Consolidation of Financial Statement - Miscellaneous Topics

MA315 – Accounting for Business Combinations
Module 4: Consolidated Financial Statements - Miscellaneous Topics
Module 4
Consolidated Financial Statements - Miscellaneous Topics
LEARNING OUTCOME
1. Account for the effect of impairment of goodwill on the consolidated financial statements.
2. Determine the effects of changes in ownership interests that (a) result in loss of control and (b)
does not result in loss of control.
3. Describe the importance of consolidation and the theories supporting consolidation.
Impairment of Goodwill
When NCI is measured at proportionate share, goodwill is attributed only to the owners of
the parent. Therefore, any impairment of goodwill is also attributed only to the owners of the
parent.
When NCI is measured at fair value, goodwill is attributed to both the owners of the parent
and NCI. Therefore, any impairment of goodwill is allocated to both the owners of the parent and
NCI.
Illustration: Impairment of goodwill

On January 1, 2020, ABC acquired 80% interest in XYZ, Inc. by issuing 5,000 shares with
fair value of P15 per share,
Information on acquisition date (Jan. 1, 2020):

 XYZ's net identifiable assets have a carrying amount of P74,000 and fair value of P90,000.
The difference is due to the following:
Carrying Amount Fair Value FVA

Inventory 20,000 24,000 4,000
Equipment, net 40,000 52,000 12,000
Totals 60,000 76,000 16,000
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 The remaining useful life of the equipment is 6 years.

 ABC measured the investment in subsidiary at cost.
ABC Co. XYZ, Inc.
Total assets 418,000 124,000
Total liabilities 73,000 30,000
Share capital 170,000 40,000
Share premium 65,000 10,000
Retained earnings 110,000 44,000
Total equity 345,000 94,000
Profit for the year 60,000 20,000
 There were no intercompany transactions during 2020. However, it was determined that
goodwill is impaired by P1.000
Requirement: Prepare the consolidated financial information on December 31, 2020 under each
of the following cases:
 Case 1: NCI is measured at proportionate share.
 Case 2: NCI is measured at fair value. The NCI fair value on acquisition date is P18,750.
Solutions:
Step 1: Analysis of effects of intercompany transaction

None.
Step 2: Analysis of subsidiary's net assets

XYZ, Inc. Jan 1, 2020 Dec 31, 2020 Net change
Net assets at carrying amount 74,000 94,000
Fair value adjustments (FVA) 16,000* 10,000*
Net assets at fair value 90,000 104,000 14,000
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FVA, 1/1/20 Useful life Depreciation FVA, 12/31/20

Inventory 4,000 N/A 4,000 -
Equipment, net 12,000 6 yrs. 2,000 10,000
Totals 16,000 6,000 10,000
Step 3: Goodwill computation

Case 1: Proportionate share
Consideration transferred (5,000 x 15) 75,000
NCI in the acquiree (90,000 x 20%) - Step 2 18,000
Previously held equity interest in the acquire -
Total 93,000
Fair value of net identifiable assets acquired (Step 2) (90,000)
Goodwill - Jan 1, 2020 3,000
Less: Accumulated impairment losses -
Goodwill - Dec 31, 2020 3,000
Accumulated impairment losses since acquisition date (1,000)
Goodwill, net - Dec 31, 2020 2,000
Case 1: Fair Value

Consideration transferred (5,000 x 15) 75,000
Less: Previously held equity interest in the acquire -
Total 75,000
Less: Parent’s proportionate share in the net assets
of subsidiary (90,000 x 80%) (72,000)
Parent’s share in Goodwill - Jan 1, 2020 3,000
Less: Parent’s share in Goodwill impairment (1,000 x 80%) (800)
Goodwill attributable to parent- Dec 31, 2020 2,200
Fair value of NCI (see given) 18,750

Less: NCI's proportionate share in the net assets of
subsidiary (90K x 20%) 18,000
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Goodwill attributable to NCI Jan. 1, 2020 750

Less: NCI’s share in Goodwill impairment (1,000 x 20%) (200)
Goodwill attributable to NCI- Dec 31, 2020 550
Goodwill, net - Dec 31, 2020 2,750
Goodwill impairment is attributed only to the owners of the parent if NCI is measured at
proportionate share (Case 1), while it is allocated to both the owners of the parent and NCI if NCI
is measured at fair value (Case 2).
Step 4: Non-controlling interest in net assets

Case 1 Case 2
Subsidiary's net assets at fair value - Dec. 31, 2020 (see Step 2) 104,000 104,000
Multiply by: NCI percentage 20% 20%
Total 20,800 20,800
Add: Goodwill attributable to NCI – Dec 31, 2020 (step 3) - 550
Non - controlling interest in net assets - Dec. 31, 2020 20,800 21,350
No goodwill is attributed to NCI if NCI is measured a proportionate share (Case 1), while
there is if NCI is measured a fair value (Case 2)
Step 5: Consolidated retained earnings

Case 1 Case 2
Parent's retained earnings - Dec 31, 2020 110,000 110,000
Parent's share in the net change in subsidiary's net assets* 11,200 11,200
Impairment loss on goodwill attributable to parent (step 3) (1,000) (800)
Consolidated retained earnings - Dec 31, 2020 120,200 120,400
* Net change in XYZ's net assets (Step 2) 14,000

Multiply by: ABC's interest in XYZ 80%
ABC's share in the net change in XYZ's net assets 11,200
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Step 6: Consolidated profit or loss

Profits of ABC & XYZ (60,000 +20,000) 80,000
Depreciation of FVA (see step 1) (6,000)
Impairment of Goodwill (1,000)
Consolidated profit 73,000
The consolidated profit is attributed to the owners of the parent and NCI as follows:
Case 1 Owners of Parent NCI Consolidated

Parent's profit before FVA (see above) 60,000 N/A 60,000
Share in XYZ's profit before FVA* 16,000 4,000 20,000
Depreciation of FVA** (4,800) (1,200) (6,000)
Impairment of goodwill (1,000) - (1,000)
Totals 70,200 2,800 73,000
* (20,000 see above x 80% = 16,000); (20,000 x 20% = 4,000).
** (6,000 x 80% = 4,800); (6,000 x 20% = 1,200).
Case 2 Owners of Parent NCI Consolidated

