CHAPTER TWO

CONSOLIDATED FINANCIAL
STATEMENT
Based on IFRS 10
PREPARED BY: HASSEN
MUSTEFA
 2.1. CONSOLIDATED FINANCIAL
STATEMENT (CFS)
• Consolidated financial statements are the financial statements of a group
in which the assets, liabilities, equity, income, expenses and cash flows of
the parent and its subsidiaries are presented as those of a single economic
entity.

• An entity that is a parent shall present consolidated financial statements

(IFRS 10.4).
– A parent is an entity that controls one or more entities
– A subsidiary is an entity that is controlled by another entity (i.e. the
parent)
– A group is a parent and its subsidiaries
 INTERACTION OF:
IFRSs 3, 7, 9, 10, 11, 12 and IAS 28
Control
alone?
YES NO

Consolidation in
accordance with IFRS 3 Joint control?
and IFRS 10
Disclosures in YES NO
accordance with IFRS
12
Define type of joint
Significant
arrangement in influence?
accordance with IFRS 11
Joint Operation Joint Venture YES NO

Account for assets, liabilities, Account for an investment in

accordance with IAS 28 IFRS 9
revenues and expenses
Disclosures in
Disclosures in accordance with Disclosures in accordance with accordance
IFRS 12 IFRS 12 with IFRSs 7
3
 2.2. ADVANTAGES OF CFS
1. Provide good information about the parent
company, including the parent`s shareholders,
creditors and other resource providers.
2. The only way to conveniently summarize the
vast amount of information about the
individual companies.
3. The parent`s long term creditors also find the
CFS of subsidiary operation on the overall
health and future of the parent.
 2.3. DISADVANTAGES OF CFS
1. The masking of poor performance.
2. Lack of detailed disclosures.
3. Non-Controlling Stockholders get little value
from CFS.
 2.4. CRITERIA FOR CFS
An investor, regardless of the nature of its involvement with an
entity (the investee) shall determine whether it is a parent by
assessing whether it controls the investee. An investor controls an
investee when it is exposed, or has rights, to variable returns from
its involvement with the investee and has the ability to affect those
returns through its power over the investee. Thus, an investor
controls an investee if and only if the investor has all the
following:
1. Power over the investee
2. Exposure, or rights, to variable returns from its involvement with
the investee; and
 THE CONTROL MODEL—AN
OVERVIEW
An investor controls an investee when it is exposed, or
has rights, to variable returns from its involvement with
the investee and has the ability to affect those returns
through its power over the investee.

Exposure Power
to
variable
returns
Link
power-
returns

control
ASSESSING CONTROL OF AN
INVESTEE

POWER EXPOSUR
E LINK

Exposure Ability to
Rights (or rights) use power
to over the
variable investee
returns of to affect
Relevant the its own
activities investee returns

8
 1. POWER OVER AN INVESTEE
• Power = existing rights that give it the
POWER current ability to direct the relevant
activities.
• Power arises from rights (e.g. voting rights,
rights to appoint key personnel, among
Rights others)
• Relevant activities: The investor has been
directing relevant activities can help to
Relevant determine whether the investor has power.
activities
-Assessing and Purchasing of Goods.
-Purpose, Design and profit margin of
An investor need the
notInvestee
have absolute power to control
 Example 1

• Investor A holds 45% of the voting rights of an investee

Z.

• Eleven other investors each hold 5% of the voting rights.

• No contractual agreement among shareholders to consult

any of the others or make collective decisions.

10
 Example 2

• Investor A holds 45% of the voting rights of an investee

Z.
• Two other investors each hold 26% of the voting rights.
• Remaining voting rights are held by three other
shareholders (each with 1%).
• No other arrangements that affect decision-making.
 Example 3

• An investor A acquires 48% of the voting rights of an

investee Z.
• Remaining voting rights held by thousands of
shareholders, with less than 1% each.
• None of the shareholders has any arrangements to
consult any of the others or make collective decisions.

12
 Example 4

• Investor A holds 35% of the voting rights of an investee Z.

• Three other investors each hold 5% of the voting right.

• Remaining voting rights are held by numerous other

shareholders (each holding 1% or less).
• Decisions about relevant activities require approval of a
majority of votes.
• Recent relevant meetings: 75% of voting rights have been cast.

