CHAPTER TWO

CONSOLIDATED FINANCIAL
STATEMENT
ON DATE OF ACQUISITION (IFRS 10)
 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
3
 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

4
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 5
Introduction

Parent-Subsidiary Relationship
Group
Subsidiary

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

Subsidiary
Consolidated FS:
Artificial creations
6
 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 assets, liabilities, Account for an investment in accordance

with IAS 28 IFRS 9
revenues and expenses
Disclosures in
Disclosures in accordance with Disclosures in accordance with accordance with
IFRS 12 IFRS 12 IFRSs 7
8
 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

POWER EXPOSURE LINK

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

14
 1. POWER OVER AN INVESTEE
• Power = existing rights that give it the current ability to
direct the relevant activities.
POWER
• 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

16
 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 rights Voting at AGM Relative voting rights

Investor A 40% 40% 57%

Investor B 10% 10% 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.

18
Potential Voting Rights in the Determination of Control

Situations where potential voting rights may

determine control

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

19
 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
20
 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.
21
 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.

22
 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.

24
 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

EXPOSURE 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
rights) to • Broad definition of returns:
variable dividends; remuneration from services, fees
returns of and exposure to losses; residual interests on
the investee liquidation; tax benefits; access to future
liquidity; returns not available to other investors
(eg synergies)
27
 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. 28
 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.
29
 Ability
• Ability requires

• 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.

30
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.

31
 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.
32
 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.
33
 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. Share Capital, Share Premium 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. 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 Share Capital…………………………………………………….xx
Reciprocal ledger account
Subsidiary`s Share Premium ……………………………………….………..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 Consdn 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.
43
Acquisition method when dissolution takes place

1. Acquisition method when dissolution takes place

44
 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.
45
Acquisition Method Example
Purchase Price = Fair Value
Basic Consolidation Information

46
 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.
47
 Consideration Transferred =
Net Identified Asset Fair Values
Dissolution of Subsidiary

48
 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:
49
Consideration Transferred Exceeds Net
Identified Asset Fair Values
Dissolution of Subsidiary

50
 Consideration Transferred Is Less Than Net
Identified Asset Fair Values
• Assume BigNet issued 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:

51
Consideration Transferred Is Less Than Net
Identified Asset Fair Values
Dissolution of Subsidiary

52
 Exercise
• Alpha Ltd acquired 100% of the shares of Beta Ltd on January 1,
2025 for $1,800,000 Cash and issuing 20,000 shares of its own
(Par Value - $20 and FV – $50 per share). This led to the
dissolution of Beta. Below are the book values and fair values of
Alpha and Beta Ltd’s assets and liabilities as of the acquisition
date.
Alpha Ltd Book Values Beta Ltd Book Values Fair Values
December 31 December 31 December 31
Current Asset $1,500,000 Current Asset $400,000 $400,000
PPE (Net) 2,000,000 PPE (Net) 500,000 800,000

Intangible Asset 700,000 Intangible Asset 150,000 250,000

(Net) (Net)
Customer List – Customer List 120,000 600,000
Notes Payable (400,000) Notes Payable (300,000) (350,000)
Net Asset $3,800,000 Net Asset $870,000 $1,700,000

• Prepare the consolidation journal entry at the acquisition date.

53
 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.

55
 Cont….

Prepare a worksheet to consolidate the

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

56
 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).

57
 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 (with the necessary
eliminations).

7. Subtract consolidated expenses from revenues to

arrive at net income.
58
• Acquisition Method –
Consolidation Working paper Example

• Consolidation of Wholly Owned Subsidiary

Basic Consolidation Information

60
 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
Balance Sheet
acquired?
P Company S Company
Cash $ 40,000 $ 40,000
Other current assets 280,000 100,000
Plant and equipment 240,000 80,000
Land 80,000 40,000
Investment in Sill 160,000
Total assets $ 800,000 $ 260,000

Liabilities $ 120,000 $ 100,000

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

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

and liabilities were the same as their carrying amount
 Cont…
Costs related to Acquisition of Subsidiary
➢ Investment in S Com……...160,000
Cash………………………..160,000
Goodwill Calculation
❖ Goodwill = Acquisition Cost – Fair Value of Net Identifiable
Asset(FVNIA)

FVNIA= Fair Value of Assets – Fair Value of Liabilities

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

Br 260,000 – Br 100,000 = Br 160,000

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

 Cont…
Elimination and Adjustment

Common stock (S) 100,000

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

This is a work paper-only entry.