Parent's profit before FVA (see above) 60,000 N/A 60,000
Share in XYZ's profit before FVA* 16,000 4,000 20,000
Depreciation of FVA** (4,800) (1,200) (6,000)
Impairment of goodwill (800) (200) (1,000)
Totals 70,400 2,600 73,000
Reconciliations using formulas:

Case 1 Case 2
Total assets of ABC 418,000 418,000
Total assets of XYZ, Inc. 124,000 124,000
Investment in subsidiary (75,000) (75,000)
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FVA net 10,000 10,000

Goodwill – net 2,000 2,750
Consolidated total assets 479,000 479,750
Total liabilities of ABC Co. 73,000 73,000

Total liabilities of XYZ, Inc. 30,000 30,000
Consolidated total liabilities 103,000 103,000
Share capital of ABC Co. 170,000 170,000

Share premium of ABC Co. 65,000 65,000
Consolidated retained earnings 120,200 120,400
Equity attributable to owners of the parent 355,200 355,400
Non-controlling interests 20,800 21,350
Consolidated total equity 376,000 376,750
Intercompany items in-transit and restatements

Each of the group members' individual financial statements are adjusted first for the
following before consolidation:
a. Accruals and deferrals of income and expenses and corrections of errors;
b. In-transit items - items arising from intercompany transactions that were already recorded by
one party but not yet by the other (e.g., intercompany deposits in transit, outstanding checks,
credit memos, and debit memos).
c. Hyperinflationary economy - the financial statements of a group member that reports in a
currency of a hyperinflationary economy are restated first in accordance with PAS 29 before
they are consolidated.
d. Currency translations - the financial statements of a subsidiary whose functional currency is
different from the group's presentation currency are translated first in accordance with PAS 21
before they are consolidated.
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Continuous assessment
An investor reassesses whether it controls an investee if facts and circumstances indicate
that there are changes to one or more of the three elements of control.
Changes in ownership interest not resulting to loss of control

If the parent's ownership interest in a subsidiary changes but does not result to loss of
control, the change is accounted for as an equity transaction.
The carrying amounts of the controlling and non - controlling interests are adjusted to
reflect the changes in their relative interests in the subsidiary. The difference between the
adjustment to the NCI and the fair value of the consideration paid or received is recognized directly
in equity and attributed to the owners of the parent. No gain or loss is recognized in profit
Illustration 1: Changes in ownership interest - No loss of control

Fact pattern
On January 1, 2020, ABC Co. acquired 80% interest in XYZ, Inc. Goodwill under each of
the available measurement options under PFRS 3 is computed as follows:
Case 1 Case 2
Consideration transferred 75,000 75,000
NCI in the acquiree (90,000 x 20%); (75,000/ 80%) x 20%] 18,000 18,750
Previously held equity interest in the acquire - -
Total 93,000 93,750
Fair value of net identifiable assets acquired (Step 2) (90,000) (90,000)
Goodwill - Jan 1, 2020 3,000 3,750
During 2020, XYZ's net assets increased by P10,000 after fair value adjustments. The NCI
is updated as follows:
Case 1 Case 2
NCI at acquisition date - Jan 1, 2020 18,000 18,750
Share of NCI in change in net assets (10,000 x 20%) 2,000 2,000
NCI in net assets - Dec. 31, 2021 20,000 20,750
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Scenario 1: Acquisition of all remaining NCI

On January 1, 2020, ABC Co. acquires all the remaining 20% NCI in XYZ for P30,000.
Requirements:
a. How much is the gain or loss on the transaction to be recognized in the consolidated financial
statements?
b. Compute for the effect of the transaction on the consolidated financial statements.
Solutions:
Requirement (a):
None. The transaction is accounted for as equity transaction because it does not result to
loss of control.
Requirement (b):
% Parent % NCI Net assets of XYZ
Before the transaction 80% 80,000** 20% 20,000 100,000*
After the transaction 100% 100,000 - - 100,000
Change – Inc. (Decrease) 20,000 - (20,000) -
* This represents the fair value of XYZ's net assets on December 31, 2020 (90,000 fair value on
acquisition date + 10,000 increase during the year).
** 100,000 fair value of net assets x 80%.
After acquiring the remaining 20% NCI, the parent's ownership interest is increased to
100%. Consequently, NCI is reduced to zero. Therefore, after the acquisition, the NCI in net assets
is eliminated and attributed to the owners of the parent.
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Case 2: Fair value

Before the transaction 80% 83,000** 20% 20,750 103,750*
After the transaction 100% 103,750 - - 103,750
* When NCI is measured at fair value, the subsidiary's net assets is grossed up to reflect the
goodwill attributable to the NCI (P20,750 NCI / 20% = P103,750)
** 103,750 x 80% = 83,000
The effects of the transaction are determined as follows:

Case 1 Case 2
Fair value of consideration 30,000 30,000
Change in NCI (see tables above) (20,000) (20,750)
Direct adjustment to equity 10,000 9,250
The effects of the transaction may also be determined by preparing journal entries.
The entry in ABC's separate books is as follows:

Jan 1, 2021 Investment in subsidiary 30,000
Cash 30,000
to record the acquisition of remaining NCI in XYZ, Inc.
The consolidation journal entries are as follows:
Case 1: NCI measured at proportionate share

Jan 1, 2021 NCI (the decrease computed above) 20,000
Retained earnings - ABC Co. (squeeze) 10,000
Investment in subsidiary 30,000
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Case 2: NCI measured at fair value

Jan 1, 2021 NCI (the decrease computed above) 20,750
The "squeezed" amounts in the CJEs above represent the direct adjustments in equity,
which are attributed to the owners of the parent
Scenario 2: Acquisition of part of remaining NCI

On January 1, 2021, ABC Co. acquires 12% out of the 20% NCI in XYZ for P20,000

Before the transaction 80% 80,000 20% 20,000 100,000
After the transaction 92% 92,000 8% 8,000 100,000
Case 2: Fair value

Before the transaction 80% 83,000 20% 20,750 103,750*
* The net assets is grossed up as follows (P20,750 NCI / 20% = P103,750)
The direct adjustment in equity is determined as follows:

Case 1 Case 2
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Scenario 3: Disposal of part of controlling interest - Control not lost

On January 1, 2021, ABC Co. sold its 10% interest in XYZ, Inc. for P20,000. The 70% (80% -
10%) remaining interest still gives ABC control over XYZ

