CHAPTER FOUR

CONSOLIDATED FINANCIAL STATEMENT

ON DATE OF ACQUISITION (IFRS 10)
PREPARED BY:D A W I T k
 Chapter Objectives and Content
• Definition of subsidiary and control

• Assessing control

• Accounting Requirements

• Definition and presentation of non-controlling interests

• Different reporting dates and accounting policies

• Loss of Control

• Consolidated Statement of Financial Position: Wholly owned subsidiary

• Consolidated Statement of Financial Position: Partially owned subsidiary

• Disclosure Requirements
Introduction
• A primary issue that underpins financial reporting is the
identification of the reporting entity.

Financial information may be reported at three levels

Financial information

Separate financial Aggregated Disaggregated

statements for the reporting for the reporting for business
legal entity economic entity units within a legal or
economic entity
4
 Introduction

• Corporate regulations may require separate financial statements to be

prepared by each legal entity
Purpose of separate
Financial Statements

Determine the financial Prevent weakness of

Provide information for individual companies to be
solvency of individual
legal and tax purposes masked by strengths of
entities other group companies

5
Introduction
Need for disaggregated Information
Loss of information if only aggregated
information is provided

Source of disaggregated
information

Separate financial
Segment information
statements

Determine risk profile of individual segments

Strength and weaknesses of specific operation and geography 6
Introduction
Parent-Subsidiary Relationship
Group
Subsidiary

Parent Consolidation:
(Controlling Control
Subsidiary
Process of preparing and
entity) presenting financial
statements of parent and
subsidiary as if they were
one economic entity

Subsidiary
Consolidated FS:
Artificial creations
7
 4.1. 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 and IFRS 10 Joint control?

Disclosures in accordance YES NO

with IFRS 12

Define type of joint arrangement Significant

in accordance with IFRS 11 influence?

Joint Operation Joint Venture YES NO

Account for an investment in accordance

Account for assets, liabilities, IFRS 9
with IAS 28
revenues and expenses
Disclosures in
Disclosures in accordance with Disclosures in accordance with accordance with
IFRS 12 IFRS 12 IFRSs 7
9
 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.
4. Efficient Contracting
 DISADVANTAGES OF CFS
1. The masking of poor performance-Information Asymmetry
2. Lack of detailed disclosures.
3. Non-Controlling Stockholders get little value from CFS.
 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
3. The ability to use its power over the investee to affect the amount
of the investor’s returns.
 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 to Power
variable
returns

Link
power-
returns

control
ASSESSING CONTROL OF AN INVESTEE

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

15
 1. POWER OVER AN INVESTEE
• Power = existing rights that give it the current ability to
direct the relevant activities.
• Power arises from rights (e.g. voting rights, rights to
appoint key personnel, among others)
• Relevant activities: The investor has been directing
Rights relevant activities can help to determine whether the
investor has power.
▪ Selling and purchasing of goods or services
Relevant • Managing financial assets during their life (including upon default)
activities • Selecting, acquiring or disposing of assets
• Researching and developing new products or processes
• Determining a funding structure or obtaining funding
An investor need not have absolute power to control an investee
Process of determining control

17
 Power
• Power can be exerted through
• Voting rights: remain as the most important source of power.
• However, even if voting rights is the most persuasive source of power, we have to
consider evidence beyond absolute voting rights (relative voting rights).
• Scenario, three investors collectively have more than 50% ownership interests.
The remaining 43% ownership interests are dispersed over 100 investors, each
not owning more than 0.5% interest. The Annual General Meeting (AGM) is
attended by investors A, B, and C and about a third of other investors.
Voting at
Voting at Relative
Relative
Voting rights
Voting rights AGM
AGM voting rights
voting rights
Investor A
Investor A 40%
40% 40%
40% 57%
57%
Investor BB
Investor 10%
10% 10%
10% 14%
14%
Investor C 7% 7% 10%
Other investors 43% 13% 19%
100% 70% 100%
 Power
• Power can be exerted through
• Potential voting rights: are rights to obtain voting rights of an investee from
potential ordinary shares.
• These shares include options, convertible instruments and forward or futures
contracts that enable the holder to acquire actual voting rights.
• Scenario, Investor A, the founding investor, invited Investor B and Investor C to
purchase shares in Entity X. Investor B is a strategic investor who has knowledge
of Entity X’s business. Investor A is a financial investor. Investor C is a related
party of Investor A. Investor B was issued options that would allow B to be issued
with 40,000 ordinary shares.