• 35% / 75% = 46.666%

2. ASSESSING EXPOSURE (OR RIGHTS) TO VARIABLE
RETURNS

• An investor is exposed, or has rights, to variable

EXPOSU
RE returns from its involvement with the investee
when the investor’s returns from its involvement
have the potential to vary as a result of the
Exposure investee’s performance.
(or rights)
to • Broad definition of returns:
variable dividends; remuneration from services, fees and
returns of exposure to losses; residual interests on liquidation;
the tax benefits; access to future liquidity; returns not
investee available to other investors (eg synergies)

14
 3. LINK BETWEEN POWER AND RETURNS
• An investor controls an investee if the investor not only has power
over the investee and exposure or rights to variable returns from its
involvement with the investee, but also has the ability to use its
power to affect the investor’s returns from its involvement with the
investee.
• A case of power without control is the agency relationship.
• An agent is a party contracted by a principal to perform some
service on behalf of the principal that involves delegating some
authority to the agent.
• Agent
– acts in the best interests of the principal (fiduciary responsibility)
– principal and agent seek to maximise their own benefits
– additional measures to ensure the agent does not act against the interests
of the principal
• Delegated power does not mean control. 15
 4.5. ACCOUNTING REQUIREMENT
1. Accounting Policy: A parent shall prepare consolidated financial statements using uniform

accounting policies for like transactions and other events in similar circumstances.

2. Non Controlling Interest: A parent shall present non-controlling interests in the consolidated

statement of financial position within equity, separately from the equity of the owners of the parent.

3. Loss of control : If a parent loses control of a subsidiary, the parent:

(a) Derecognizes the assets and liabilities of the former subsidiary from the consolidated statement of

financial position.

(b) Recognizes any investment retained in the former subsidiary.

(c) Recognizes the gain or loss associated with the loss of control

4. Parent and Subsidiary with different Fiscal period: When the fiscal periods of parents and its

subsidiaries differ, We prepare CFS for and as of the end of the parent`s fiscal period. If the difference

in fiscal period is not in excess of three months, it usually is accepted to use the subsidiary`s statement

for its fiscal year for consolidation.

 4.6. STEPS OF CFS
1. Combine like items of assets, liabilities, income, expenses and cash flows of the
parent at Book Value with those of its subsidiaries at Fair values;
2. Offset (eliminate): the carrying amount of the parent’s investment in subsidiary; and
the subsidiary`s equity account (i.e. Common Stock, Additional Paid in capital and
Retained Earning.);
3. Eliminate in full intra-group assets and liabilities, equity, income, expenses and
cash flows relating to transactions between entities of the group (Inter company
Receivable and Payables).
4. The elimination is not entered in either the parent company’s or the subsidiary’s
accounting records; it is only a part of the working paper for preparation of the
consolidated balance sheet.
5. The elimination And Adjustment is used to reflect differences between current
fair values and carrying amounts of the subsidiary’s identifiable net assets
because the subsidiary did not write up its assets to current fair values on the
date of the business combination.
6. The Elimination and Adjustment column in the working paper for consolidated
balance sheet reflects debits and credits.
7. CFS of Equity includes Parent`s Equity balance and Non Controlling Interest.
 Cont…
Intercompany Accounts to Be Eliminated
Parent’s Accounts
Investment in subsidiary
Intercompany receivable
(payable)
Advances to subsidiary (from
subsidiary)
Interest revenue (interest expense)
Dividend revenue (dividends
declared)
Management fee received from
subsidiary
Sales to subsidiary (purchases of
inventory from subsidiary)
Subsidiary’s Accounts
Against Equity accounts
Intercompany payable
Against
(receivable)
Against Advances from parent (to parent)
Interest expense (interest
Against
revenue)
Dividends declared (dividend
Against
revenue)
Against Management fee paid to parent
Purchases of inventory from
Against
parent (sales to parent)
 Cont…

• It is necessary to eliminate the investment account of

the parent company against the related stockholders’
equity of the subsidiary to avoid double counting of
these net assets.
 Cont…
Sample Elimination and Adjustment Entry
Subsidiary`s Common Stock…………………………………………………….xx Reciprocal ledger account
Subsidiary`s Additional Paid in capital in excess of Par………..xx
(Subsidiary`s Equity
Subsidiary`s Retained Earning…………………………………………………xx Account)
Payable to Inter company transaction
Parent………………………………………………………………………xx Increase in Asset and
Increase in Fair Value of Assets………………………………………………..xx Decrease in Liability in
Decrease in Fair Value of Liabilities………………………………………….xx termsofofAC
Excess FV(TC)
of Sub.
Over
Goodwill…………………………………………………………………………… FVNIA
………….xx
Investment in
Subsidiary…………………………………………xx
Non Controlling
Interest………………………………………….xx
Receivable from
Subsidiary……………………………………xx
 PRACTICAL EXAMPLE 1

