Home Office, Branch and Agency Accounting

Lesson 1: Accounting for Home Office, Branch, and Agency: General Procedures

Identify the differences between a branch and an agency

Account for the transactions of an agency.

Account for home office and branch transactions in each of the home office’s and
Objectives:
branch’s books.

Reconcile interoffice accounts.

Prepare combined financial statements of the home office and its branch(es).

In their effort to generate more sales, business firms usually widen the
geographical area they cover. Their services are available in more areas through
their travelling salesmen or by shipments on consignment. Frequently, however,
better results are achieved with new sales outlets established at strategic locations.
The creation of these outlets develops business in distant areas or improves the
company’s share of existing markets through more effective and efficient contract
with the customers. Selling activities are undertaken by the different sales offices at
the direction of the home office. Hence, customers need not deal with the far away
Introduction: head office but with the nearest operating sales unit. The desired goods, services
and information are made more readily available to customers.
 
The new sales outlets may be organized as sales agencies or branches.
Regardless of which form of operation is used, the financial statements of each
separate unit are combined with those of the controlling unit to come up with
financial statements of the economic entity as a whole.
 

Activating Prior The third chapter of the Conceptual Framework for Financial Reporting covers the
Knowledge objective and types of financial statements. With this, the instructor would like you
to answer the following:
1.      What is the general objective of financial statements?
2.      What are the three types of financial statements according to the
conceptual framework?
3.      Which among the three types of financial statements is applicable for a
 home office and branch?
 

As a business flourishes, it may need to extend its operations to a wider

geographical area in order to generate more profits. There are various ways to
extend business operations, for instance, through electronic commerce, mail order,
or having sales personnel travel far away from the main office. However, if the
business’ objectives are greater customer relationship and lower delivery costs,
establishing a new sales outlet that can be more responsive to customers’ needs
Analysis may achieve the desired results.
 
This lesson will discuss the accounting concepts and procedures applicable to
home office, branch, and sales agency.
 

AGENCY vs. BRANCH

New sales outlet may be put up as sales agencies or branches. A new sales
agency is not an independent business but rather acts only on behalf of the home
office. On the other hand, a branch is an independent business which acts
independently but within the bounds of company policy and subject to the control of
the home office. A branch does not have a separate legal existence.
 
The following further differentiates the branch and agency from each other:
 

Acquiring New Agency Branch

Knowledge
1.      Carries stock of merchandise
1.      Displays merchandise and takes used to fill customer orders (or
customers’ orders but does not provides services similar to
carry stock of merchandise to fill those provided by the home
customers’ orders. office).
 

2.      Customers’ orders are sent to

2.      Grants credit in accordance
the home office for approval of with the company’s policies,
credit. Customers remit makes normal warranties, fill
payments directly to the home customers’ orders, and makes
office. collections on sales.
  

3.      Has its own assets and

liabilities and generates its own
3.      Holds revolving cash fund revenues and incurs its own
provided by the home office that expenses. Makes periodic
is replenished when depleted. No remittances to home office
other cash funds are held. subject to company policy.
 

4.      Not a separate accounting

entity. The only accounting 4.      A separate accounting entity
records maintained are cash for internal reporting. It
receipts and cash disbursements maintains its own complete set
books necessary to account for of accounting records. For
the revolving fund. The home or external reporting, the branch’s
main office maintains records of financial statements are
sales made through the agency combined with the home
and the expenses it incurs. office’s financial statements.
 

EXAMPLES:
1.      A booth located in a mall that
displays miniature designs of
houses and lots and
condominium units for a real EXAMPLES:
estate company. 1.      A branch of Jollibee located in
  a mall.

2.      A booth located on a sidewalk2.      A branch of BPI located at

offering internet connection on Timog Ave.
behalf of an internet service
provider (ISP). Interested
customers apply directly to the
ISP’s office.

 
 
ACCOUNTING FOR AGENCY
Since an agency does not maintain its own separate accounting books, all of its
transactions are recorded in the books of the main office. The agency maintains a
simple record (e.g., a log book) to record its cash receipts and cash disbursements,
 similarly to a petty cash system.
 
INTRODUCTION TO ACCOUNTING FOR BRANCH OPERATIONS
A branch is accounted for as a separate entity but subject to the control of the
home office. The home office and its branch usually maintain separate accounting
systems. Each records its transactions with outside parties in its own accounting
system in the usual manner. In addition, both the home office and the branch must
record transactions with one another in their respective accounting systems. This is
called inter-office transactions.
 
Even though the home office and each branch maintain separate books prepares
their own financial statements, all accounts are combined for external financial
reporting, so that the financial statements will represent the company as a single
economic entity.
 