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

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

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

• Assume also that the combination qualified for Acquisition

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

Costs related to Issuance of Shares

➢ Additional paid in capital in Excess of Par…………………………35,000
Cash……………………………………………………………………………35,000
 Cont…
Since the Financial Statements are Given Prior to combination, We Should Adjust some
items that are affected by Business Combination.
Common Stock
Investment in Starr
BB…300,000
EB……Br 500,000
100,000
EB….Br 400,000
Additional Paid in capital in excess of Par
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 Stock…………………………………………………………..200,000
Additional Paid in Capital in Excess of Par………………….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 stockholders of Sage Company in exchange
for 38,000 of the 40,000 outstanding shares of Sage’s Br
10 par common stock. Thus Post acquired 95% of the
interest in Sage (38/40). There was no contingent
consideration. Cost of issuing shares of the combination
paid in cash by Post on December 31, 2003 were as
follows:
Cost of issuing shares 72,750
• The Fair value of Non Controlling Interest is Br 70,000.
• Financial statements of the two companies before the
combination are as follows:
Cont…
Cont…
 Cont…
On Dec, 31, 2003 current fair values of Sage company’s
identifiable assets and liabilities were the same as their
carrying amount, except for the following assets:
Fair Values
Inventories Br 526,000
Plant assets (net) Br 1,290,000
Leasehold Br 30,000
 SOLUTION
Costs related to Acquisition of Subsidiary
➢ Investment in Starr Com…(66,500shares*Br. 20/share)……...1,330,000
Common Stock………(66,500shares*Br. 1/share)….………….66,500
Additional paid in capital in Excess of Par…………………………1,263,500

Costs related to Issuance of Shares

➢ Additional paid in capital in Excess of Par…………………………72,750
Cash……………………………………………………………………………72,750
 Cont…
Since the Financial Statements are Given Prior to combination, We Should Adjust some
items that are affected by Business Combination.
Common Stock
Investment in Starr
BB….1,000,000
EB…Br 1,330,000
66,500
EB….Br 1,066,500
Additional Paid in capital in excess of Par
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 Stock…………………………………………………………..400,000
Additional Paid in Capital in Excess of Par………………..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…
 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
Equity: $80,000

At acquisition date, Subsidiary Co unrecognized

intangible assets had a fair value of $50,000. Tax rate
was 20% 90
 Illustration 1: Elimination of investment
Parent Subsidiary

Assets
Investment in
200,000
Subsidiary
Goodwill (Note 2)
Other net assets
300,000 80,000
(Note 1)
500,000 80,000

Equity
Share capital 100,000 50,000
Retained earnings 400,000 30,000
500,000 80,000
91
 Illustration 1: Elimination of investment
Parent Subsidiary Adjustments

Assets
Investment in
200,000 200,000
Subsidiary
Goodwill (Note 2) 80,000
Other net assets
300,000 80,000 50,000 10,000
(Note 1)
500,000 80,000

Equity
Share capital 100,000 50,000 50,000
Retained earnings 400,000 30,000 30,000
500,000 80,000
92
 Illustration 1: Elimination of investment
Parent Subsidiary Cons’n Adjustments Consolidated

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 80,000 500,000

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
93
 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 94
 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
95
 SUMMARY OF CFS
1. The investment account and related subsidiary’s
stockholders’ equity have been eliminated and the
subsidiary’s net assets substituted for the investment
account.
2. Consolidated assets and liabilities consist of the sum of the
parent and subsidiary assets and liabilities in each
classification.
3. Consolidated stockholders’ equity is the same as the parent
company’s stockholders’ equity.
Consolidated Net Income = Parent’s Net Income
Consolidated Retained Earnings = Parent’s Retained Earnings
Consolidated Stockholders’ Equity = Parent’s Stockholders’
Equity
(if 100% Subsidiary)
Consolidated Stockholders’ Equity = Parent’s Stockholders’
Equity + Non Controlling Interest
(if < 100% Subsidiary)