Assume that on January 1, 2013, P Company acquired all the

outstanding stock of S Company for cash of $160,000. What
journal entry would P Company make to record the shares of S
Company
Balance Sheet acquired?
P Company S Company
Cash $ 40,000 $ 40,000
Other current assets 280,000 100,000
Plant and equipment 240,000 80,000
Land 80,000 40,000
Investment in Sill 160,000
Total assets $ 800,000 $ 260,000

Liabilities $ 120,000 $ 100,000

Common stock 400,000 100,000
Additional Paid in Capital 80,000 20,000
Retained earnings 200,000 40,000
Total Liab. and Equity $ 800,000 $ 260,000

On January 1, 2013 current fair values of S Company’s identifiable

assets and liabilities were the same as their carrying amount
 Cont…
Costs related to Acquisition of Subsidiary
 Investment in S Com……...160,000
Cash………………………..160,000
Goodwill Calculation
 Goodwill = Acquisition Cost – Fair Value of Net Identifiable

Asset(FVNIA)

FVNIA= Fair Value of Assets – Fair Value of Liabilities

FVNIA =(40,000 + 100,000 + 80,000 + 40,000) - (100, 000) =

Br 260,000 – Br 100,000 = Br 160,000

 Goodwill = $ 160,000 – $ 160,000 = $ 0.00

 Cont…

Elimination and Adjustment

Common stock (S) 100,000

Additional Paid in capital (S) 20,000
Retained earnings (S) 40,000
Investment in S Company 160,000

This is a work paper-only entry.

 Cont…
Eliminations Consolidated
Balance Sheet P Company S Company Debit Credit Balances
Cash $ 40,000 $ 40,000 $ 80,000
Other current assets 280,000 100,000 380,000
Plant and equipment 240,000 80,000 320,000
Land 80,000 40,000 120,000
Investment in Sill 160,000 160,000 -
Total assets $ 800,000 $ 260,000 $ 900,000

Liabilities $ 120,000 $ 100,000 $ 220,000

Common stock 400,000 100,000 100,000 400,000
Additional Paid in Capital 80,000 20,000 20,000 80,000
Retained earnings 200,000 40,000 40,000 200,000
Total Liab. and Equity $ 800,000 $ 260,000 $ 160,000 $ 160,000 $ 900,000
 PRACTICAL EXAMPLE 2
• There is no question of control of a wholly owned subsidiary. Thus, as
an illustration assume that on December 31, 2002, PALM Corporation
issued 10,000 shares of its 10 par common stock (current fair value Br 50
a share) to shareholder of STARR Company for all the outstanding Br 5
par common stock of Starr. There was no contingent consideration. Costs
of issuing common stock of the business combination paid by Palm Corp
on December 31, 2002 consisted of the following;
Costs of issuing common stock………35,000

• Assume also that the combination qualified for Acquisition accounting.

Starr Company was to continue its corporate existence as a wholly
owned subsidiary of Palm Corporation. Both companies had a December
31 fiscal year and use the same accounting policies. Income tax rate for
both companies was 40%. Financial statements of the two companies as of
December 31, 2002 Prior to combination are presented below follow:
Cont…
Cont…
 Cont…
• On Dec, 31, 2002 current fair values of Starr
Company’s identifiable assets and liabilities were
the same as their carrying amount, except for the
following 3 assets:
Fair Values:
Inventories Br 135,000
Plant assets (net) Br 365,000
Patent (net) Br 25,000
 SOLUTION
Costs related to Acquisition of Subsidiary
 Investment in Starr Com…(10,000shares*Br. 50/share)……...500,000
Common Stock………(10,000shares*Br. 10/share)…..
………100,000
Additional paid in capital in Excess of
Par…………………………400,000

Costs related to Issuance of Shares

 Additional paid in capital in Excess of Par…………………………
35,000

Cash……………………………………………………………………
………35,000
 Cont…
Since the Financial Statements are Given Prior to combination, We
Should Adjust some items that are affected by Business
Combination. Common Stock
Investment in Starr
BB…300,000
EB……Br
500,000 100,000
EB….Br
Additional Paid in capital in 400,000
excess of Par Cash
BB…50,000 BB … 35,000
100,000
400,000
EB ….Br
35,000 65,000
EB… Br
415,000
 Cont…
Goodwill Calculation
 Goodwill = Acquisition Cost – Fair Value of Net Identifiable Asset(FVNIA)