INTRACOMPANY ACCOUNTS
Transactions with outside parties are recorded in the usual manner. Transactions
between the home office and a branch are recorded in intra-company accounts.
These are also known as reciprocal accounts between the home office and the
branch. The reciprocal account in the books of the home office is labeled
as Investment in Branch or Branch Current while the reciprocal account in the
books of the branch is labeled as Home Office or Home Office Current.
 
When a company has several branches, a separate investment account for each
branch is maintained in the home office books.
 
Investment in Branch (or Branch Current) Account
        This account represents the home office’s equity in the branch assets.
This account is debited when the home office transfers assets to the branch and
       
when it takes up the branch profit. This account is also debited when the home
office allocates expenses to the branch or pays expenses chargeable to the
branch.
This account is credited when the branch remits cash; when it returns
       
merchandise to the home office; when the office takes up the branch loss: and
when a branch pays expenses chargeable to the home office. The following T-
account summarizes the different components and transactions affecting this
account:
  

Branch Current

Asset received
X X
Beginning Balance from
X X
branch                      

Home office
X X expenses paid by
Asset transferred to branch                            
X X branch                      
                 

Expense
X X
allocation                                                                       Branch loss
X X
                                                   

X
Branch expenses paid by home office  
X

X
Branch profit    
X

X
End Bal.    
X

 
This account is presented as part of assets (specifically, noncurrent asset) in the
       
separate financial statements of the home office.
 
Home Office Current Account
This account is maintained in the branch’s books in lieu of the stockholders’
       
equity accounts.
This account indicates the extent of the accountability of the branch to the home
       
office.
This account is credited when the branch receives assets (cash, merchandise,
       
fixed assets, etc.) from the home office and is debited when it remits cash and
returns merchandise and other assets back to the home office. This account is also
credited when it receives the expense allocation from the home office. Because
there is no retained earnings account in the branch, the results of the branch
operation are closed to this account. Thus, the account is credited for branch profit
and debited for branch loss. The following T-account summarizes the different
components and transactions affecting this account:
 
 Home office Current

Asset transferred to the home X X

Beginning Balance
office                             X X

HO expenses paid by the X X Asset transferred to

branch X X branch                      

X X Branch expenses paid by the

Branch loss
X X HO                                        

X
    Expense allocation
X

X
    Branch profit
X

X
    End Balance
X

 
This account is presented as an equity item in the separate financial statements
       
of the branch.
 
ACCOUNTING FOR BRANCH PLANT ASSETS
The procedures to be used in accounting for branch plant assets will depend on
       
whether the branch plant asset records are maintained in the:
(1)   Branch books, or
(2)   Home office books
 
APPORTIONMENT OF EXPENSES
Branch expenses incurred and paid by the branch are recorded in the books of the
branch in the usual manner. Similarly, home office expenses incurred and paid by
the home office are also recorded in the books of the home office in the usual
manner.
 
However, the home office may allocate expenses to a branch and vice versa.
These allocated expenses might be of several types:
(a)   Expenses incurred by the branch but paid for by the home office.
(b)   Expenses incurred by the home office but paid for by the branch.
(c)   Allocations of expenses incurred by the home office (e.g., general expenses)
 
Journal Entries:

  Home office books   Branch books

X
(a) Investment in Branch XX     Expense  
X

     Cash   XX      Home Office Current   XX

               

X
(b) Expense XX     Home Office Current  
X

     Investment in Branch   XX      Cash   XX

               

X
(c) Investment in Branch XX     Expenses  
X

     Expenses   XX      Home Office Current   XX

 
COMBINED FINANCIAL STATEMENTS FOR THE HOME OFFICE AND
BRANCH/ES
The home office and its branch/es are considered “one economic entity”. For
external reporting purposes, the financial statements of the home office and those
of its branches are to be combined to generate a set of financial statements for a
single economic entity.
 
The home office prepares the combined financial statements. In combining the
financial statements, intracompany accounts are eliminated. Thus, the investment
in the branch account is eliminated against the home office account and the
shipments to branch and the shipments from home office accounts are also
eliminated against each other.  All other accounts are combined.
 
RECONCILIATION OF RECIPROCAL ACCOUNTS
Ø  The Investment in Branch account (in the home office books) and the Home Office
Current account (in the branch books) are reciprocal accounts and theoretically,
 should be equal at the end of the accounting period. However, this scenario
seldom exists in practice because of different factors such as:
(a)   Bookkeeping errors
(b)   Mathematical errors
(c)   Timing difference in recording transactions
Ø  The reciprocal accounts must be brought into agreement before the preparation of
combined financial statements.