Change – Inc. (Decrease) (10,000) - 10,000 -
Case 2: Fair value

Change – Inc. (Decrease) (10,375) - 10,375 -

Case 1 Case 2
The entry in ABC’s separate books is as follows:

Jan 1, 2021 Cash 20,000
Gain on sale 10,625
To record the partial disposal of investment
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Gain on sale 10,625
NCI (the increase computed above) 10,000

Gain on sale 10,625
Scenario 4: Subsidiary issues additional shares – Control not lost

The 80% interest acquired by ABC in XYZ on January 1, 2020 represents 40,000 of XYZ's
50,000 outstanding shares as of that date.
On January 1, 2021, XYZ, Inc. issues additional 10,000 shares with par value of P1 per
share to other investors for P2.50 per share. Although ABC acquires none of those shares, ABC
still retains its control over XYZ.
The change in ABC's ownership interest in XYZ is determined follows:

Before Issuance % After issuance %
Shares held by ABC 40,000 80% 40,000 66.67%
Outstanding shares of XYZ 50,000 80% 60,000 66.67%
* (50,000 + 10,000 additional shares issued to NCI = 60,000)

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After the transaction 66.67% 83,333 33.33% 41,667 125,000*

Change – Inc. (Decrease) 3,333 - 21,667 25,000
* 100,000 + 25,000 proceeds from issuance of additional shares
Case 2: Fair value

Before the transaction 80% 83,000 20% 20,750 103,750*
After the transaction 66.67% 85,833 33.33% 42,917 128,750**
Change – Inc. (Decrease) 2,833 - 22,167 25,000
** (P103,750 + 25,000 proceeds from issuance of additional shares = 128,750)

Case 1 Case 2
The entry in XYZ’s separate books is as follows:

Jan 1, 2021 Cash 25,000
Share Capital 10,000
Share Premium 15,000
To record the issuance of shares

Jan 1, 2021 Share Capital 10,000
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Jan 1, 2021 Share Capital 10,000
Notice in all the scenarios' above that no adjustment is made to goodwill because control
is not lost. Instead, all adjustments are made directly in equity (i.e., NCI and parent's retained
earnings)
Loss of control
A parent can lose control of a subsidiary in much the same way it can obtain control. That
is, with or without a change in absolute or relative ownership levels and with or without the
investor being involved in that event. Examples:
a. Control is lost even without a change in the parent's ownership interest when the subsidiary
becomes subject to the control of a government, court, administrator or regulator, or as a result
of a contractual agreement.
b. Control is lost even without the parent being involved in that event if decision-making rights
are given to another party or the decision-making rights previously granted to the parent have
elapsed.
c. Control is lost if the parent ceases to be entitled to receive returns.
d. Control is lost if the parent's previous status changes to an agent.
When a parent loses control over a subsidiary, the parent shall:

a. Derecognize the assets and liabilities of the former subsidiary from the consolidated statement
of financial position.
b. Recognize any investment retained in the former subsidiary its fair value at the date control is
lost and subsequently account for the investment in accordance with relevant PFRS.
c. Recognize the gain or loss associated with the loss of control in profit or loss. This is attributed
to the former controlling interest.
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The gain or loss on disposal of controlling interest is computed as follows:

Consideration received (at fair value) xx
Investment retained in the former subsidiary (at fair value) xx
NCI (carrying amount) xx
Total xx
Less: Former subsidiary's net identifiable assets (carrying amount) (xx)
Goodwill (carrying amount) (xx)
Gain or loss on disposal of controlling interest xx
OR
Cash or other assets (Consideration received) xx

Investment account (Investment retained) xx
NCI xx
Liabilities of former subsidiary xx
Assets of former subsidiary xx
Goodwill xx
Gain on disposal of controlling interest (squeeze) xx
Illustration: Loss of control - Deconsolidation

On January 1, 2020, ABC Co sells 60% out of its 80% interest in XYZ, Inc. for P100,000,
ABC's remaining 20% interest in XYZ has fair value of P25,000. This gives ABC significant
influence over XYZ. Financial information immediately before the sale is shown below:
ABC Co. XYZ, Inc. Consolidated

ASSETS
Other assets 343,000 124,000 473,000
Investment in subsidiary 75,000 - -
Goodwill - - 3,000
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TOTAL ASSETS 418,000 124,000 476,000
LIABILITIES AND EQUITY

Accounts payable 73,000 30,000 103,000
Total liabilities 73,000 30,000 103,000
Share capital 235,000 50,000 235,000
Retained earnings 110,000 44,000 118,000
Non-controlling interest - - 20,000
Total equity 345,000 94,000 373,000
TOTAL LIAB. & EQUITY 418,000 124,000 476,000
Requirement: Prepare the deconsolidated financial information after the sale
Solution:
Step 1: Determine the carrying amounts of XYZ's assets and liabilities in the consolidated financial
statements as at the date control was lost.
The carrying amounts in the consolidated financial statements may not be equal to the
carrying amounts in the individual financial statements because of fair value adjustments (FVA).
ABC Co. XYZ, Inc. Consolidated CA of XYZ’s Net assets

ASSETS (a) (b) (c) = (b) – (a)
Other assets 343,000 124,000 473,000 130,000
Investment in subsidiary 75,000 - -
Goodwill - - 3,000
TOTAL ASSETS 418,000 124,000 476,000 130,000

Accounts payable 73,000 30,000 103,000 30,000
Total liabilities 73,000 30,000 103,000 30,000
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Share capital 235,000 50,000 235,000

Non-controlling interest - - 20,000
Total equity 345,000 94,000 373,000 100,000
TOTAL LIAB. & EQUITY 418,000 124,000 476,000 130,000
Step 2: Remove (deconsolidate) the subsidiary's assets and liabilities from the consolidated
financial statements.
ASSETS
Cash consideration received from sale 100,000
Other assets (473,000 – 130,000) 343,000
Investment in subsidiary eliminated -
Investment in associate (at fair value) 25,000
Goodwill (eliminated) -
TOTAL ASSETS 468,000

Accounts payable (103,000 – 30,000) 73,000
Total liabilities 73,000
Share capital (Parent only) 235,000
Retained earnings (118,000 + 42,000 gain on disposal *) 160,000
Non-controlling interest (eliminated) -
Total equity 395,000
TOTAL LIABILITIES AND EQUITY 468,000
* The gain or loss on disposal is computed as follows:

Jan 1, 2021 Cash - ABC Co. (Consideration received) 100,000
Investment in associate (investment retained) 25,000
Accounts payable - XYZ. Inc. 30,000
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Non-controlling interest 20,000

Other assets - XYZ, Inc. 130,000
Goodwill 3,000
Gain on disposal (squeeze) 42,000
OR
Consideration received (at fair value) 100,000

Investment retained in the former subsidiary (at fair value) 25,000
NCI (carrying amount – see consolidated financial statements) 20,000
Total 145,000
Less: XYZ’s net identifiable assets at fair value (130,000 – 30,000) (100,000)
Goodwill (see consolidated financial statements) (3,000)
Gain or loss on disposal of controlling interest 42,000
Notice that the loss of control is accounted for prospectively. No retrospective adjustments
are made to the consolidated retained earnings.
Derecognition of other comprehensive income

When control is lost, the parent recognizes amounts previously recognized in other
comprehensive income (OCI) as follows:
Type of OCI Accounting

a. Revaluation surplus directly in equity
b. Actuarial gains or losses on defined benefit plans directly in equity
c. Unrealized gains or losses on FVOCI investments directly in equity
d. Translation gains or losses on foreign operations Profit / Loss
e. Effective portion of cash flow hedges Profit / Loss
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The first three are accounted for directly in equity (i.e., transferred directly to retained
earnings) because PAS 1 Presentation of Financial Statements prohibits the reclassification
adjustment for these items. The last two are transferred to profit or loss as reclassification
adjustments.
Notes:
Change in ownership interest Accounting Treatment
Does not result to loss of control As an equity transaction:
 As an equity transaction: No gain or loss is
recognized.
 Consideration less Change in NCI - Direct
adjustment in equity.
As sale of subsidiary:
 Deconsolidate as follows:
Cash (Consideration received) xx
Investment retained xx
NCI xx
Goodwill xx
Net identifiable assets xx
Gain on disposal xx
Importance of consolidation
1. Consolidated financial statements provide true and fair view of the financial position and
performance of the group. Users are provided with a clearer view of the risks and rewards
surrounding the group of entities
2. It would be burdensome for users to gather together all the individual financial statements of a
parent and its many subsidiaries in order to get an idea of the financial position and
performance of the group, so parent entities are required to prepare consolidated financial
statements.
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3. Consolidated financial statements lessen the temptation of hiding certain activities in the
subsidiary's or special purpose entity's (SPE) separate financial statements. Although a possible
loophole in consolidated financial statements is that certain activities of subsidiaries or SPEs
may be buried or obscured in the notes.
4. Consolidated financial statements eliminate the effects of transactions with related entities
making the consolidated financial statements more useful than the aggregate of each of the
group members' separate financial statements.
Additional illustrations
Illustration 1: Intercompany receivables and payables

On January 1, 20, Horse Co, acquired 80% interest in Colt Co. by issuing bonds with fair
value of P250,000. NCI is measured at proportionate share. The following information was
determined immediately before the acquisition
Horse Co. Colt Co. Colt Co.

Carrying amount Carrying amount Fair value
Total assets 1,000,000 400,000 430,000
Total liabilities (600,000) (200,000) (200,000)
Net assets 400,000 200,000 230,000
Included in Colt's liabilities is an account payable to Horse amounting to P20,000.
Requirements: Compute for the following:

a. Total assets in Horse's separate financial statements immediately after the combination.
b. Total assets in the consolidated financial statements.
Solutions:
Requirement (a): Total assets in separate financial statements
Total assets of Horse before the combination 1,000,000
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Total assets of Horse after the combination 1,250,000
Requirement (b): Total assets in consolidated financial statements

Total assets of Horse after the combination (see above) 1,250,000
Total assets of Colt (Carrying amount) 400,000
Investment in subsidiary (250,000)
FVA on assets (430,000 FV – 400,000 carrying amount) 30,000
Goodwill - net [250,000 + (2230,000 x 20% NC1)] – 230,000 66,000
Effect of intercompany transactions international (20,000)
Consolidated total assets 1,476,000
Illustration 2: Business combination achieved in stages ('Step acquisition)

Rabbit Co. acquired 40% in Bunny Co. for P10,000 many years ago. The interest was
classified as investment in associate.
On January 1, 2022, Rabbit acquired additional 35% interest in Bunny for P200,000. On
this date, Bunny's net assets have a fair value of P180,000, same as the carrying amount. Rabbit
measured the NCI at a fair value of P55,000. Rabbit's investment in associate account has a
carrying amount of P120,000 and a fair value of P100,000. Rabbit measured the investment in
subsidiary at cost.
Financial information on December 31, 2022 follows:

Rabbit Co. Bunny Co.
Total assets 1,000,000 500,000
Total liabilities 200,000 120,000

Total liabilities and equity 1,000,000 500,000
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Requirements: Compute for the amounts of following in the December 31, 2022 consolidated
financial statements:
a. Goodwill
b. NCI in net assets
c. Consolidated retained earnings
d. Consolidated total assets
e. Consolidated total equity
Solutions:
Step 1: Analysis of effects of intercompany transaction

None.
Step 2: Analysis of subsidiary's net assets

XYZ, Inc. Jan 1, 2020 Dec 31, 2020 Net change
Net assets at carrying amount 180,000 380,000*
Fair value adjustments (FVA) - -
Net assets at fair value 180,000 380,000 200,000
* (100,000 share capital + 280,000 retained earnings)
Step 3: Goodwill
Consideration transferred 200,000
Less: Previously held equity interest in the acquire 100,000
Total 300,000
Less: Parent’s proportionate share in the net assets
of subsidiary (180,000 x 75%) (135,000)
Parent’s share in Goodwill – acq. date 165,000
Less: Parent’s share in Goodwill impairment -
Goodwill attributable to parent- current date 165,000
Fair value of NCI (see given) 55,000

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Less: NCI's proportionate share in the net assets of

subsidiary (180,000 x 25%) (45,000)
Goodwill attributable to NCI – acq. Date 10,000
Less: NCI’s share in Goodwill impairment -
Goodwill attributable to NCI- current date 10,000
Goodwill, net - Dec 31, 2020 175,000
Step 4: Non-controlling interest in net assets

