FMGT 7121 (Advanced Accounting) Module 6

Module 6 – Consolidated Cash Flows and

Ownership Issues
Reading:
Hilton & Herauf, Chapter 8 (omit 491 – 498)

Consolidated Cash Flow Statement

• The consolidated cash flow statement must include the operating, investing, and financing cash
flows of the corporate group, only to the extent that these cash flows have taken place with parties
outside of the combined group and not within the group. Cash flows between group members do
not change the consolidated cash balance and should not be included in the consolidated statement
of cash flows.
• Instead of combining the separate company cash flow statements of the parent and subsidiary
which contain intercompany transactions, it is easier and more practical to prepare the consolidated
cash flow statement by using comparative year-end consolidated balance sheets and income
statements.
• You should follow the standard procedures for preparing a statement of cash flow (as set out in IAS
7 and covered in your previous accounting courses). Watch out for the following items arising from
business combinations when preparing consolidated cash flow statements:
o In the period that a subsidiary is acquired, any cash paid to acquire the subsidiary, less cash
held by the subsidiary on the acquisition date, is netted and disclosed under “Investing
Activities” on the cash flow statement.
o The acquisition differential is amortized in the consolidated income statement but does not
affect cash flows (same as regular amortization and depreciation expense).
o Non-controlling interest in the consolidated income statement is an allocation of the entity’s
net income and does not affect cash flows.
o Dividends paid by subsidiaries to the parent company do not change the combined entity’s
cash. Dividends paid by subsidiaries to non-controlling shareholders must be disclosed
separately from dividends paid by the parent to its shareholders.

Example 1 – Problem 8-14 (page 533)

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Required (a)

Parento Inc.
Consolidated Cash Flow Statement
For the Year Ended December 31, Year 4

Operating activities

Net income

Database amortization

Depreciation

Bond premium amortization

Loss on sale of land

Decrease in accounts receivable

Increase in inventory

Increase in accounts payable

Increase in accrued liabilities

Investing activities

Proceeds from sale of land

Purchase of buildings and equipment

Financing activities

Issue of bonds payable

Dividends: To shareholders of Parento

To non-controlling shareholders

Increase in cash during the year

Cash at beginning of year

Cash at end of year

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Changes in Parent’s Ownership Interest

• A parent’s ownership interest will change for any of the following reasons:
o The parent buys additional shares of the subsidiary
o The parent sells some of the shares of the subsidiary
o The subsidiary issues additional common shares to the public, and the parent does not
maintain its previous ownership percentage
o The subsidiary repurchases some of its common shares from the non-controlling interest
causing the parent’s ownership percentage to increase

Increases in ownership
• Often investors acquire equity investments in stages over several separate transactions (“block
acquisitions” or “step purchases”). These steps may take the investor from owning a passive
investment (FVTPL or FVTOCI), to having significant influence (investment in associate), and finally to
a controlling interest in a subsidiary.
• As previously discussed, fair value investments (without significant influence) are recorded at the
price paid for the shares and are adjusted to fair value through net income or other comprehensive
income at the end of each reporting period.
• After the first increase step purchase that results in the investor obtaining significant influence, the
equity method of accounting is used which requires an acquisition differential to be calculated and
allocated based on fair values at the date that significant influence is obtained. For this calculation,
the total acquisition cost equals the carrying value of previous purchases (updated to current fair
value) plus the cost of the current purchase.
• IFRS 28 is silent on the issue of how increases in ownership in an associate that do not change the
nature of the investment should be reported (i.e. where the investor still has significant influence
but not control). Two alternative accounting methods are used in practice as follows:
o Under the first method, the previous step purchases are not revalued. An acquisition
differential is calculated only for the current purchase. This means that the acquisition
differentials (if any) for each purchase must be tracked and if applicable, amortized
separately. Note that this is the method suggested by our textbook and it is illustrated on
pages 474 and 475.
o The other method of reporting is to deem the existing investment as having been sold with
the associated gain or loss being recognized in net income. Thereby the full investment,
including both the existing and the newly acquired portion, is valued at its fair value on the
date of the new purchase. The new fair value adjustment is now allocated to the net
identifiable assets of the investee on the date of the new share purchase, and the equity
method is applied to the new shareholding percentage prospectively.
• When a step purchase gives the investor control over the investee, the acquisition must be
accounted for as a business combination using the acquisition method. Any previous acquisition cost
allocations are replaced with a new acquisition cost allocation on the date of the business
combination (i.e. the date control was achieved). The entire investment must be revalued and the
acquisition differential recalculated as follows:
o Adjust the carrying value of the investment to its fair value immediately before the business
combination. Any unrealized gain or loss is recognized in net income.
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o The total acquisition cost is comprised of the fair value of the investment immediately
before the investor obtains control plus the cost of the current purchase.
o Allocate the total acquisition cost based on the current fair value of the subsidiary’s net
assets. The new acquisition differential (if any) is tracked from that date forward and
amortized where applicable.
• If there are subsequent step purchases that increase the parent’s controlling interest in the
subsidiary, the subsidiary’s net assets are not revalued and acquisition differentials are not
calculated for these purchases. These transactions are not considered to be business combinations
since the parent already has control. Instead, these transactions represent the transfer of ownership
interests from the NCI to the parent. In such circumstances, the carrying amount of the portion of
the NCI being sold is allocated to the parent. Any difference between the fair value of the
consideration paid and the carrying value of the NCI being transferred to the parent, is recognized as
a direct charge or credit to owner’s equity (debits to contributed surplus if any and then to retained
earnings; credits to contributed surplus), and attributed to the shareholders of the parent.