Accounting for Home Office and Branch

Operations: Special Procedures
Account for the shipments at billed price in the books
of the home office and its branch(es).
Objectives:
Account for interbranch transactions in the books of
the home office and its branch(es).
In addition to the general procedures discussed in the
preceding lesson, the following transactions between
the home office and the branch which create special
accounting problems will be discussed:
Introduction:
1.      Merchandise shipments to the branch at billed
price
2.      Interbranch transfers
 
The preceding lesson discusses the general
procedures applied in accounting for home office,
branch, and sales agency. In this regard, I would like
you to answer the following:
1.      What do you call the type of transactions that
take place between the home office and the branch?
Activating Prior Knowledge 2.      What are two intracompany balance sheet
accounts in the records of the home office and the
branch?
3.      What are two intracompany income statement
accounts in the records of the home office and the
branch?
 
In continuation of our preceding lesson, this lesson
will discuss the special accounting procedures applied
Analysis to certain transactions between the home office and
branch.
 
Acquiring New Knowledge ACCOUNTING FOR MERCHANDISE SHIPMENTS
TO BRANCH ‒ AT BILLED PRICE
 Ø  Under this scenario, merchandise shipped to
branch are billed at cost plus certain mark-up. This is
termed as billed price.
Ø  This is usually done in practice by the home office
for internal control purposes.
Ø  When billings to the branch is at a price in excess
of cost, the consequence will be as follows:
(a)   The profits determined by the branch will
be understated.
(b)   The inventories reported by the branch will
be overstated.
Ø  Adjustments must be made by the home office to
eliminate the excess of billed price over cost in the
preparation of combined financial statements for the
home office and branch.
 
INTERBRANCH TRANSFERS
Ø  Branch activities are limited to transactions with the
home office and with outside parties. Occasionally,
the home office may instruct one branch to transfer
cash or other assets to another branch. In this case,
the branch will clear such inter-branch
transfers through its Home Office Current Account.
 
ACCOUNTING FOR EXCESS FREIGHT ON
INTERBRANCH TRANSFER OF MERCHANDISE
Ø  Freight on goods received by a branch directly
from home office is properly included in the cost of
branch inventory. But the transfer of merchandise
from one branch to another does not justify increasing
the value of inventory because of indirect routing.
Excess freight costs should be treated by the home
office as an expense.
ü  Excess freight costs arising from such inter-branch
shipments generally is a result of management
inefficiency and therefore, should not be included in
the cost of branch inventories.

Module 1: Business Combinations

Accounting for Business Combinations  
Define a business combination.  
Explain briefly the accounting requirements for a business combination.  
Account for business combinations through net asset acquisition.  
Compute for goodwill or gain from bargain purchase.  
Explain the concept of measurement period in relation to business combinations.  
Account for the changes in the valuation of assets transferred included among the
 
consideration transferred by the acquirer.
Account for contingent considerations and its changes.  
Accounting for business combinations is perhaps one of the most significant and interesting
topics of accounting. An accountant must understand the proper accounting for various
business transactions in accordance with financial reporting standards.
 
 
In this lesson, we will gain knowledge and appreciation on the pertinent principles, methods
and techniques in accounting for business combinations in accordance with financial
reporting standards.
 
As discussed in your course “Conceptual Framework and Accounting Standards”, there are
three types of financial statements. These are the consolidated financial statements,
unconsolidated financial statements, and combined financial statements.
 
To recall this, I would like you to answer the following:
1.      Explain the nature and contents of the three types of financial statements.
 
2.      Explain the difference between consolidated financial statements and combined
financial statements.
3.      What do you understand about business combinations?
 
All answers must be submitted on or before AUGUST 13, 2020 (Thursday)
 
A business combination is the term applied to external expansion in which separate
organizations are brought together into one organization as a result of one enterprise
obtaining control over the net assets and operations of another enterprise.
 
 
Financial reporting standards provide the accounting and reporting requirements of various
business transactions and events, including business combinations. This lesson covers
specifically the pertinent accounting and reporting requirements for business combinations.
 
NATURE OF BUSINESS COMBINATION
Business combinations are accounted for under PFRS 3 Business Combinations.
 
PFRS 3 defines a business combination as “a transaction or other event in which an acquirer
obtains control of one or more businesses”. In simple terms, a business combination occurs
when one company acquires another or when two or more companies merge into one. After
the combination, one company gains control over the other.
 
There are two parties in a business combination. The company that obtains control over the
other is referred to as the acquirer and the company that is controlled is the acquiree.
 
Business combinations are carried out either through:
(a)   Net asset acquisition, or
(b)   Stock acquisition
 
Net Asset Acquisition
Ø  The acquirer purchases the assets and assumes the liabilities of the acquire in exchange
for cash or other non-cash considerations.
Ø  Under the Corporation Code of the Philippines, a business combination effected through
asset acquisition may be either:
(a)   Merger – occurs when two or more companies merge into a single entity which shall be
one of the combining companies.
ü  EXAMPLE: A Co. + B Co. = A Co. or B Co.
(b)   Consolidation – occurs when two or more companies consolidate into a single entity
which shall be the consolidated company.
ü  EXAMPLE: A Co. + B Co. = C Co.
 
Stock Acquisition
Ø  The acquirer obtains control over the acquiree by acquiring a majority ownership interest
(e.g., more than 50%) in the voting rights of the acquiree.
Ø  In a stock acquisition, the acquirer is known as the parent while the acquire is known as
the subsidiary. After the combination, the parent and subsidiary retain their separate legal
existence. However, for financial reporting purposes, both the parent and the subsidiary are
viewed as a single reporting entity. Also, the parent and subsidiary continue to maintain their
own separate accounting books, recording separately their assets, liabilities and the
transactions they enter into.
Ø  The parent records the ownership interest acquired as “investment in subsidiary” in its
separate accounting books.
 
ACCOUNTING FOR BUSINESS COMBINATIONS
Business combinations are accounted for using the acquisition method. This method
requires the following:
1.      Identifying the acquirer;
2.      Determining the acquisition date; and
3.      Recognizing and measuring goodwill or gain from bargain purchase.
 
Identifying the acquirer
The acquirer is the entity that obtains control of the acquire. An acquirer may obtain control
of an acquiree in one or more of the following ways:
Ø  By transferring cash or other assets;
Ø  By incurring liabilities;
Ø  By issuing equity interests;
 
Determining the acquisition date
·         The acquisition date is the date on which the acquirer obtains the control of the
acquiree. It is generally the date on which the acquirer legally transfers the consideration,
acquires the assets and assumes the liabilities of the acquiree. This is known as the closing
date.
 
·         The acquisition date is critical because it is the date used to establish the fair value of
the entity acquired and also the fair values of its accounts.
 
Recognizing and measuring goodwill or gain from bargain purchase
On acquisition date, the acquirer computes and recognizes goodwill or gain from bargain
purchase using the following formula:
 
Consideration transferred XX
Non-controlling interest (NCI) in the acquiree XX
Previously held equity interest in the acquiree XX
Total XX
Less: Fair value of identifiable net assets
(XX)
acquired
Goodwill (Gain on bargain purchase) XX(XX)
 
Note:
1.      The fair value of identifiable net assets should never include goodwill that exists in
the acquiree’s books. This is referred to as pre-existing goodwill.
2.      If the fair value of identifiable net assets is lower, the result is goodwill. This is
recognized as an asset.
3.      If the fair value of identifiable net assets is higher, the result is gain on bargain
purchase. This is recognized in profit or loss in the year of acquisition.
F Before recognizing a gain on bargain purchase, the acquirer shall reassess whether it has
correctly identified all of the assets acquired and all of the liabilities assumed and shall
recognize any additional assets or liabilities that are identified in that reassessment.
 
Consideration transferred
Ø  Also known as the price paid.
Ø  This is measured at fair value, which is the sum of the acquisition-date fair values of the
following:
(a)   Assets transferred by the acquirer;
(b)   Liabilities incurred by the acquirer; and
(c)   Equity interests issued by the acquirer
 
Ø  Examples of forms of consideration include:
(a)   Cash
(b)   Non-cash assets
(c)   Equity instruments, e.g., shares, options and warrants
(d)   Contingent consideration
 
Contingent Consideration
·         Defined as an obligation of the acquirer to transfer additional assets or equity interests
to the former owners of an acquiree as part of the exchange for control of the acquiree if
specified future events occur.
·         It was clarified that the consideration that the acquirer transfers in exchange for the
acquiree includes any asset or liability resulting from a contingent consideration
arrangement.
·         The acquirer shall recognize the acquisition-date fair value of contingent consideration
as part of the consideration transferred in exchange for the acquiree.
·         The acquirer shall classify an obligation to pay contingent consideration as
a liability or as equity.
ü  Liability – if the contingent consideration takes the form of additional cash consideration
payable.
ü  Equity instrument – if the contingent consideration is in the form of additional equity
instrument.
 