Subsidiary's net assets at fair value – current year 380,000
Multiply by: NCI percentage 25%
Total 95,000
Goodwill attributable to NCI- current date 10,000
Non - controlling interest in net assets – Req. B 105,000
Step 5: Consolidated retained earnings

Parent's retained earnings – current year 500,000
Parent's share in the net change in subsidiary's net assets* 150,000
Consolidated retained earnings – Req. C 650,000
* Net change in subsidiary's net assets (see Step 2) P200,000 x 75% = 150,000
Total assets of Parent 1,000,000

Total assets of XYZ, Inc. 500,000
Investment in subsidiary (300,000)
FVA net -
Goodwill – net 175,000
Consolidated total assets, Requirement d 1,055,000
Share capital of Parent 300,000

Consolidated retained earnings 650,000
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Equity attributable to owners of the parent 950,000

Non-controlling interests 105,000
Consolidated total equity Requirement e 1,055,000
Consolidation of a reverse acquisition

The consolidated financial statements prepared after a reverse acquisition are issued under
the name of the legal parent (accounting acquiree) but described in the notes as a continuation of
the financial statements of the legal subsidiary (accounting acquirer). However, the accounting
acquirer's legal capital is retrospectively adjusted to reflect the accounting acquiree's legal capital.
Because the consolidated financial statements are a continuation of the accounting
acquirer's financial statements, except for the capital structure, the consolidated financial
statements reflect:
a. The accounting acquirer's assets and liabilities measured at carrying amounts plus the
accounting acquiree's assets and liabilities adjusted for the fair value adjustments at acquisition
date.
b. The accounting acquirer retained earnings and other equity balances before the business
combination.
c. The amount recognized as issued equity interests in the consolidated financial statements
determined by adding the issued equity interest of the legal subsidiary (accounting acquirer)
outstanding immediately before the business combination to the fair value of the legal parent
(accounting acquiree) determined in accordance with PFRS 3.
However, the equity structure (i.e., the number and type of equity interests issued)
reflects the equity structure of the legal parent (the accounting acquiree), including the equity
interests the legal parent issued to effect the combination.
Accordingly, the equity structure of the legal subsidiary (the accounting acquirer) is
restated using the exchange ratio established in the acquisition agreement to reflect the number
of shares of the legal parent (accounting acquiree) issued in the reverse acquisition.
The non-controlling interest proportionate share of the legal subsidiary's (accounting
acquirer) pre-combination carrying amounts of retained earnings and other equity interests.
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Non-controlling interest
A non-controlling interest arises in a reverse acquisition when some of the owners of the
legal acquiree (accounting acquirer) do not exchange their equity interests for equity interests of
the legal parent (accounting acquiree). Those owners are treated as NCI in the consolidated
financial statements after the reverse acquisition.
The owners of the legal acquiree accounting acquirer) that do not exchange their equity
interests for equity interests of the legal acquirer (accounting acquiree) have an interest in only the
results and net assets of the legal acquiree (accounting acquirer) and not in the results and net
assets of the combined entity.
On the other hand, even though the legal acquirer is the acquiree for accounting purposes,
the owners of the legal acquirer (accounting acquiree) have an interest in the results and net assets
of the combined entity. The assets and liabilities of the legal acquiree (accounting acquirer) are
measured and recognized in the consolidated financial statements at their pre - combination
carrying amount. Therefore, in a reverse acquisition the NCI reflects the NCI’s proportionate
interest in the pre-combination carrying amounts of the legal acquiree's (accounting acquirer) net
assets.
Conventional acquisition vs. Reverse acquisition:

Conventional acquisition Reverse acquisition
Issuer of shares as The issuer of shares is the The issue of shares is the
consideration transferred accounting acquirer. accounting acquiree.
Reference to combining - Accounting acquirer/ - Accounting acquirer/
constituents Legal parent Legal subsidiary
- Accounting acquiree / - Accounting acquiree /
Legal subsidiary Legal parent
Measurement of Fair value of consideration Fair value of the notional
consideration transferred transferred by the accounting number of equity instruments
acquirer. that the accounting acquirer
(legal subsidiary) would have
had to issue to the accounting
178
acquiree (legal parent) to give

the owners of the accounting
acquire (legal parent the same
percentage ownership in the
combined entity.
Consolidated financial In the name of the accounting In the name of the accounting
statements acquirer which is also the acquiree (legal parent) with
legal parent. disclosure in the notes that the
financial statements are a
continuation of the accounting
acquirer’s legal subsidiary)
financial statements.
Consolidated assets and Accounting acquirer's assets Accounting acquirer's assets
liabilities and liabilities at carrying and liabilities at carrying
amounts plus accounting amounts plus accounting
acquiree's assets and liabilities acquiree's assets and liabilities
adjusted for FVA’s. adjusted for FVA’s.
Consolidated retained The accounting acquirer only. The accounting acquirer only.
earnings and other equity
balances
Consolidate equity The equity Instruments of the The issued equity instruments
instruments accounting Acquirer of the accounting acquirer
outstanding before the
business combination plus the
fair value the consideration
effectively transferred.
Non - controlling interests - Arises if accounting - Arises if not all of the
acquirer acquires less than accounting acquirer's
100% interest in the shares are exchanged for
accounting аcquiree.
179
the accounting acquiree's

- Measured at the NCI’s shares.
proportionate share of
accounting acquiree's net - NCI's proportionate share
assets, or at fair value. of accounting acquirer's
net assets at pre -
combination carrying
amounts. No fair value
option.
Special purpose entities

