Consolidated

Financial
Statements
By: Group 7
Consolidated Financial Statements
(Part 1)
Learning objectives:
1. State the elements of control.
2. Prepare consolidated financial statements at the acquisition date.
3. Prepare consolidated financial statements at a consolidated date.
 Consolidated FS- “the FS of a
group in which the assets,

Introduction liabilities, income, expense and

cash flows of the parent and
its subsidiaries are presented
PFRS 3 deals with the accounting
as those of a single entity.”
for a business combination at the
Group- “a parent and its
acquisition date, while PFRS 10
subsidiaries.”
deals with the presentation and
Parent- “an entity that controls
presentation of consolidated FS
one or more entities.”
after the business combination.
Subsidiary- “an entity that is
controlled by another entity.”
 Control
Control is the basis for consolidation. PFRS 10 requires an investor to
determine whether it is a parent by assessing whether it controls the
investee.
Control of an investee- “An investor controls an investee when the
investor is exposed, or has the rights, to variable returns from its
involvement with the investee and has the ability to affect those returns
through its power over the investee.”

Control exists if the investor has ALL of the following:

a. Power
b. Exposure, or rights, to variable returns from the investee, and;
c. Ability to affect returns through use of power.
 Power
An investor has power over an investee when the investor has existing
rights that give it the current ability to direct the investee’s relevant
activities.
Relevant activities- “activities of the investee that significantly affect
the investee’s returns.”
Ability to use power to affect
investor returns
Elements of control
Variable
Power Ability to affect returns
returns

Control
Accounting requirements
Same reporting
01 date

Uniform
02
accounting
policies
Consolidation period
-begins from the date the investor obtains control of the investee and
ceases when the investor loses control of the investee.

Measurement
INCOME AND EXPENSES - at the acquisition date
INVESTMENT IN SUBSIDIARY - accounted for in the parent’s separate FS
either:
a. at cost
b. in accordance with PFRS 9, or
c. using the equity method
Preparing the Consolidated FS

Consolidated FS are prepared by combining the financial

statements of the parent and its subsidiaries line by line, by
adding together similar items of assets, liabilities, equity, income,
and expenses.

Consolidation at the date of acquisition

1. Eliminate the “investment in subsidiary” 2. Add, line by line, similar items of assets and
account. This requires: liabilities of the combining entities. The
a. acquisition-date fair values subsidiary’s assets and liabilities are included in
b. recognizing goodwill the consolidated financial statements at 100% of
c. eliminating the subsidiary’s pre-combination their amounts irrespective of the interest
equity accounts and replacing them with the acquired by the parent.
non-controlling interest.
NCI in the net assets of the subsidiary
NCI in the net assets of the subsidiary consists of:
a. the amount determined at the acquisition date
b. the NCI’s share of changes in equity since the
Non-controlling
acquisition date interests (NCI)
NCI in P/L and comprehensive income
Attributed to the following:
a. Owners of the parent
b. NCI
Goodwill or a gain from bargain purchase
I. the sum of:
the fair value of the consideration transferred
the recognized amount of any NCI in the acquiree
for step acquisition, the fair value of any previously held equity interest in the
acquiree; and
II. the acquisition date recognized fair value amount of the net identifiable assets
acquired and liabilities assumed.

*goodwill arises when I exceeds II under:

option 1: “full” goodwill method - there is a non-controlling interest share in the
goodwill
option 2: “partial” goodwill method - there is no non-controlling interest share in the
goodwill

*bargain purchase arises when II exceeds I

 Illustration: Consolidation at acquisition date
On January 1, 20x1, ABC Co. (parent) acquired 80% interest in XYZ, Inc. (subsidiary). The Financial
statements of the combining entities immediately after the business combination are shown
below:
Parent Subsidiary
Cash 10,000 5,000
Accounts receivable 30,000 12,000
Inventory 40,000 23,000
Investment in subsidiary 75,000 -
Equipment, net 180,000 40,000
Total assets 335,000 80,000

Accounts payable 50,000 6,000

Share capital 170,000 50,000
Share premium 65,000 -
Retained earnings 50,000 24,000
Total liabilities and equity 335,000 80,000
Additional information:

The subsidiary’s assets and liabilities are stated at their acquisition-date fair values, except
for:
-Inventory, P 31,000
-Equipment, net, P48,000
The goodwill determined using PFRS 3 is P3,000.
The NCI in the net assets of the subsidiary, also determined using PFRS 3, is P18,000.

Requirement:
Prepare the consolidated statement of financial position.

Solution:
1. Eliminate the “investment in subsidiary” account and:
a. acquisition-date fair values
b. recognizing goodwill
c. eliminating the subsidiary’s pre-combination equity accounts and replacing them
with the non-controlling interest.
2. Add, line by line, similar items of assets and liabilities of the combining entities.
 Parent Subsidiary Consolidated

Cash 10,000 5,000 15,000

Accounts receivable 30,000 12,000 42,000
Inventory 40,000 31,000 71,000
Investment in Subsidiary 0
Equipment, net 180,000 48,000 228,000
Goodwill 3,000 3,000
Total assets 359,000

Accounts payable 50,000 6,000 56,000

Share capital 170,000 0 170,000
Share premium 65,000 - 65,000
Retained earnings 50,000 50,000
NCI in net assets 18,000 18,000
Total liabilities and equity 359,000
Traditional accounting method

The consolidated FS can also be prepared by using (a) consolidation journal

entries and (b) consolidation worksheets.

