the acquire, thereby exercising control (IAS27)
2. At fair value in accordance with IFRS 9, financial instrument - measure investment of the entity is
defined as an entity that
• Obtains fund from one or more investors for the purpose of providing those investors with
investment management services.
• Commits to its investors that its business purpose is to invest funds solely for returns from capital
appreciation , investment income or both
• Measure and evaluates the performance of substantially all of its investments on a fair value basis.
Fair value example:
Entity X a vehicle manufacturer is the parent company of investment entity B. B has holdings in various companies
that are not active in the automobile sector. While X is not an investment entity pursuant to IFRS 10, B is classed as
an investment entity pursuant to IFRS 10. For purposes of this example, it should be assumed that both X and B
must prepare consolidated financial statement.

Analysis: Since B is an investment equity, it must report companies in which it

holds a controlling interest at fair value through profit or loss. Conversely, X must
fully consolidate all its subsidiaries, including B.

– 3. Using the entity method as described in PAS 28- it is used when the investor
or acquirer owns 20% or more less than a 50% of the voting power of the
investee. This method is applied to investment in associates and joint ventures.
 CONSOLIDATION : WHOLLY OWNED
SUBSIDIARY- Acquisition at Book value

– FIRST YEAR AFTER ACQUISITION

• Assume that on January 2, 2017, pete Corporation acquires all the common stock of Sake Company
for P300,000. At the time, Sake Company has P200,000 of common stock outstanding and retained
earnings of P100,000. analysis of the acquisition is an as follows:

Price Paid P300,000

Less book value of interest acquired (100%)
Common stock 200,000
Retained Earnings 100,000 300,000
Excess 0
On December 31,2017, Sake Company reported the following results of its operations:
Net income 50,000
Dividends paid 30,000

– PARENT COMPANY ENTRIES

Jan 2 Investment in Sake Company 300,000
Cash 300,000
To record the purchase of Sake Company stock.
Dec 31 Cash 30,000
Dividend income 30,000
To record 100% of dividend from Sake Company.
- After posting the above journal entries, Pete Corporation’s Investment in Sake Company and Dividend
Income accounts will have a balance of
- Investment in Sake Company P300,000
- Dividend income 30,000
WORKING PAPER ELIMINATION
ENTRIES
– When the acquisition of a subsidiary is at book value, the following working
paper elimination procedures are used before the consolidation of the financial
statements:
1. Eliminate Dividend Income account against the Dividend Declared by the
Subsidiary.
2. Eliminate the parent’s equity in the subsidiary’s stockholders’ equity at date of
acquisition
- Using this procedures, the working paper elimination entries for Pete Corporation
and subsidiary on December 31,2017, one year after acquisition , are as follows
Using this procedures, the working paper elimination entries for Pete Corporation
and subsidiary on December 31,2017, one year after acquisition , are as follows

– 1. Dividend Income 30,000

Dividend declared- Sake company 30,000
To eliminate inter company dividends.

2. Common stock – Sake company 200,000

Retained Earnings- Sake Company 100,000
Investment in Sake Company 300,000
To eliminate investment and equity accounts at date of acquisition
CONSOLIDATION WORKING
PAPER- First Year
– A number of different working paper formats for preparing consolidated financial
statements are used in practice. One of the most widely used format is the three
section working paper, consisting of one section for each three basic financial
statements: the Income Statement, the Statement of Retained Earnings, and the
Statement of Financial Position. Other format such as trial balance approach format
may also be used. This format has the following columns: Trial balance of the parent
and the subsidiary, eliminations and adjustments, Statement of CI, NCI (if any),
Controlling Retained Earnings, and the Consolidated Statement of Financial Position.
– The three section consolidation working paper will be used through out the chapter
(unless stated)
the consolidation working paper for Pete Corporation
and subsidiary for the year ended December 31,2017
is presented in Illustration 15-1
WORKING PAPER
RELATIONSHIPS
1. The two elimination entries have been entered in the working paper and the
amounts totaled across and down to complete the working paper.
2. Each of the first two sections of the working paper “telescopes” into the
section below in a logical progression. As part of the normal accounting cycle,
net income is closed to retained earnings and reflected in the statement of
financial position. Similarly, in the consolidation working paper the retained
earnings is carried forward to the statement of financial position.
3. Using the double entry rule bookkeeping, total debits must be equal to total
credits for any single elimination entry and for the working paper as a whole.
4. Elimination (2) deals with the intercompany investment and subsidiary equity
accounts on the date of acquisition. This accounting technique is necessary
because the parent’s Investment in Sake Company account is maintained at the
cost of the origin al investment under the cost method.
5. The consolidated CI and consolidated retained earnings in the working paper
may be verified as follows, to assure their accuracy.
Consolidated CI:
Pete Corporation CI P170,000
Sake Company CI 50,000
Dividend income (30,000)
Consolidate CI P 190,000

Consolidated Retained Earnings:

Retained of Pete Corporation, December 31 P 410,000
Add: Pete’s share of net increase in Sake’s retained
earnings ((50,000-30,000)X100%) 20,000
Consolidated retained earnings P 430,000
CONSOLIDATED FINANCIAL
STATEMENTS
– The consolidated financial statement of comprehensive income and retained earnings,
and statement of financial position of Pete Corporation and subsidiary for the year
ended December 31, 2017. the amounts of the consolidated financial statements are
taken from the consolidated column of the consolidation working paper illustration 15-1

Pete Corporation and Subsidiary

Consolidated Statement of Comprehensive Income and Retained Earnings
Year Ended December 31,2017
Pete Corporation and Subsidiary
Consolidated Statement of Comprehensive Income and Retained Earnings
Year Ended December 31,2017

Sales P 600,000
Cost and expenses
Cost of goods sold P 285,000
Operating expenses 70,000
Other expenses 55,000 410,000
Consolidated CI 190,000
Retained Earnings, January 1- Pete Corporation 300,000
Total 490,000
Dividends paid- Pete Corporation 60,000
Consolidation retained earnings, Dec 31 P 430,000
Pete Corporation and Subsidiary
Consolidated Statement of Financial Position
December 31, 2017

Assets Liabilities and Stockholders’ Equity

Current assets Liabilities

Cash P 285,000 Accounts payable P 200,000

Accounts receivable 125,000 Bonds payable 300,000

Inventory 175,000 Total liabilities 500,000

Stockholders equity
Total current assets 585,000
Common stock P 500,000
Property and equipment 845,000
Retained earnings 430,000 930,000
Total Assets P 1,430,000
Total liabilities and stockholders equity P1,430,000
SECOND AND SUBSEQUENT
YEARS AFTER ACQUISITION
– The consolidation procedures to be used at the end of the second year, and in
periods therafter, are basically the same as those used at the end of the first
year. In essence , each year’s consolidation procedures begin as if there had
never been a previous consolidation.
– Consolidation two years after combination is illustrated by continuing the
example of Pete Corporation and Sake Company. On December 31, 2018, Sake
Company reported net income of P 75,000 and paid dividends of P 40,000.
Parent Company Entries
Pete corporation will only record the dividends received from Sake Company by following entry
on December 31,2018

Cash 40,000
Dividend Income 40,000
To record dividends received from Sake (100%)

On December 31, 2018 the balances of the investment in Sake Company account
and Dividend Income are:
Investment in Sake Company (at original cost) P300,000
Dividend Income 40,000
WORKING PAPER
ELIMINATIONB ENTRIES
E1 Dividend income 40,000
Dividend declared- Sake Company 40,000
To eliminate intercompany dividends
E2 Common Stock- Sake Company 200,000
Retained Earnings- Sake Company 100,000
Investment in sake Company 300,000
To eliminate investment and subsidiary’s equity
accounts at the date of acquisition
-after posting the elimination entries in the working paper, the retained earnings account of Sake
Company is not fully eliminated. The difference of P20,000 represents Pete Corporation’s share in the
undistributed earnings of Sake Company in prior years ((50,000-30,000)X100%). This is because the
earning of the subsidiary under the cost method are not recorded by the parent company.
CONSOLIDATION: PARTIALLY OWNED
SUBSIDIARY- Acquisition at Book Value