A special purpose entity (SPE) (or special purpose vehicle SPV) is a legal entity created
by a sponsor (i.e., another entity on whose behalf the SPE was created) to accomplish a narrow
and well defined objective (e.g., to effect a lease, research and development activities or a
securitization of financial assets) for the sponsor.
SPEs are commonly created to isolate the sponsor from financial risk. However, SPEs are
also used to, among other things hide liabilities, create "cookie jar reserves," obscure relationships
between related entities, and avoid tax (when the SPE is created in tax haven).
Normally, the sponsor frequently transfers assets to the SPE, obtains the right to use assets
held by the SPE or performs services for the SPE, while other parties ("capital providers) may
provide the funding to the SPE. The SPE will then perform tasks (e.g., to finance a large project,
enter into derivative transactions etc.) for the sponsor, thereby, reducing the risk to the sponsor.
An entity that engages in transactions with an SPE (frequently the sponsor) may in
substance control the SPE. This may be true even if the sponsor owns little or none of the SPE's
equity.
The sponsor shall use PFRS 10 in assessing the existence of control and performing
consolidation procedures.
180
Push-down accounting
In the previous illustrations, we assigned the fair value adjustments (FVA) to the
subsidiary's net identifiable assets through consolidation computations (or consolidation journal
entries) which are not recorded in the separate books of either the subsidiary or the parent.
Another approach to assigning FVA to a subsidiary's net identifiable assets is pushdown
accounting. Under push - down accounting, FVA are directly recorded in the subsidiary's books.
Therefore, FVA are reflected in the subsidiary's individual financial statements. In other words,
FVA are "pushed down to the subsidiary's statements. This procedure simplifies the consolidation
process.
Authoritative status of push-down accounting

The SEC in the U.S.
a. Requires push - down accounting if a subsidiary is substantially wholly - owned, "i.e., parent's
ownership interest is at least 95%;
b. Encourages push - down accounting if a parent's ownership interest is 80% to less than 95%;
and
c. Prohibits push-down accounting if a parent's ownership interest is less than 80%
However, if the subsidiary has outstanding public debt or preference shares, the U.S. SEC
encourages, but does not require, the use of push down accounting. (U.S. SEC Staff Accounting
Bulletin No. 54)
It should be noted though that the PFRSs do not address push-down accounting. Neither
does the Philippine SEC require the use of the push-down accounting. This section only attempts
to illustrate how push-down accounting works.
Illustration 1: Push-down accounting - Acquisition date

On January 1, 2020, ABC Co. acquired 80% interest in XYZ, Inc. by issuing 5,000 shares
with fair value of P15 per share and par value of P10 per share. The individual financial statements
immediately before the acquisition are shown below:
181
ABC Co. XYZ, Inc.

Cash 40,000 17,000
Inventory 40,000 23,000
Equipment, net 180,000 40,000
Total assets 260,000 80,000
Accounts payable 50,000 6,000

Share premium 40,000 -
Total liabilities and equity 260,000 80,000
The carrying amounts of XYZ's net identifiable assets approximate their fair values except
for the following:
XYZ, Inc. Carrying Amount Fair Value FVA

Inventory 23,000 31,000 8,000
Equipment, net 40,000 48,000 8,000
Totals 63,000 79,000 16,000
NCI is measured at proportionate share
Requirement: Prepare the consolidated statement of financial position using "push-down

accounting."
Solutions:
ABC Co, records the acquisition in its separate books as follows:

Investment in subsidiary (5,000 x 15) 75,000
Share capital (5,000 x 10) 50,000
182
Share premium 25,000
XYZ also records the transaction in its separate books.
Goodwill is computed as follows:

Consideration transferred 75,000
NCI in the acquiree (90,000 see below x 20%) 18,000
Previously held equity interest in the acquire -
Total 93,000
Fair value of net assets acquired (50,000 + 24,000 + 16,000 FVA) (90,000)
Goodwill 3,000
The entry in XYZ's separate books is as follows:

Goodwill 3,000
Inventory 8,000
Equipment 8,000
Retained earnings 24,000
Push-down capital (squeeze) 43,000
To push - down FVAS in XYZ's books
The entry above is not a CJE but rather a regular entry that Recorded in the separate books of XYZ.
Under push down accounting the subsidiary is viewed as a new entity. Accordingly, the
pre - acquisition retained earnings are eliminated and the accounts are remeasured at acquisition
date fair values.
The resulting "push-down capital" is presented as an equity account in the subsidiary
separate financial statements, but this will be eliminated in the consolidated financial statements.
The individual financial statements after recording the entries above are shown below:
183
Before Acquisition After Acquisition

ABC Co. XYZ, Inc. ABC Co. XYZ, Inc.
Cash 40,000 40,000 40,000 17,000
Inventory 40,000 23,000 40,000 31,000
Equipment 180,000 40,000 180,000 48,000
Goodwill 3,000
Total assets 260,000 80,000 235,000 99,000
Accounts payable 50,000 6,000 50,000 6,000
Share capital 120,000 50,000 170,000 50,000
Share premium 40,000 - 65,000 -
Pushdown capital 43,000
Total Liabilities and equity 260,000 80,000 235,000 99,000
When push-down accounting is used, the subsidiary:

a. Records the goodwill arising from the business combination;
b. Records the acquisition - date fair value adjustments to its identifiable assets and liabilities;
c. Eliminates the pre - acquisition retained earnings; and
d. The balancing figure after performing (a) to (c) is recorded in the "push-down capital" account.
As mentioned earlier, push - down accounting simplified the consolidation process because
the consolidation journal entries mainly involve only the elimination of the investment in
subsidiary and effects of intercompany transactions, if any. No depreciation of FVA is made
because the subsidiary's net identifiable assets are already restated to acquisition date fair values.
The consolidation journal entry is as follows:

CJE 1: To eliminate the investment in subsidiary
Share capital - XYZ, Inc. 50,000
Push-down capital 43,000
184

Non-controlling interest (see above) 18,000
Just like in normal consolidation procedures, the CJE above is also not recorded in the
separate books but rather used only for consolidation purposes.
The consolidated statement of financial position is shown below:
ASSETS
Cash (40,000 + 17,000) 57,000
Inventory (40,000 + 31,000) 71,000
Investment in Subsidiary (eliminated) -
Equipment, net 228,000
Goodwill (Step 3) 3,000

Accounts payable 56,000
Share premium (Parent only) 65,000
Push – down capital (eliminated) -
Retained earnings (Parent only) 50,000
Owners of parent 285,000
Non-controlling interest 18,000
Whether or not the push - down accounting is used, consolidated accounts should result to
the same amounts.
185
Illustration 2: Push - down accounting - Subsequent date

Use the same facts in Illustration above:
No intercompany transactions occurred during 2020. Goodwill.is not impaired. The
December 31, 2020 individual financial statements show the following information:
Statements of financial position

As at December 31, 2020
ABC Co. XYZ, Inc.