CJE #1: To eliminate investment in subsidiary and recognize goodwill

01/01/20x1 Inventory 8,000

Equipment 8,000
Share capital - XYZ, Inc. 50,000
Retained earnings - XYZ, Inc. 24,000
Goodwill 3,000
Investment in subsidiary 75,000
Non-controlling interest 18,000
Consolidation subsequent to date of acquisition

The consolidation procedures subsequent to the date of

acquisition involve the same procedures of (a) eliminating the
investment in subsidiary account and (b) adding, line by line,
similar items of assets liabilities, income, and expenses of the
parent and the subsidiary. However, this time, changes in the
subsidiary’s net assets since the acquisition date are
considered.
ILLUSTRATION: Consolidation - Subsequent to the date of acquisition

On January 1, 20x1, ABC acquired 80% interest in XYZ, Inc. for P75,000.

Information on the acquisition date (01/01/20x1)

XYZ’s net identifiable assets have a carrying amount of P74,000 and FV of P90,000.
The difference is due to the following:
Carrying amount Fair value Fair vlaue adjustment (FVA)

Inventory 20,000 24,000 4,000

Equipment, net 40,000 52,000 12,000
Total 60,000 76,000 16,000

The remaining useful life of the equipment is 6 years.

ABC measured the NCI at ‘proportionate share’.
Information on subsequent reporting date (12/31/20x1)

Statements of financial position

As of December 31, 20x1
ABC Co. XYZ, Inc
ASSETS
Cash 23,000 57,000
A/R 75,000 22,000
Inventory 105,000 15,000
Investment in subsidiary(at cost) 75,000
Equipment, net 140,000 30,000
TOTAL ASSETS 418,000 124,000

LIABILITIES AND EQUITY

A/P 73,000 30,000
Total liabilities 73,000 30,000
Share capital 170,000 40,000
Share premium 65,000 10,000
Retained earnings 110,000 44,000
Total equity 345,000 94,000
TOTAL LIABILITIES AND EQUITY 418,000 124,000
Statements of profits or loss

For the year ended December 31, 20x1

ABC Co. XYZ, Inc.
Sales 300,000 120,000
Cost of goods sold (165,000) (72,000)
Gross profit 135,000 48,000
Depreciation expense (40,000) (10,000)
Distribution costs (35,000) (18,000)
Profit for the year 60,000 20,000

There were no dividends declared, no intercompany transactions, and no

impairment of goodwill in 20x1.

Requirement: Prepare the December 31, 20x1 consolidated FS.

Solution:

Step 1: Analysis of the subsidiary’s net assets

XYZ, Inc 01/01/20x1 12/31/20x1 Net change

Net assets at carrying amount 74,000 94,000
Fair value adjustments (FVA) 16,000* 10,000**
Net assets at fair value 90,000 104,000 14,000

*FVA at acquisition date|| **FVA at acquisition date less subsequent depreciation

FVA.1/1/20x1 Useful life Depreciation FVA,12/31/20x1

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

The goodwill that is reported in the post-combination financial statements is the

amount determined at the acquisition date less accumulated impairment losses.

Consideration transferred 75,000

NCI in the acquirer (90k x 20%)-step 1 18,000
Previously held equity interest in the acquirer -
Total 93,000
Fair value of net identifiable assets acquired (90,000)
Goodwill - 1/1/20x1 3,000
Less: Accumulated impairment losses -
Goodwill - 12/31/20x1 3,000
Step 3: NCI in net assets

Subsidiary’s net assets in fair value - 12/31/20x1 104,000

Multiply by: NCI percentage 20%
NCI in net assets - 12/31/20x1 20,800

other solution:
NCI at acquisition date 18,000
NCI’s share in net change in subsidiary’s net assets
(14k x 20%) 2,800
NCI - 12/31/20x1 20,800

Step 4: Consolidated retained earnings

Parent’s retained earnings - 12/31/20x1 110,000

Parent’s share in the net change in subsidiary’s net assets* 11,200
Consolidated retained earnings - 12/31/20x1 121,200

*Net change in XYZ’s net assets 14,000

Multiply by: ABC’s interest in XYZ 80%
ABC’s share in the net change in XYZ’s net assets 11,200
Step 5: Consolidated profit or loss

Profits of ABC and XYZ (60k + 20k) 80,000

Depreciation of FVA (6,000)
Consolidated profit 74,000

We now have all the information we need to draft the consolidated financial
statements.
Traditional accounting method

The consolidated FS can also be prepared by using (a) consolidation journal entries
and (b) consolidation worksheets.

CJE #1. To eliminate investment in subsidiary

12/31/20x1 Inventory 4,000
Equipment 12,000
Share capital 40,000
Share premium 10,000
Retained earnings 24,000
Goodwill 3,000
Investment in subsidiary 75,000
NCI (90k x 20%) 18,000

CJE #2. To recognize depreciation of fair value adjustments

12/31/20x1 Cost of sales 4,000
Depreciation expense 2,000
Inventory 4,000
Accum. dep. 2,000
CJE #3: To adjust the Parent’s and Subsidiary’s retained earnings for the
depreciation of FVA during the year
12/31/20x1 Retained earnings - ABC [(4k + 2k) x 80%] 4,800
Retained earnings - XYZ [(4k + 2k) x 20%] 1,200
Income summary - working paper 6,000

CJE #4: To recognize NCI in post-acquisition change in XYZ’s net assets

12/31/20x1 Retained earnings - XYZ 18,800
Retained earnings - ABC 16,000
NCI (post-acquisition) 2,800

The sum of NCI’s in CJE #1 and #4 represents the 12/31/20x1 NCI.

NCI - acquisition date 18,000
NCI - post-acquisition net assets 2,800
NCI in net-assets - 12/31/20x1 20,800
Thank
you!