– FIRST YEAR AFTER ACQUISITION

• Assume that on January 2, 2017, Pete Corporation purchased 80% OF THE
COMMON STOCK OF Sake Company for P240,000. all other data are the same
as those used in the previous example. Those following D&A schedule was
prepared on the date of acquisition:
 Total Parent Price (80%) NCI at FV (20%)
Fair value of subsidiary P 300,000 P 240,000 P 60,000
Less book value of interest acquired
Common stock-S Company 200,000
Retained earnings – S Company 100,000
Total P 300,000 P 300,000 P 300,000
Interest acquired 80% 20%
Book value P 240,000 P 60,000
Excess P -0- P -0- P -0-
Pete Corporation would record its investment in Sake Company stock, and the
receipt of dividends from Sake Company as follows:

2017
Jan 2 investment in Sake Company 240,000
Cash 240,000
To record purchase of Sake Company stock

Dec 31 Cash 24,000

Dividend income 24,000
To record share in dividends paid by Sake (30,000X80%)
- After posting the above entries for 2017 under the cost method of accounting, the balance of
the Investment in sake Company and Dividend income accounts re P240,000 and P24,000,
respectively.
 WORKING PAPER ELIMINATION ENTRIES
- The elimination procedures used in the previous illustration are the same except for the
recognition of the NCI and NCI in comprehensive income of subsidiary. The working paper
elimination entries on December 31,2017, first year after acquisition are as follows:

E(1) Dividend Income (80%) 24,000

NCI (20%) 6,000
Dividend Declared- Sake Company 30,000
To eliminate intercompany dividends and establish minority interest share.
E(2) Common Stock- Sake Company 200,000
Retained earnings – Sake company 100,000
Investment in Sake Company 240,000
NCI 60,000
To eliminate inter-company investment and equity accounts of subsidiary on date of acquisition,
and to establish minority interest in net assets of subsidiary.
(3) NCI in CI of subsidiary 10,000
NCI 10,000
To recognize NCI in subsidiary ‘s net income for the year (50,000X20%)
5. The NCI of P 64,000 in the working paper can be verified by the following
computation:
Net Assets at book value 1/2/2017- S Company P 300,000
Increase in earnings, 2017
Net Income P50,000
Dividend paid (30,000) 20,000
Net assets at fair value 12/31/2017- S Company P 320,000
NCI (P320,000X20%) P 64,000
6. The consolidated CI of P 190,000 in the working paper can be proven by the
following computation:
Pete Corporation CI P 164,000
Sake Company CI 50,000
Dividend Income ( 24,000)
Consolidated CI P 190,000
-The Ci carried forward to the consolidated retained earnings is the CI attributable
to parent ( P190,000-P10,000)
7. The consolidated retained earnings of P420,000 may also be verified by the
following computation
Pete Company retained earnings, Dec 31 P 404,000
Pete’s share in net increase in Sake’s retained earnings
((50,000-30,000)X80%) 16,000
Consolidated Retained Earnings P 420,000
CONSOLIDATED FINANCIAL
STATEMENTS
- THE AMOUNTS TAKEN FROM ILLUSTRATION 15-3

Sales P 600,000
Cost and expenses:
Cost of Goods sold P 285,000
Operating Expenses 70,000
Other Expenses 55,000 410,000
Consolidated CI 190,000
NCI in CI subsidiary 10,000
Attributable to parent company 180,000
Retained Earnings as the beginning of year- Pete Corporation 300,000
Dividends paid- Pete Corporation ( 60,000)
Consolidated Retained Earnings, December 31, 2017 P 420,000
 Pete Corporation and Subsidiary
Consolidated Statement of Financial Position
December 31, 2017