Acquisition costs
Ø  These are costs the acquirer incurs to effect a business combination.
Ø  Examples:
(a)   Finder’s or broker’s fees
(b)   Professional fees, such as legal, accounting, and consulting fees
(c)   General administrative costs
Ø  Acquisition costs are not included in the consideration transferred and are expensed
immediately.
 
Share issuance costs
Ø  Share issuance costs (SIC) such as SEC registration fees, documentary stamp tax and
newspaper publication shall be treated as a direct charge to share premium arising from
related share issuance.
v  In case the said share premium is insufficient to absorb such SIC, the excess shall be
debited to SIC account. The SIC shall be reported as a contra-equity account as a deduction
from the following in the order of priority:
1.      Share premium from previous share issuance
2.      Retained earnings
 
Non-controlling interest (NCI)
Ø  It is the equity in a subsidiary not attributable, directly or indirectly, to a parent.
Ø  It is also known as the “minority interest”.
Ø  For each business combination, the acquirer measures any non-controlling interest in the
acquiree either at:
(a)   Fair value; or
(b)   The NCI’s proportionate share of the acquiree’s net identifiable assets.
 
Previously held equity interest in the acquiree
This pertains to any pre-existing interest held by the acquirer before the business
combination. This affects the computation of goodwill or gain from bargain purchase only in
business combinations achieved in stages.
 
Identifiable net assets acquired
Ø  On acquisition date, the acquirer recognizes the identifiable assets acquired, the liabilities
assumed and any NCI in the acquiree at fair value.
Ø  Unidentifiable assets are not recognized. Examples are:
(a)   Goodwill in the books of the acquire;
(b)   Assembled workforce;
(c)   Potential contracts that the acquire is negotiating with prospective new customers at the
acquisition date.
  
 
 
FORMULAS USED IN THE COMPUTATION OF COMBINED ACCOUNTS
We have learned to compute the amount of consideration transferred and goodwill/gain on
bargain purchase. In this lesson, we are also asked to compute for the combined account
balances after combination. These are as follows:
1.      Combined ordinary share capital
2.      Combined share premium
3.      Combined retained earnings
4.      Combined total liabilities
5.      Combined total assets
 
The formulas to compute for the foregoing combined accounts are as follows:
Acquirer’s ordinary share capital before combination (at
1 XX  
par)
  Add: Ordinary shares issued (at par) – Acquirer’s XX  
  Combined ordinary share capital XX  
 
Similar procedures for preference share capital, if any
       
2 Acquirer’s share premium – previous issuance XX  
  Add: Share premium – new issuance (Acquirer) XX  
  Less: Share issuance cost (XX)  
  Combined share premium XX  
       
3 Acquirer’s retained earnings before combination XX  
  Add: Gain on bargain purchase XX  
  Less: Acquisition costs (XX)  
  Less: Excess share issuance cost (XX)  
  Combined retained earnings XX  
       
Acquirer’s total liabilities before combination (at book
4 XX  
value)
Acquiree’s total liabilities before combination (at fair
  XX  
value)
  Add: Contingent consideration XX  
  Add: Unpaid cost of business combination XX  
  Combined total liabilities XX  
       
Acquirer’s total assets before combination (at book
5 XX  
value)
 Add: Acquiree’s total identifiable assets before
  XX  
combination (at fair value)
  Add: Goodwill arising from business combination XX  
  Less: Total cash paid* (XX)  
  Combined total assets XX  
 
*Total cash paid is composed of the following:
Cash paid to acquire the
XX
acquiree
Cash paid for acquisition costs XX    
Cash paid for share issuance
XX
costs
Total cash paid XX
 
 
 
ACCOUNTING FOR SUBSEQUENT CHANGES IN VALUATION OF ACQUIRED ASSETS
AND ASSUMED LIABILITIES
If the initial accounting for a business combination is incomplete by the end of the reporting
period in which the combination occurs, the acquirer shall report in its financial statements
provisional amounts for the items for which the accounting is incomplete.
 
During the measurement period, the acquirer shall retrospectively adjust the provisional
amounts recognized at the acquisition date to reflect new information obtained about facts
and circumstances that existed as of the acquisition date and, if known, would have affected
the measurement of the amounts recognized as of that date.
 
During the measurement period, the acquirer shall also recognize additional assets or
liabilities if new information is obtained about facts and circumstances that existed as of the
acquisition date and, if known, would have resulted in the recognition of those assets and
liabilities as of that date.
 
The measurement period ends as soon as the acquirer receives the information it was
seeking about facts and circumstances that existed as of the acquisition date However, the
measurement period shall not exceed one year from the acquisition date.
 
Changes that result from events after the acquisition date are not measurement period
adjustments. These changes are recognized in profit or loss.