Consolidated FS:

5 Basic Consolidation
Procedures
Many companies have expanded their businesses through

purchasing another company’s stocks or starting a new business as

part of their conglomerate. This is to ensure that a steady supply of

raw materials is at hand, a new industry is grasp or additional income

on the new investment or acquisition. This led to multiple separate

entities which the companies may have significant influence or

control. This led to the terms parent company and the subsidiary

company.

Consolidating the financial statements of the parent and the

subsidiary company entails a lot of consideration and procedures as

mandated by PFRS 3 and guided by PFRS 10.

LEARNING OUTCOMES:

After reading this module, the learner should be able to:

1. Describe the elements of control

2. Prepare consolidated financial statements at the acquisition date
3. Prepare consolidated financial statements at a subsequent date

TIME:

The time allotted for this module is 6 hours.

LEARNER DESCRIPTION

The participants in this module are Third Year BSA Students

MODULE CONTENTS:

LESSON 5.1 CONSOLIDATION OVERVIEW

PFRS 10 and PFRS 3

PFRS 3 deals with the accounting for a business combination at the acquisition
date while PFRS 10 deals with preparation of consolidated financial statements after the
business combination

All parent entities are required to prepare consolidated financial statements, except
as follows:
1. A parent is exempt from presenting consolidated financial statement if:
a. It is a subsidiary of another entity and all its other owners o not object to its
non presentation of consolidated FS
b. Its debt or equity instruments are not traded in a public market
c. Its ultimate or any intermediate parent produces consolidated financial
statements that are available for public use and comply with PFRS
2. Post-employment benefit plans or other long-term employee benefit plans to which
PAS 19 applies.

CONTROL
Control is the basis for consolidation. Control exists if the investor has all of the
following:
 a. Power over the investee
b. Exposure or rights, to variable returns from the investee; and
c. Ability to affect returns through use of power

Only one entity is identified to have control over an investee. If two or more
investors collectively control an investee, such as when they must act together to direct
the investee’s relevant activities, then none of the investors individually controls the
investee. Accordingly, each investor accounts for its interest in the investee in accordance
with PFRS 11 Joint Arrangements, PAS 28 Investments in Associates and Joint Ventures
or PFRS 9 Financial Instruments, as appropriate.

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.
Power arises from rights and it may be obtained directly from the voting rights
conferred by shareholders. Example of rights that, either individually or in combination,
can give an investor power include:
a. Rights in the form of voting rights (or potential voting rights) of an investee;
b. Rights to appoint, reassign or remove members of an investee’s key
management personnel who have the ability to direct the relevant activities;
c. Rights to appoint or remove another entity that directs the relevant activities;
d. Rights to direct the investee to enter into, or veto any changes to, transactions
for the benefit of the investor
e. Other rights that give the holder the ability to direct the relevant activities.

Power with a majority of the voting rights

An investor that holds more than half (51% or more) of the voting rights of an investee
is presumed to have power over the investee except when this is clearly not the case.
Holding more than half of the voting rights results to power when:
a. The relevant activities are directed through majority vote; or
b. A majority of the members of the governing body that directs the relevant
activities are appointed through majority vote

Majority of the voting rights but no power

An investor does not have power over an investee, even if he holds more than half of
the voting rights, if:
a. The right to direct the investee’s relevant activities is conferred to a third party
who is not an agent of the investor. For example, the investee’s relevant
 activities are subject to direction by a government, court, administrator,
receiver, liquidator or regulator.
b. The investor’s voting rights are not substantive.

Power without a majority of the voting rights

An investor can have power even if he holds less than a majority of the voting rights
of an investee. For example, through:
a. A contractual arrangement between the investor and other vote holders;
b. Rights arising from other contractual arrangements;
c. The investor’s voting rights;
d. Potential voting rights; or
e. A combination of (a)-(d)

ACCOUNTING REQUIREMENTS

The financial statements of the parents and its subsidiaries used in preparing
consolidated financial statements shall have the same reporting dates. If a parent and a
subsidiary’s reporting period do not coincide, the subsidiary shall prepare financial
statements that coincide with the parent’s reporting period before consolidation. Uniform
accounting policies shall be used. If the subsidiary uses different accounting policies, its
financial statements need to be adjusted to conform to the parent’s accounting policies
before they are consolidated.