Assets Liabilities and Stockholders’ Equity

Current assets Liabilities

Cash P 339,000 Accounts payable P 200,000

Bonds payable 300,000
Accounts Receivable 125,000
Total liabilities 500,000
Inventory 175,000
Stockholders equity
Total Current Assets 639,000
Common stock P 500,000
Property Plant and Equipment
Retained earnings 420,000
845,000
Total controlling interest 920,000
TOTAL ASSETS P 1,484,000
Non-controlling interest 64,000 984,000
Total liabilities and stockholders equity P1,484,000
CONSOLIDATION: PARTIALLY OWNED
SUBSIDIARY- Acquisition at Other Than Book
Value
– The following elimination procedures may be used to eliminate inter-company transactions
when the investment cost is not equal to the book value of the interest acquired:
1. Eliminate inter-company dividends and recognize NCI share of subsidiary’s dividends declared.
2. Eliminate equity accounts of subsidiary at date of acquisition against investment account and
NCI.
3. Allocate excess to the specific assets and liabilities of the subsidiary. The allocation should be
in accordance with the principles in chapter 15
4. Amortize the allocated excess except goodwill in accordance with accounting for asset to
which it is assigned.
5. Assign income of subsidiary to NCI.
FIRST YEAR AFTER
COMBINATION- 2017
– Using the data in previous example , assume that Pete Corporation purchased
80% of the common stock of Stake company on January 2,2017, for P300,000.
assume further that on the date of the combination, all assets and liabilities of
Sake Company have fair market values equal to their book values, except for the
following
Book value Fair Value Under /
overvaluation
Inventory P 60,000 P 65,000 P ( 5,000)
Property Plant and Equipment 300,000 360,000 (60,000)
P 360,000 P 425,000 P ( 65,000)
 Total Parent price (80%) NCI at FV (20%)
Fair value of subsidiary P 375,000 P 300,000
Less book of net assets acquired:
Common stock- S Company P 200,000
Retained earnings- S Company 100,000
Total P300,000 P300,000 P300,000
Interest acquired 80% 20%
Book Value P 240,000 P 60,000
Excess P 75,000 P 60,000 P 15,000
Allocations (adjustments)
Inventory (5,000)
Property and equipment (60,000)
Total P (65,000)
Goodwill P 10,000

All the inventory on Jan 2, 2017 to which the difference relates are sold during 2017. therefore none is left in the ending
inventory. The property and equipment have a remaining life of 10 years from the date of acquisition, and straight line method
of depreciation used
For the first year immediately after the acquisition, Sake company reported the following
Comprehensive Income P50,000
Dividends Income 30,000

– Parent Company Entries

Jan 2 investment in Sake Company 300,000
Cash 300,000
To record purchase of Sake Company stock.

Dec 31 Cash 24,000

Dividend income 24,000
To record share in dividends paid by Sake (30,000X80%)
On December 31, 2017, after posting the above entries, Pete Coporation ‘s Investment in Sake
Company and Dividend Income accounts would show balances of P300,000 and P24,000 respectively.
AMORTIZATION OF ALLOCATED EXCESS
- the amortization of allocated excess is not recorded in the books of the parent. The
amortization is only a working paper entry computed as follows:

Allocated Excess AMORT IZATION

2014 to 2023
2013
Inventory P 5,000 P 5,000 -

Plant and equipment 60,000 6,000 P 6,000

Goodwill 10,000 - -

Total P 75,000 P 11,000 P 6,000

 WORKING PAPER ELIMINATION
ENTRIES- First year
E(1) Dividend Income (80%) 24,000
NCI (20%) 6,000
Dividend Declared- Sake Company 30,000
To eliminate intercompany dividends and establish minority interest share of dividends (30,000X20%).
E(2) Common Stock- Sake Company 200,000
Retained earnings – Sake company 100,000
Investment in Sake Company 240,000
NCI 60,000
To eliminate inter-company investment and equity accounts of subsidiary on date of acquisition, and to establish minority interest in net
assets of subsidiary.
E(3) Inventory 5,000
Property and Equipment 60,000
Goodwill 10,000
Investment in Sake Company 60,000
NCI 15,000
To allocate excess between investment cost and the book value of identifiable assets acquired with remainder to goodwill
E(4) Cost of goods sold 5,000
Operating Expenses 6,000
Inventory 5,000
Property and equipment 6,000
To amortize allocated excess to identifiable assets
E(5) NCI in CI of subsidiary `7,800
NCI 7,800
To recognize NCI in subsidiary’s adjusted net income for 2017 as follows:
CI of Subsidiary 50,000
Amortization per E(4) 11,000
Adjusted CI of Subsidiary 39,000
NCI share(39,000X20%) 7,800
Working Paper Elimination Entries-
second year 2018
E(1) Dividend Income (80%) 32,000
NCI (20%) 8,000
Dividend Declared- Sake Company 40,000
To eliminate intercompany dividends and establish minority interest share of dividends (40,000X20%).
E(2) Common Stock- Sake Company 200,000
Retained earnings – Sake company 100,000
Investment in Sake Company 240,000
NCI 60,000
To eliminate equity accounts of Sake and investment account against the parents interest and NCI
E(3) Inventory5,000
Property and Equipment 60,000
Goodwill 10,000
Investment in Sake Company 60,000
NCI 15,000
To allocate excess
E(4) Retained earnings- Sake January 1 1,800
NCI 1,800
To assign to the non controlling stockholders their share of the increase in the subsidiary ‘s adjusted
undistributed earnings that occurred between the acquisition date and the beginning of the current period.
This is computed as follows:
Retained earnings- Sake company Jan 1, 2018 120,000
Retained earnings- Sake company Jan 2, 2017 100,000
Increase in earnings- prior year 20,000
Amortization of allocated excess in prior years (11,000)
Adjusted undistributed earnings 9,000
Assignable to NCI (9,000X20%) 1,800
SUBSIDIARY THAT HAS A
DIFFERENT REPORTING DATE
– IFRS 10 generally requires that the financial statements of the parent
and its subsidiaries used in the preparation of the consolidated financial
statements shall be prepared as of the same reporting date. When the
reporting date of the parent is different from that of a subsidiary, the
subsidiary prepares for consolidation purposes, addition financial
statements as of the same date as the financial statements of the parent
unless it is impracticable to do so.
– However IFRS 10 permits consolidation of a subsidiary’s financial statements
with a different reporting date, provided that the difference between the
reporting dates of the parent and any of its subsidiaries shall be no more than
3 months. For example, if the financial year ended of a parent is 31 December
2016, it may consolidate the accounts of a subsidiary with a financial year
ended 30 September 2016 or with a financial year ended March 2017 or any
financial year ended in between those dates and the date the parents financial
statements.
ACCOUNTING FOR LOSS OF
CONTROL
If a parent losses control of a subsidiary, the parent
• Derecognizes the assets and liabilities of the former subsidiary from the
consolidated statement of financial position
• Recognizes and investment retained in the former subsidiary at its fair value
when control is lost and subsequently accounts for it and for any amounts
owned by or the former subsidiary in accordance with relevant IFRS.
• Recognizes the gain or loss of control attributable to the former controlling
interest.
The gain or loss is included in net income attributable to the parent company . The gain or loss
is the difference between

a. The aggregate of
1. the fair value of any consideration
2. the fair value of any retained non-controlling investment in the former
subsidiary at the date the subsidiary is de consolidated
3. the carrying amount of the NCI in the former subsidiary at the date the
subsidiary is deconsolidated
b. The carrying amount of the former subsidiary’s assets and liabilities.
SALE OF INTEREST NOT RESULTING IN
LOSS OF CONTROL

– A parent company may sell a portion of its investment in a subsidiary but still
have an interest that provides control even after the sale. There can be no
income statement gains or losses resulting from any stock issuance by the
consolidated entity. Gain on sale of investment in a subsidiary is recorded as an
addition to additional paid in capital. Loss on sale of the investment in
subsidiary is treated as a reduction from APIC. If the APIC is inadequate, the
Retained Earnings should be debited.