Example 2
Premiere Limited has made several purchases of Slack Corp shares over the years. The history of these
purchases is as follows:
• January 1, Year 5: Purchased 1,500 shares for $90,000
• January 1, Year 6: Purchased another 1,000 shares for $70,000
• January 1, Year 7: Purchased another 5,000 shares for $375,000
• January 1, Year 8: Purchased another 1,000 shares for $80,000
Slack had 10,000 common shares outstanding during this entire period. Selected financial information
for Slack is presented below.
Years ended December 31
Year 4 Year 5 Year 6 Year 7 Year 8
Net income 40,000 $ 50,000 $ 70,000 $ 80,000 $ 100,000
Dividends (10,000) (20,000) (35,000) (50,000) (60,000)
Opening retained earnings 120,000 150,000 180,000 215,000 245,000
Closing retained earnings 150,000 180,000 215,000 245,000 285,000
Common stock 100,000 100,000 100,000 100,000 100,000
Total shareholders' equity $ 250,000 $ 280,000 $ 315,000 $ 345,000 $ 385,000

Fair value per share - December 31 $ 60.00 $ 70.00 $ 75.00 $ 80.00 $ 85.00
Trademarks - December 31
Fair value $ 75,000 $ 75,000 $ 120,000 $ 150,000 $ 150,000
Remaining life (years) 11 10 9 8 7

The carrying values of Slack’s identifiable net assets approximate their fair values with the exception of
trademarks which have no carrying value for accounting purposes. The fair values of Slack’s trademarks
at the end of each fiscal year are noted above.

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Required
(a) Prepare the necessary journal entries to record the events noted above. Assume that the
investment in Slack was classified as a “FVTPL” investment following Premiere’s Year 5 purchase,
and as an “investment in associate” following the Year 6 purchase. Also assume that Premiere
continued to use the equity method to account for its investment in Slack after it obtained
control.
(b) Determine the balance of Premiere’s “Investment in Slack” account at December 31, Years 5, 6,
7 and 8.
(c) Determine the balance of the non-controlling interest on Premiere’s consolidated balance sheet
at December 31, Years 7 and 8.

Requirement (a)
Step 1: FVTPL investment: Purchased 1,500 / 10,000 shares (15%)

DR CR
Jan 1/Y5 Investment in Slack 90,000
Cash 90,000
To record purchase of investment

Dec 31/Y5 Cash 3,000

Dividend revenue 3,000
($20,000 X 15%)
To record receipt of dividends from Slack

Investment in Slack 15,000

Unrealized holding gain 15,000
[1,500 X ($70 - $60)]
To record increase in fair value of Slack

Step 2: Investment in Associate: Purchased 1,000 shares - 2,500/10,000 shares (25%)

Cost of 25% of Slack ($90,000 + $15,000 + $70,000) $ 175,000

25% of carrying value of Slack's equity ($280,000 X 25%) (70,000)
Acquisition differential 105,000
Allocated to trademarks ($75,000 X 25%) (18,750)
Goodwill $ 86,250
DR CR
Jan 1/Y6 Investment in Slack 70,000
Cash 70,000
To record additional investment in Slack