ASSETS
Cash 98,000 79,000
Inventory 105,000 15,000
Investment in subsidiary (at cost) 75,000
Equipment, net 140,000 36,000
Goodwill 3,000
TOTAL ASSETS 418,000 133,000

Accounts payable 73,000 30,000
Share premium 65,000 -
Push – down capital - 43,000
Total equity 345,000 103,000
TOTAL LIAB. AND SHE 418,000 133,000
Statements of profit or loss

For the year ended December 31, 2020
Sales 300,000 120,000
186
Expenses (240,000) (110,000)

CJE 1: To eliminate the investment in subsidiary

Share capital - XYZ Inc. 50,000
Push - down capital 43,000
Non - controlling interest (acquisition date) 18,000
CJE 2: To climate XYZ’s post - combination change in net assets

Retained earnings - XYZ, Inc. 10,000
Retained earnings - ABC Co* 8,000
Non-controlling interest (post – acquisition)** 2,000
* ABC's share in the net change in XYZ's net assets (P10,000 x 80%).
** NCI's share in the net change in XYZ's net assets (10,000 x 20%).
The consolidated financial statements are shown below:

The consolidated statement of financial position is shown below:
ASSETS
Cash (98,000 + 79,000) 177,000
Inventory (105,000 + 15,000) 71,000
Investment in Subsidiary (eliminated) -
Equipment, net (140,000 + 26,000) 176,000
Goodwill 3,000
187

Accounts payable 103,000
Share premium (Parent only) 65,000
Push – down capital (eliminated) -
Retained earnings (ABC’s 110,000 + 8,000 CJE 2) 118,000
Owners of parent 353,000
Non-controlling interest (18,000 + 2,000) 20,000
Revenues (300,000 + 120,000) 420,000

Expenses (240,000 + 110,000) (350,000)
Profit for the year 70,000
Profit attributable to owners of parent [60,000 + (10,000 x 80%)] 68,000

Profit attributable to NCI (10,000 x 20%) 2,000
Profit for the year 70,000
SUMMARY
 Impairment of goodwill is
(a) attributed to the parent only, if NCI is measured at proportionate share.
(b) attributed to both parent and NCI, if NCI is measured at fair value.
 A change in the parent's ownership interest in the subsidiary that
(a) does not result to loss of control is accounted for as equity transaction.
(b) results to loss of control is accounted for as deconsolidation.
 The gain or loss on the deconsolidation is computed as follows:
188
Cash or other assets (Consideration received) xx

Investment account (Investment retained) xx
NCI xx
Liabilities of former subsidiary xx
Assets of former subsidiary xx
Goodwill xx
Gain on disposal of controlling interest (squeeze) xx
OR
Consideration received (at fair value) xx

Investment retained in the former subsidiary (at fair value) xx
NCI (carrying amount) xx
Total xx
Less: Former subsidiary's net identifiable assets (carrying amount) (xx)
Goodwill (carrying amount) (xx)
Gain or loss on disposal of controlling interest xx
 The consolidated financial statements after a reverse acquisition are in the name of the
accounting acquiree but described in the notes as a continuation of the financial statements
of the accounting acquirer. The consolidated accounts are computed in a manner similar to
a conventional acquisition except for equity. The number of shares is that of the accounting
acquiree but the monetary amount is equal to the accounting acquirer’s share capital plus
the fair value of the consideration effectively transferred.
189
EXERCISE
TRUE OR FALSE
1. If non-controlling interest is measured at proportionate share, there is goodwill attributable to

NCI.
2. If non-controlling interest is measured at proportionate share, there is no goodwill attributable
to NCI.
3. Consolidation begins when control is obtained and ceases when control is lost.
4. Consolidation begins at the earliest comparative period presented it business combination
occurred during the current period.
5. Consolidation begins when there is no non-controlling interest left in the subsidiary
6. If the parent's ownership interest in a subsidiary changes but control is not lost, the change is
accounted for as a gain or loss transaction.
7. If the parent's ownership interest in a subsidiary changes but control is not lost, is accounted
for retrospectively c. is accounted for as equity transaction.
8. When a parent loses control over a subsidiary, the parent shall derecognize the net identifiable
assets of the former subsidiary from the consolidated financial statements and shall recognize
the gain or loss associated with the loss of control attributable to the former controlling interest.
9. When a parent loses control over a subsidiary, the parent shall derecognize the net identifiable
assets of the former subsidiary from the consolidated financial statements and shall recognize
the gain or loss directly within equity.
10. When a parent-subsidiary relationship exists, consolidated financial statements are prepared in
recognition of the accounting concept of Economic entity.
STRAIGHT PROBLEMS
1. On January 1, 2020, Bright Co. acquired 75% interest in Dull Co. for P180,000. On this date,
the carrying amount of Dull's net identifiable assets was P160,000, equal to fair value. Non -
controlling interest was measured at a fair value of P60,000.
The financial statements of the entities on December 31, 20x1 show the following information:
Bright Co. Dull Co.

190
ASSETS
Other Assets 600,000 235,000
TOTAL ASSETS 780,000 235,000

Liabilities 70,000 25,000
Retained Earnings 110,000 110,000
Total Equity 710,000 210,000
Bright Co. Dull Co.

Sales 300,000 80,000
Depreciation expense (60,000) (30,000)
Additional information:
 No dividends were declared by either entity during 2020 and there were no inter - company
transactions.
 However, it was determined by year - end that goodwill was impaired by P10,000.
Requirement: Prepare a draft of the December 31, 2020 consolidated statements of financial
position and consolidated statement of profit or loss.
Use the following information for the next five questions:

Rubber Co. owns 75% interest in Plastic, Inc. The statements of financial position of the
entities on January 1, 2020 are shown below:
191
Rubber Co. Plastic Co. Consolidated

ASSETS
Investment in subsidiary (at cost) 112,500 - -
Other Assets 514,500 186,000 709,500
Goodwill - - 12,000
TOTAL ASSETS 627,000 186,000 721,500