19
Potential Voting Rights in the Determination of Control

Situations where potential voting rights may determine control

When one investor has the

Currently exercisable share
right to increase its voting
options even though they are
power or reduce other
currently “out of the money”
investors’ voting power

20
 Power
• Power can be exerted through
• Power over key management personnel: The entity that is able to appoint,
remove and remunerate these personnel effectively has the power over these
personnel.
• management personnel are persons having authority and responsibility for
planning, directing, and controlling the activities of the entity, directly or indirectly.
• Control over another entity that directs relevant activities:
• management contracts
• other arrangements.
• technical know-how
• Statutory and contractual provisions, rights to veto or enter into
transactions

21
 Power
• Power can be exerted through
• Special relationships: considers of qualitative sources of power
• The key management personnel of the investee are current or
previous employees of the investor;
• The investee’s operations are dependent on the investor (for
example, provision of critical services or specialized knowledge);
• A significant portion of the investee’s activities are conducted on
behalf of or may significantly involve the investor; or
• The investor’s exposure or rights to returns is proportionately
higher than its ownership interests in the investee.

22
 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.

23
 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.

25
 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%

 Example 5

Investor A holds 40% of the voting rights of an investee and

twelve other investors each hold 5% of the voting rights of the
investee. A shareholder agreement grants investor A the right to
appoint, remove and set the remuneration of management
responsible for directing the relevant activities. To change the
agreement, a two-thirds majority vote of the shareholders is
required.
 2. ASSESSING EXPOSURE (OR RIGHTS) TO VARIABLE RETURNS

• An investor is exposed, or has rights, to variable 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 investee’s performance.

Exposure (or • Broad definition of returns:

rights) to dividends; remuneration from services, fees and exposure to
variable losses; residual interests on liquidation; tax benefits; access to
returns of future liquidity; returns not available to other investors (eg
the investee synergies)

28
 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.
29
 Ability
Ability requires

• Substantive rights: the practical ability to exercise the rights that it is empowered
with.
• Assuming that the options are immediately exercisable, consider the following
variations:
(a) The options are profitable (in the money).
• In this scenario, Investor B has control with 59% ownership, as there is no financial barrier to
Investor B to exercise the options.
(b) The options are clearly not profitable (deeply out of the money).
• In this scenario, Investor A has control as the options are clearly not profitable, and there is a
financial barrier to Investor B in the form of a financial disincentive to exercise the options.
(c) The options are out of the money but not deeply so.
• This is an area of subjective evaluation and it is not clear if there is a sufficient barrier to
prevent the exercise of the options. Other evidence may be required to assess if control exists.
30
 Ability
• Ability requires

• Protective rights: Rights must be substantive and not merely protective.

• They are decision-making rights on fundamental changes to an investee’s
activities and are often relating to exceptional events.
• Unilateral ability: An investor has ability if it is able to exercise its power on
another entity without restrictions from other parties.
• Currently exercisable: The ability to use the power to affect returns must be
currently exercisable.
• Delegated Power: In some situations, the “decision maker” acts on delegated
power and is an agent. An agent is “a party primarily engaged to act on behalf and
for the benefit of another party or parties (the principal(s)), and therefore, not
control the investee when it exercises its decision-making authority.

31
Ability

• IFRS 10 provides factors to evaluate whether the decision maker is acting

as an agent or acting as a principal.
• The scope of the decision-making authority.
• Rights held by other parties.
• Remuneration.
• Exposure to variability in returns from other interests.

32
 Example
• A structured entity is created and financed by debt instruments
held by a senior lender and a subordinated lender and a minimal
equity investment from the sponsor. The subordinated lender
transferred receivables to the structured entity.
• Managing the receivables in default is the only activity of the
structured entity that causes its returns to vary, and this power
has been given to the subordinated lender by contract. The
subordinated loan is designed to absorb the first losses and to
receive any residual return from the structured entity. The senior
lender has exposure to variable returns due to the credit risk of
the structured entity.
 Exemption from preparing group accounts
• Exemption is allowed if and only if all of the following hold.
(a) The parent is itself a wholly-owned sub. or it is a partially owned sub.
of another entity & its other owners, have been informed about, and do
not object to, the parent not presenting CFS.

(b) Its securities are not publicly traded.

(c) It is not in the process of issuing securities in public securities

markets.

(d) The ultimate or intermediate parent publishes CFSs that comply with
IFRS. 34
 Exemptions …
• The rules on exclusion of subsidiaries from consldn are
necessarily strict.
– B/c, this is a common method used by entities to manipulate
their results.
OFF-BALANCESHEET-FINANCING!!!

– If a subsidiary which carries a large amount of debt can be excluded,

then the gearing of the group as a whole will be improved.
• In other words, this is a way of taking debt out of the C-SoFP.

35
 4.5. ACCOUNTING REQUIREMENT
1. UNIFORM Accounting Period IF NOT, Adjustments (Reconciliations) Required!!!

2. UNIFORM Accounting Policy

3. 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.

4. 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
 Disposal of Subsidiary
A parent sells an 85% interest in a wholly owned subsidiary as follows:
❑ After the sale the parent accounts for its remaining 15% interest as
an available-for-sale investment;
❑ The subsidiary did not recognize any amounts in other
comprehensive income;
❑ Net assets of the subsidiary before the disposal are $500;
❑ Cash proceeds from the sale of the 85% interests are $750; and
❑ The fair value of the 15% interest retained by the parent is $130.

The parent accounts for the disposal of an 85% interest as follows:

Equity Investment-Available-for-sale 130
Cash 750
Net assets of the subsidiary derecognized(summarized) 500
Gain on loss of control of subsidiary 380
. Parent and Subsidiary with different Fiscal period

• When a sub has a different reporting date from the Group; the
subsidiary may prepare additional statements to the reporting date
of the rest of the group, for consolidation purposes.

– If this is not possible, the sub's accounts may still be used for the
consolidation, provided that the gap between the reporting dates is
3 months or less.
• And adjustments should be made for the effects of significant
transactions/events that occur b/n that date and the parent's reporting
date.
 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.
 STEPS OF CFS………….
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 Subsidiary’s Accounts
Investment in subsidiary Against Equity accounts
Intercompany receivable (payable) Against Intercompany payable (receivable)

Advances to subsidiary (from subsidiary) Against Advances from parent (to parent)

Interest revenue (interest expense) Against Interest expense (interest revenue)

Dividend revenue (dividends declared) Against Dividends declared (dividend revenue)

Management fee received from subsidiary Against Management fee paid to parent
Sales to subsidiary (purchases of inventory Purchases of inventory from parent (sales
Against
from subsidiary) 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 Account)
Subsidiary`s Retained Earning… .................................................... xx
Payable to Parent ............................................................................. xx Inter company transaction
Increase in Fair Value of Assets… ................................................... xx Increase in Asset and Decrease in
Decrease in Fair Value of Liabilities… ................................................... xx Liability in terms of FV of Sub.
Goodwill ...................................................................................... xx Excess of AC (IV) Over FVNIA
Investment in Subsidiary… ........................................... xx
Non Controlling Interest .............................................. xx
Receivable from Subsidiary… ..................................... xx
Increase in Fair Value of Liabilities ........................... xx
Decrease in Fair Value of Assets… ............................. xx
 Procedures for Consolidating
Financial Information

Legal and accounting distinctions divide business combinations into

separate categories. Various procedures are utilized in this process
according to the following sequence:

1. Acquisition method when dissolution takes place.

2. Acquisition method when separate incorporation is maintained.

45
Acquisition method when dissolution takes place

1. Acquisition method when dissolution takes place

46
 Acquisition Method Example
Purchase Price = Fair Value
Assume BigNet Company owns Internet communications equipment and
other business software applications. It seeks to expand its operations and
plans to acquire Smallport on December 31. Smallport Company owns
similar assets.
Smallport’s net assets have a book value of $600,000 and a fair value of
$2,550,000. Fair values for assets and liabilities are appraised; capital
stock, retained earnings, dividend, revenue, and expense accounts
represent historical measurements. The equity and income accounts are
not transferred in the combination.

47
Acquisition Method Example
Purchase Price = Fair Value
Basic Consolidation Information

48
 Consideration Transferred =
Net Identified Asset Fair Values
• Assume that after negotiations with the owners of Smallport,
BigNet agrees to pay cash of $550,000 and to issue 20,000
previously unissued shares of its $10 par value common stock
(currently selling for $100 per share) for all of Smallport’s
assets and liabilities. Following the acquisition, Smallport then
dissolves itself as a legal entity.

• Prepare the journal entry to consolidate the accounts of a

subsidiary if dissolution takes place.
49
 Consideration Transferred =
Net Identified Asset Fair Values
Dissolution of Subsidiary

50
 Consideration Transferred Exceeds Net
Identified Asset Fair Values
• Assume BigNet transfers to the owners of Smallport
consideration of $1,000,000 in cash plus 20,000 shares of
common stock with a fair value of $100 per share in
exchange for ownership of the company. The consideration
transferred from BigNet to Smallport is now computed as
follows and results in an excess amount exchanged over the
fair value of the net assets acquired:

51
Consideration Transferred Exceeds Net
Identified Asset Fair Values
Dissolution of Subsidiary

52
 Consideration Transferred Is Less Than Net
Identified Asset Fair Values
• Assume BigNet have transferred consideration of $2,000,000 to
the owners of Smallport in exchange for their business. BigNet
conveys no cash and issues 20,000 shares of $10 par common
stock that has a $100 per share fair value. The consideration
transferred from BigNet to Smallport is now computed as
follows and results in a gain on bargain purchase:

53
Consideration Transferred Is Less Than Net
Identified Asset Fair Values
Dissolution of Subsidiary

54
 Acquisition method when separate
incorporation is maintained
Acquisition Method - Subsidiary Is Not Dissolved

Separate Incorporation Maintained

• Dissolution does not occur.
• Consolidation process is similar to previous example.
• Fair value is the basis for initial consolidation of subsidiary’s net assets.
• Subsidiary is a legally incorporated separate entity.
• Each company maintains independent record-keeping
• Consolidation of financial information is simulated.
• Acquiring company does not physically record the transaction.

56
 Cont….

Prepare a worksheet to consolidate the accounts of two

companies that form a business combination if dissolution does
not take place.

57
 The Consolidation Worksheet

Consolidation worksheet entries (adjustments and eliminations) are entered

on the worksheet only.

Steps in the process:

1. Prior to constructing a worksheet, the parent prepares a formal

allocation of the acquisition date fair value.

2. Financial information for Parent and Sub is recorded in the first two
columns of the worksheet (with Sub’s prior revenue and expense already
closed).
58
 The Consolidation Worksheet
continued. . .
3. Remove the Sub’s equity account balances.

4. Remove the Investment in Sub balance.

5. Allocate Sub’s Fair Values, including any excess of cost over Book
Value to identifiable assets or goodwill.

6. Combine all account balances and extend into the Consolidated

totals column.

7. Subtract consolidated expenses from revenues to arrive at net

income. 59
• Acquisition Method –
Consolidation Working paper Example

• Consolidation of Wholly Owned Subsidiary

 Acquisition Method –
Consolidation Workpaper Example
• Assume that BigNet acquires Smallport Company’s share on
December 31 by issuing 26,000 shares of $10 par value common
stock valued at $100 per share (or $2,600,000 in total). BigNet
pays fees of $40,000 to a third party for its assistance in
arranging the transaction.
• Then, to settle a difference of opinion regarding Smallport’s fair
value, BigNet promises to pay an additional $83,200 to the
former owners if Smallport’s earnings exceed $300,000 during
the next annual period. BigNet estimates the fair value of the
contingent payment as 20,000.
61
Cont….

62
 Acquisition Method –
Consolidation Workpaper Example
Prior to constructing a worksheet, the parent prepares a formal
allocation of the acquisition date fair value.

63
Acquisition Method – Consolidation
Workpaper Journal Entries

64
 Acquisition Method –
Consolidation Workpaper Example
The first two columns of the worksheet show the separate companies’
acquisition-date book value financial figures. BigNet’s accounts have been
adjusted for the investment and combination costs, and Smallport’s revenue,
expense, and dividend accounts have been closed to retained earnings.

65
Acquisition Method – Consolidation Workpaper Example continued . .
.

66
 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 acquired?
Balance Sheet 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 shares 400,000 100,000
Share Premium-Ordinary 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 shares 400,000 100,000 100,000 400,000
Share Premium-Ordinary 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
shares (current fair value Br 50 a share) to shareholder of
STARR Company for all the outstanding Br 5 par common
shares of Starr. There was no contingent consideration. Costs
of issuing common shares of the business combination paid by
Palm Corp on December 31, 2002 consisted of the following;
Costs of issuing common shares………35,000
 Cont….d

• 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 Shares………(10,000shares*Br. 10/share)… ............ 100,000
Share Premium-Ordinary…........................................................ 400,000

Costs related to Issuance of Shares

➢ Share Premium-Ordinary… .......................... 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 Shares
Investment in Starr
BB…300,000
EB……Br 500,000
100,000
EB….Br 400,000
Share Premium -Ordinary

Cash
BB…50,000 BB …100,000 35,000
400,000 EB ….Br 65,000
35,000
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 Shares ............................................................................. 200,000
Share Premium-Ordinary… ........................................................58,000
Retained Earning… ......................................................................132,000
Payable to Palm ............................................................................. 25,000
Inventory….............................................................................. 25,000
Plant Asset… .................................................................................. 65,000
Patent… .......................................................................................5,000
Goodwill ..................................................................................... 15,000
Investment in Starr ..................................................................500,000
Receivable from Starr................................................................. 25,000
Cont…
Consolidation of Partially Owned Subsidiary
 Illustrations
• 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 shareholders 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 Land Br 30,000
 SOLUTION
Costs related to Acquisition of Subsidiary
➢ Investment in Starr Com…(66,500shares*Br. 20/share)… ....... 1,330,000
Common Shares………(66,500shares*Br. 1/share)… ............... 66,500
Share Premium-Ordinary…...................................................... 1,263,500

Costs related to Issuance of Shares

➢ Share Premium-Ordinary… .......................... 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 Shares
Investment in Starr
BB….1,000,000
EB…Br 1,330,000
66,500
EB….Br 1,066,500
Share Premium-Ordinary
Cash
BB…550,000 BB …200,000 72,750
1,263,500 EB …Br 127,250
72,750
EB… Br 1,740,750
 Cont…
Goodwill Calculation
❖ Goodwill = Implied Value – Fair Value of Net Identifiable Asset(FVNIA)

❖ Implied Value = Acquisition Cost + Fair Value of Non Controlling Interest

Implied Value = Br 1,330,000 + Br 70,000 = Br 1,400,000 Or

Implied Value = Acquisition Cost/ % of Controlling Interest

Br 1,330,000/0.95 = 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 Shares.............................................................................. 400,000
Share Premium-Ordinary… ....................................................... 235,000
Retained Earning… ...................................................................... 334,000
Inventory… ............................................................................... 26,000
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 and NCI
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)
 Illustration: Elimination of investment
Illustration
On 8 August 2010, Parent Co. bought 100% interest in subsidiary for
$200,000. At the date of acquisition, Subsidiary Co had the following:

Share capital: $50,000

Retained earnings: $30,000
Total Equity: $80,000

At acquisition date, Subsidiary Co unrecognized intangible assets had a fair

value of $50,000. Tax rate was 20%
93
 Illustration 1: Elimination of investment
Parent Subsidiary Eliminations Consolidated Bal.
Dr. Cr.
Assets
Investment in 80,000+1200
200,000 0
Subsidiary 00
Goodwill (Note 2) 80,000 80,000
Other net assets
300,000 80,000 50,000 10,000 420,000
(Note 1)
500,000 80,000 500,000

Equity
Share capital 100,000 50,000 50,000 100,000
Retained earnings 400,000 30,000 30,000 400,000
500,000 80,000 500,000
94
 Illustration 1: Elimination of Investment
Note 1:
Increase in other net assets due to recognition of intangible assets 50,000
Decrease in other net assets due to recognition of deferred tax liability (10,000)
Net increase in other net assets 40,000

Note 2:
Goodwill is excess of the investment amount over the FV of identifiable net assets
Investment in Subsidiary 200,000
Book value of equity or net assets (80,000)
Fair value of intangible asset 50,000
Book value of intangible asset 0
Excess of fair value over book value 50,000
Deferred tax effects (10,000)
(40,000)
Goodwill 80,000 95
 Illustration 1: Elimination of investment
CJE1: Elimination of investment in subsidiary
Dr Share capital 50,000
Dr Retained earnings 30,000
Dr Goodwill 80,000
Dr Intangible asset 50,000
Cr Investment in Subsidiary 200,000
Cr Deferred tax liability 10,000
210,000 210,000

Re-enacting CJE
• Building blocks of consolidation worksheet are the legal entity financial
statements of parent and subsidiary
• CJE 1 has to be re-enacted at each reporting date as long as Parent has control
over subsidiary
• Each consolidation process is a fresh-start approach
96
 Illustration 1: Elimination of investment
Consolidation Consolidated
Parent Subsidiary
adjustments balance
Dr Cr
Assets
Investment in
200,000 200,000 0
Subsidiary
Goodwill (Note 2) 80,000 80,000
Other net assets
300,000 80,000 50,000 10,000 420,000
(Note 1)
500,000 80,000 130,000 210,000 500,000

Equity
Share capital 100,000 50,000 50,000 100,000
Retained earnings 400,000 30,000 30,000 400,000
500,000 80,000 80,000 0 500,000
97
210,000 210,000