CONSOLIDATION PERIOD

Consolidation 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

Income and expenses of the subsidiary are based on the amounts of the assets
and liabilities recognized in the consolidated financial statements at the acquisition date.

Investment in Subsidiary
Investments in subsidiaries are accounted for in the parent’s separate financial
statements either:
a. At cost
 - Initially measured equal to the value assigned to the consideration
transferred at the acquisition date and subsequently measured at that
amount, unless the investment becomes impaired.
b. In accordance with PFRS 9
- Initially measured equal to the value assigned to the consideration
transferred at the acquisition date and subsequently measured at fair
value.
c. Using the equity method
- Initially measured equal to the value assigned to the consideration
transferred at the acquisition date and subsequently increased or
decreased for the investor’s share in the changes in the investee’s
equity.

NON-CONTROLLING INTERESTS (NCI)

- It is equity in a subsidiary not attributable, directly or indirectly to a parent
(PFRS 9)
NCI in the net assets of the subsidiary
- It is presented in the consolidated statement of financial position within
equity, separately from the equity of the owners of the parent
- Consists of:
o The amount determined at the acquisition date using PFRS 3
o The NCI’s share of changes in equity since the acquisition date.

NCI in profit or loss and comprehensive income

The profit or loss and each component of other comprehensive income in the
consolidated statement of profit or loss and other comprehensive income are attributed
to the following:
1. Owner’s of the parent
2. Non-controlling interests

LESSON 5.2 PREPARATION OF THE CONSOLIDATED FINANCIAL STATEMENTS

PREPARING THE CONSOLIDATED FINANCIAL STATEMENTS

Consolidated financial statements 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 DATE OF ACQUISITION

The following are the steps involved:
1. Eliminate the “Investment in subsidiary” account. This requires:
 a. Measuring the identifiable assets acquired and liabilities assumed in the
business combination at their acquisition date fair values.
b. Recognizing the goodwill from the business combination
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
constituents. The subsidiary’s assets and liabilities are included in the consolidated
financial statements at 100% of their amounts irrespective of the interest acquired
by the parent.

CONSOLIDATION SUBSEQUENT TO DATE OF ACQUISITION

It involves the same procedures as consolidation at the date of acquisition.
However, changes in the subsidiary’s net assets are considered since the date of
acquisition. The following are the steps to be observed:
1. Analysis of effects of intercompany transaction
2. Analysis of net assets
Subsidiary Acquisition Consolidation Net
Date Date Change
Share capital (& share premium) xx xx
Retained earnings xx xx
Other components of equity xx xx
Total at carrying amounts xx xx
Fair value adjustments at acquisition date xx xx
Subsequent depreciation of fair value nil (xx)
adjustments
Unrealized profits (upstream only) nil (xx)
(a)
Net assets at fair value xx xx(b) xx(c)
*(a) this amount is used for computing goodwill in step 3
(b) This amount is used for computing NCI in net assets in step 4
(c)This difference represents the net change in the subsidiary’s net assets since acquisition date.
This is used for computing consolidated retained earnings in step 5.

3. Goodwill computation
Goodwill is computed as follows:
a. Formula 1: NCI is measured at NCI’s proportionate share
Consideration transferred xx
Non-controlling interest in the acquiree xx
Previously held equity interest in the acquiree xx
Total xx
Fair value of net identifiable assets acquired (xx)
Goodwill at acquisition date xx
 Accumulated impairment losses since acquisition date (xx)
Goodwill, net-current year xx

b. Formula 2: NCI is measured at fair value

Consideration transferred xx
Previously held equity interest in the acquiree xx
Total xx
Less: Parent’s proportionate share in the net assets of (xx)
subsidiary
Goodwill attributable to owners of parent – acquisition date xx
Less: Parent’s share in goodwill impairment (xx)
Goodwill attributable to owners of parent – current year (a) xx

Fair value of NCI xx

Less: NCI’s proportionate share in net assets of subsidiary (xx)
Goodwill attributable to NCI – acquisition date Xx
Less: NCI’s share in goodwill impairment (xx)
Goodwill attributable to NCI – current year (b) xx
Goodwill, net – current year (a) + (b)

4. NCI interest in net assets

The NCI interest in net assets is computed as follows:

Subsidiary’s net assets at fair value – current year xx

Multiply by: NCI percentage X%
Total xx
Add: Goodwill to NCI net of accumulated impairment loss (xx)*
NCI interest in net assets – current year xx
*This amount is zero if NCI is measured at proportionate share. Goodwill is
attributed to NCI only if NCI is measured at fair value.