FVNIA= Fair Value of Assets – Fair Value of Liabilities

FVNIA =(40,000 + 135,000 + 70,000 + 365,000 + 25,000) -

(25,000 + 10, 000 + 115,000) = Br 635,000 – Br 150,000

= Br 485,000

 Goodwill = Br 500,000 – Br 485,000 = Br 15,000

 Cont…
Elimination and Adjustment Entry
Common Stock…………………………………………………………..200,000
Additional Paid in Capital in Excess of Par………………….58,000
Retained Earning………………………………………………………..132,000
Payable to Palm……..….………………………………………………..25,000
Inventory…………………………………………………………………….25,00
0
Plant Asset………………………………………………………………….65,000
Patent……………………………………………………………………………
5,000
Goodwill……………………………………………………………………….15,
000
Investment in
Starr………………………………………………….500,000
Receivable from Starr.……..
………………………………..………25,000
Cont…
 PRACTICAL EXAMPLE 3
• To illustrate the consolidation techniques for a Acquisition type
business combination involving a partially owned subsidiary,
assume the following facts:
• On December 31,2003 Post Corporation issued 66,500 shares of
its Br 1 par common stock (Current fair value Br 20 a share ) to
stockholders of Sage Company in exchange for 38,000 of the
40,000 outstanding shares of Sage’s Br 10 par common stock. Thus
Post acquired 95% of the interest in Sage (38/40). There was no
contingent consideration. Cost of issuing shares of the combination
paid in cash by Post on December 31, 2003 were as follows:
Cost of issuing shares 72,750
• The Fair value of Non Controlling Interest is Br 70,000.
• Financial statements of the two companies before the combination
are as follows:
Cont…
Cont…
 Cont…
On Dec, 31, 2003 current fair values of Sage
company’s identifiable assets and liabilities
were the same as their carrying amount, except
for the following assets:
Fair Values
Inventories Br 526,000
Plant assets (net) Br
1,290,000
Leasehold Br
30,000
 SOLUTION
Costs related to Acquisition of Subsidiary
 Investment in Starr Com…(66,500shares*Br. 20/share)……...1,330,000
Common Stock………(66,500shares*Br. 1/share)….
………….66,500
Additional paid in capital in Excess of
Par…………………………1,263,500

Costs related to Issuance of Shares

 Additional paid in capital in Excess of Par…………………………
72,750

Cash……………………………………………………………………
………72,750
 Cont…
Since the Financial Statements are Given Prior to combination, We
Should Adjust some items that are affected by Business
Combination. Common Stock
Investment in Starr
BB….1,000,00
EB…Br
0
1,330,000
66,500
Additional Paid in capital in excess EB….Br
of Par Cash1,066,500
BB…550,000 BB … 72,750
200,000
1,263,500
EB …Br
72,750 127,250
EB… Br
1,740,750
 Cont…
Goodwill Calculation
 Goodwill = Total Consideration– Fair Value of Net Identifiable Asset(FVNIA)

 Total Consideration = Acquisition Cost + Fair Value of Non Controlling Interest

Total Consideration = Br 1,330,000 + Br 70,000 = Br 1,400,000

 FVNIA= Fair Value of Assets – Fair Value of Liabilities

FVNIA =(Br 100,000 + 526,000 + 215,000 + 1,290,000 + 30,000) -

(Br 16,000 + 930, 000) = Br 2,161,000 – Br 946,000 = Br 1,215,000

 Goodwill = Br 1,400,000 – Br 1,215,000 = Br 185,000

 Cont…
Elimination and Adjustment
Common Stock…………………………………………………………..400,000
Additional Paid in Capital in Excess of Par………………..235,000
Retained Earning………………………………………………………..334,000
Inventory……………………………………………………………………..26,0
00
Plant
Asset………………………………………………………………….190,000
Leasehold Land……………………………………………………………30,000
Goodwill……………………………………………………………………...185,
000
Investment in
Starr………………………………………………….1,330,000
Non Controlling
Interest…………………………………………..…70,000
Cont…
 SUMMARY OF CFS
1. The investment account and related subsidiary’s stockholders’
equity have been eliminated and the subsidiary’s net assets
substituted for the investment account.
2. Consolidated assets and liabilities consist of the sum of the
parent and subsidiary assets and liabilities in each classification.
3. Consolidated stockholders’ equity is the same as the parent
company’s stockholders’ equity.
Consolidated Net Income = Parent’s Net Income
Consolidated Retained Earnings = Parent’s Retained Earnings
Consolidated Stockholders’ Equity = Parent’s Stockholders’ Equity
(if 100% Subsidiary)
Consolidated Stockholders’ Equity = Parent’s Stockholders’ Equity +
Non Controlling Interest
(if < 100% Subsidiary)