Dec 31/Y6 Investment in Slack 17,500

Investment income 17,500
($70,000 X 25%)
To record share of Slack's net income

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Investment income 1,875

Investment in Slack 1,875
($18,750 ÷ 10)
To record amortization of acquisition differential

Cash 8,750
Investment in Slack 8,750
($35,000 X 25%)
To record dividends received from Slack

Step 3: Control investment: Purchased 5,000 shares - 7,500/10,000 shares (75%)

Value of 100% of Slack shares (10,000 X $75) $ 750,000

Carrying value of Slack's equity (315,000)
Acquisition differential 435,000
Allocated to: trademarks (120,000)
Goodwill $ 315,000

Amortization schedule

Opening balance Amort. Y7 Balance Amort. Y8 Balance

Trademarks $ 120,000 $ 13,333 $ 106,667 $ 13,333 $ 93,333
Goodwill 315,000 - 315,000 - 315,000
$ 435,000 $ 13,333 $ 421,667 $ 13,333 $ 408,333

Carrying value of Investment in Slack account prior to control

$ 90,000
15,000
Dec 31/Y5 105,000
70,000
17,500 1,875
8,750
Dec 31/Y6 $ 181,875

DR CR
Jan 1/Y7 Investment in Slack 5,625
Unrealized gain 5,625
[(2,500 X $75) - $181,875]
To set the investment account to fair value

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Investment in Slack 375,000

Cash 375,000
To record additional investment in Slack

Dec 31/Y7 Investment in Slack 60,000

Investment income 60,000
($80,000 X 75%)
To record share of Slack's net income

Investment income 10,000

Investment in Slack 10,000
($13,333 X 75%)
To record amortization of acquisition differential

Cash 37,500
Investment in Slack 37,500
($50,000 X 75%)
To record dividends received from Slack

Step 4: Purchased 1,000 shares - 8,500/10,000 = 85%

Non-controlling interest - Dec 31/Y7

Carrying value of Slack's equity $ 345,000

Unamortized A.D.
Trademark (120,000 X 8/9) 106,667
Goodwill 315,000
766,667
NCI % 25%
NCI (balance sheet) $ 191,667

Portion sold (1,000 of 2,500 shares) $ 76,667

DR CR
Jan 1/Y8 Investment in Slack 76,667
Retained earnings 3,333
Cash 80,000
To record additional investment in Slack

Dec 31/Y8 Investment in Slack 85,000

Investment income 85,000
($100,000 X 85%)
To record share of Slack's net income

Investment income 11,333

Investment in Slack 11,333
($13,333 X 85%)
To record amortization of acquisition differential

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Cash 51,000
Investment in Slack 51,000
($60,000 X 85%)
To record dividends received from Slack

Requirement (b)

Carrying value of "Investment in Slack" account

$ 90,000
15,000
Dec 31/Y5 105,000
70,000
17,500 1,875
8,750
Dec 31/Y6 181,875
5,625
375,000
60,000 10,000
37,500
Dec 31/Y7 575,000
76,667
85,000 11,333
51,000
Dec 31/Y8 $ 674,333

Reconciliation of investment account at Dec. 31/Y8

Carrying value of Slack's equity $ 385,000

Unamortized A.D. 408,333
793,333
Ownership interest 85%
$ 674,333

Requirement (c)

Non-controlling interest - Dec 31/Y7

Carrying value of Slack's equity $ 345,000

Unamortized A.D.
Trademark 106,667
Goodwill 315,000
766,667
NCI % 25%
NCI (balance sheet) $ 191,667

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Non-controlling interest - Dec 31/Y8

Opening balance $ 191,667

Sale of 1,000 of 2,500 shares (page 7) (76,667)
115,000
Share of net income ($100,000 X 15%) 15,000
Share of dividends ($60,000 X 15%) (9,000)
Share of AD amortization ($13,333 X 15%) (2,000)
$ 119,000
Or
Carrying value of Slack's equity $ 385,000
Unamortized A.D.
Trademark 93,333
Goodwill 315,000
793,333
NCI % 15%
NCI (balance sheet) $ 119,000

Decreases in ownership interest in a subsidiary

• If a parent sells part of its investment in a subsidiary but still retains control, the transaction is
considered to be a transfer of ownership interests between owners (i.e. parent’s interest is
transferred to the NCI). Any gain or loss on the sale is not recognized in net income but rather is
charged or credited directly to shareholder’s equity (debits to contributed surplus if any and then to
retained earnings; credits to contributed surplus), and attributed to the parent.
• In such circumstances there is no revaluation of the investment and therefore, no recalculation of
the acquisition differential. The carrying value of the parent’s investment in the subsidiary is
reduced by the percentage of the investment that was sold. There is a corresponding increase in the
NCI. The unamortized acquisition differential, if any, remains the same and continues to be
amortized on the same basis as before the sale. The parent’s portion of the acquisition differential
amortization and impairment losses are reduced based to the parent’s new ownership interest in
the subsidiary.

Example 3
Assume that all of the facts in Example 2 are the same and that on January 1, Year 9, Premiere sold
2,000 shares of Slack for their fair value of $85 per share ($170,000).

Required:

Prepare the journal entries to record this transaction and Premiere’s portion of the acquisition
differential amortization for the year ending December 31, Year 9.

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Percentage ownership before sale 85% (8,500 ÷ 10,000)

Percentage ownership after sale 65% (6,500 ÷ 10,000)
Percentage of Slack shares sold 20%

Carrying value of "Investment in Slack"

on December 31, Year 8 (see page 8) $ 674,333
Percent of investment sold (20% ÷ 85%) 23.53%
Carrying value sold $ 158,667

DR CR
Jan 1/Y9 Cash 170,000
Investment in Slack 158,667
Contributed surplus 11,333
To record sale of 20% of Slack shares

Dec 31/Y9 Investment income 8,667

Investment in Slack 8,667
($13,333 X 65% - see page 6)
To record amortization of acquisition differential

• If the subsidiary issues additional shares to the public and the parent does not acquire any of the
additional shares, the parent’s ownership interest in the subsidiary will be reduced. If the parent still
retains control over the subsidiary, this reduction is treated the same as if parent had sold a portion
of its interest to the NCI (see above). The parent will have a loss equal to portion of the carrying
value of its investment in the subsidiary that was “sold”. This loss is offset by the parent’s portion of
the increase in the subsidiary’s shareholder’s equity resulting from the share issuance. The net loss
or gain is charged or credited directly to shareholder’s equity as previously discussed.
• In this situation the carrying value of the NCI on the consolidated balance sheet will increase by the
portion of the investment carrying value transferred from the parent, plus the NCI’s portion of the
increase in the subsidiary’s shareholder’s equity resulting from the share issuance.

Example 4
Assume that all of the facts in Example 2 are the same and that on January 1, Year 9, Slack issued 2,000
additional shares to the public for their fair value of $85 per share ($170,000). Premiere did not acquire
any of these additional shares

Required:

Prepare the journal entry to record the effect on Premiere of the share issuance by Slack. Determine the
balance of the non-controlling interest in Slack immediately after the share issuance.

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Percentage ownership before share issuance 85.00% (8,500 ÷ 10,000)

Percentage ownership after share issuance 70.83% (8,500 ÷ 12,000)
Percentage of Slack shares "sold" 14.17%

NCI percentage after share issuance 29.17% (3,500 ÷ 12,000)

Carrying value of "Investment in Slack"

on December 31, Year 8 (see page 8) $ 674,333
Percent of investment "sold" (14.17% ÷ 85.00%) 16.67%
Loss due to reduction of investment account 112,411
Premier's portion of increase in Slack's equity
due to share issuance (2,000 X $85 X 70.83%) 120,411
Net benefit to Premiere from share issuance $ 8,000

DR CR
Jan 1/Y9 Investment in Slack 8,000
Contributed surplus 8,000
To record the effect of Slack's issuance of 2,000 shares

Non-controlling interest - Jan 1/Y9

NCI December 31, Year 8 (page 9) $ 119,000

Carrying value of investment transferred to NCI (above) 112,411
NCI's portion of increase in Slack's equity
due to share issuance (2,000 X $85 X 29.17%) 49,589
NCI (balance sheet) $ 281,000

Or
Carrying value of Slack's equity prior to share issuance $ 385,000
Increase in Slack's equity due to share issuance 170,000
Carrying value of Slack's equity after share issuance 555,000
Unamortized A.D.
Trademark 93,333
Goodwill 315,000
963,333
NCI % 29.17%
NCI (balance sheet) $ 281,000

Change in NCI ($281,000 - $119,000) $ 162,000

Comprised of:
Increase in Slack's equity due to share issuance $ 170,000
Net benefit to Premiere from share issuance (above) (8,000)
$ 162,000

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