5. Consolidated retained earnings

Consolidated retained earnings is computed as follows:

Parent’s retained earnings in current year-end xx

Consolidation adjustments:
Parent’s share in the net change in subsidiary’s net assets Xx
Unrealized profits (downstream only) (xx)
Gain or loss on extinguishment of bonds (xx)
Impairment loss on goodwill attributable to parent (xx)
 Net consolidation adjustments xx
Consolidated retained earnings xx

6. Consolidated profit or loss

The consolidated profit or loss is computed as follows:
Parent Subsidiary Consolidated
Profits before adjustments xx xx xx
Consolidation adjustments:
Unrealized profits (xx) (xx) (xx)
Dividend income from subsidiary (xx) n/a (xx)
Gain or loss on extinguishment of bonds (xx) (xx) (xx)
Net consolidation adjustments (xx) (xx) (xx)
Profits before fair value adjustments xx xx xx
Depreciation of fair value adjustments (xx) (xx) (xx)
Impairment loss on goodwill (xx) (xx) (xx)
Consolidated profit or loss xx xx xx

7. Profit or loss attributable to owners of parent and NCI

The consolidated profit or loss attributed to the owners of parent and NCI are
computed as follows:

Owners NCI Consolidated

of parent
Parent’s profit before FVA* xx n/a xx
Share in the subsidiary’s profit before FVA xx xx xx
Depreciation of fair value adjustments (xx) (xx) (xx)
Share in impairment loss on goodwill (xx) (xx) (xx)
Totals xx xx xx

CONSOLIDATED FINANCIAL STATEMENTS

These include amounts determined in the previous steps as follows:

Statement of financial position

a. Goodwill (step 3)
b. NCI in net assets of the subsidiary (step 4)
c. Consolidated retained earnings (step 5)

Statement of profit or loss and other comprehensive income

a. Consolidated profit or loss and comprehensive income (step 6)
 b. Profit or loss and comprehensive income attributable to (a) owners of the parent
and (b) NCI (step 7)

ONLINE READING MATERIALS:

• Read the complete details of IFRS 10 at

https://www.iasplus.com/en/standards/ifrs/ifrs10
• Read the complete details of IFRS 3 at
https://www.iasplus.com/en/standards/ifrs/ifrs3
• Read Chapter 2 of Advanced Accounting by Antonio Dayag

ONLINE VIDEO LINKS AND MATERIALS:

• Watch the online video lecture of the course instructor uploaded at NEO LMS
and to the class shared Google drive (if applicable).
• Watch a YouTube Video by Farhat’s Accounting Lectures through this link
https://www.youtube.com/watch?v=ZImRDtjlu6U&list=PLxP0KZzCGFYPqHukAY
qv-fDU3rmlTQhur

TEST YOUR KNOWLEDGE:

Refer to Ubian LMS for Activity and Quiz

LESSON REFERENCES:
Dayag, Antonio J. (2020) Advanced Accounting and Reporting (A Comprehensive:
Conceptual & Procedural Approach). Good Dreams Publishing. Sampaloc, Manila
Deloitte (2020). IFRS 3 — Business Combinations. IASPlus.com. Retrieved from
https://www.iasplus.com/en/standards/ifrs/ifrs3
Deloitte (2020). IFRS 10 – Consolidated Financial Statements. IASPlus.com. Retrieved
from https://www.iasplus.com/en/standards/ifrs/ifrs10

Farhat’s Accounting Lectures (2016, June 8). Net Asset and Stock Acquisitions –
Consolidations | Advanced Accounting | CPA Exam FAR | Ch 1 P1. Retrieved from
 https://www.youtube.com/watch?v=ZImRDtjlu6U&list=PLxP0KZzCGFYPqHukAYq
v-fDU3rmlTQhur
Millan, Zeus Vernon B. (2020). Chapter 4 – Consolidated Financial Statements Part 1.
Advanced Accounting for Business Combinations. Bandolin Enterprise. #21
Paramount Vill., Sto. Tomas, Baguio City