Liabilities 109,500 45,000 154,500
Share capital 352,500 75,000 352,500
Retained Earnings 165,000 66,000 177,000
Equity attributable to owners of the parent 529,500
NCI 37,500
Total Equity 517,500 141,000 567,000
TOTAL LIAB. AND SHE 627,000 186,000 721,500
2. On January 1, 2021, Rubber Co. acquired the remaining 25% interest in Plastic Inc. for
P80,000. How much is the gain or loss on the acquisition to be recognized in the consolidated
financial statements?
3. On January 1, 2021, Rubber Co. acquired the remaining 25% interest for P100,000. Non -
controlling interests were measured using the proportionate share method. How much is non -
controlling interest in the net assets of the acquiree in the consolidated financial statements
prepared immediately after the acquisition?
4. On January 1, 2021, Rubber Co. acquired additional 20% interest for P100,000. Non -
controlling interests were measured using the proportionate share method. How much is non -
controlling interest in the net assets of the acquiree in the consolidated financial statements
prepared immediately after the acquisition?
5. On January 1, 2021, Rubber Co. acquired additional 20% interest for P100,000. Non -
controlling interests were measured using the proportionate share method. How much is
consolidated retained earnings immediately after the acquisition?
192
6. On January 1, 2021, Rubber Co. sold 60% out of its 75% interest in Plastic Inc. for P120,000.
The sale resulted to loss of control. The remaining interest is classified as held for trading.
How much is the gain or loss on the sale?
7. On January 1, 2020, Day Co, acquired 75% interest in Night Co. for P216,000. On this date,
the carrying amount of Night's net identifiable assets was P192,000, equal to fair value. Non -
controlling interest was measured at a fair value of P72,000.
The financial statements of the entities on December 31, 20x1 show the following information:
Day Co. Night Co.
ASSETS
Other Assets 720,000 282,000
TOTAL ASSETS 936,000 282,000

Liabilities 84,000 30,000
Retained Earnings 132,000 132,000
Total Equity 852,000 252,000
Day Co. NightCo.

Sales 360,000 96,000
Depreciation expense (48,000) (14,400)
Other Expenses (38,400) (21,600)
Gain on sale of equipment 14,400 -
193
 No dividends were declared by either entity during 2020. There is also no impairment of
goodwill.
 However, it was determined at year – end that goodwill is impaired by P8,000.
Requirement: Prepare a draft of the December 31, 2020 consolidated statements of financial
position and consolidated statement of profit or loss.
8. Selected information from the separate and consolidated balance sheets and income statements
of Pare, Inc. and its subsidiary, Shel Co., as of December 31, 2020, and for the year then ended
is as follows:
Pare Shel Consolidated
Balance sheet accounts:
Accounts receivable 52,000 38,000 78,000
Inventory 60,000 50,000 104,000
Income statement accounts:

Revenues 400,000 280,000 616,000
Cost of goods sold 300,000 220,000 462,000
Gross profit 100,000 60,000 154,000
During 2020, Pare sold goods to Shel at the same markup on cost that Pare uses for all sales.
At December 31, 2020, what was the amount of Shel’s payable to Pare for intercompany sales?
9. Wright Corp. has several subsidiaries that are included in its consolidated financial statements.
In its December 31, 2020, trial balance, Wright had the following intercompany balances
before eliminations:
Debit Credit
Current receivable due from Main Co.
194
Non - current receivable from Main

Cash advance to Corn Corp.
Cash advance from King Co.
Intercompany payable to King
In its December 31, 2020, consolidated balance sheet, what amount should Wright report as
intercompany receivables?
Recommended learning materials and resources for supplementary reading

PFRS 10 Consolidated Financial Statements
REFERENCES
Balocating, R., 2015. Advance Accounting, Volume 2. C&E Publishing, Inc.
Dayag, A., 2021. Advance Financial Accounting.
Millan, Z.V., 2019. Accounting for Business Combination. Bandolin Enterprise (Publishing and Printing)
195

Consolidation of Financial Statement - Miscellaneous Topics

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MA315 – Accounting for Business Combinations

Module 4: Consolidated Financial Statements - Miscellaneous Topics

Illustration: Impairment of goodwill

Information on acquisition date (Jan. 1, 2020):

Carrying Amount Fair Value FVA

 The remaining useful life of the equipment is 6 years.

Profit for the year 60,000 20,000

Step 1: Analysis of effects of intercompany transaction

Step 2: Analysis of subsidiary's net assets

FVA, 1/1/20 Useful life Depreciation FVA, 12/31/20

Step 3: Goodwill computation

Case 1: Fair Value

Fair value of NCI (see given) 18,750

Goodwill attributable to NCI Jan. 1, 2020 750

Goodwill, net - Dec 31, 2020 2,750

Step 4: Non-controlling interest in net assets

Step 5: Consolidated retained earnings

* Net change in XYZ's net assets (Step 2) 14,000

Step 6: Consolidated profit or loss

Case 1 Owners of Parent NCI Consolidated

Case 2 Owners of Parent NCI Consolidated

Reconciliations using formulas:

FVA net 10,000 10,000

Total liabilities of ABC Co. 73,000 73,000

Share capital of ABC Co. 170,000 170,000

Intercompany items in-transit and restatements

Changes in ownership interest not resulting to loss of control

Illustration 1: Changes in ownership interest - No loss of control

Scenario 1: Acquisition of all remaining NCI

Case 2: Fair value

The effects of the transaction are determined as follows:

The entry in ABC's separate books is as follows:

The consolidation journal entries are as follows:

Case 1: NCI measured at proportionate share

Case 2: NCI measured at fair value

Scenario 2: Acquisition of part of remaining NCI

Case 1: Proportionate share

Case 2: Fair value

* The net assets is grossed up as follows (P20,750 NCI / 20% = P103,750)

The direct adjustment in equity is determined as follows:

Scenario 3: Disposal of part of controlling interest - Control not lost

Case 1: Proportionate share

Case 2: Fair value

* The net assets is grossed up as follows (P20,750 NCI / 20% = P103,750)

The direct adjustment in equity is determined as follows:

The entry in ABC’s separate books is as follows:

The consolidation journal entries are as follows:

Case 2: NCI measured at fair value

Scenario 4: Subsidiary issues additional shares – Control not lost

The change in ABC's ownership interest in XYZ is determined follows:

* (50,000 + 10,000 additional shares issued to NCI = 60,000)

Case 1: Proportionate share

After the transaction 66.67% 83,333 33.33% 41,667 125,000*

Case 2: Fair value

The direct adjustment in equity is determined as follows:

The entry in XYZ’s separate books is as follows:

The consolidation journal entries are as follows:

Case 2: NCI measured at fair value

When a parent loses control over a subsidiary, the parent shall: