Consolidated Financial

Statements-Subsequent
to Date of Acquisition
 UNIFORM ACCOUNTING POLICIES

 IFRS 10 requires that "a parent shall prepare

consolidated financial statements using uniform
accounting policies for like transactions and
other events in similar
circumstances" Thus, all entities in the group
shall ideally use the same accounting policies
for like transactions and other events.
 THE CONSOLIDATION PROCESS

The approach followed to prepare a complete set of

consolidated financial statements subsequent to acquisition
is quite similar to that used to prepare a consolidated
statement of financial position as of the date of acquisition.
However in addition to the statement of financial position,
the statement of comprehensive income and retained
earnings statement of the consolidating companies must be
combined.
 ACCOUNTING PROCEDURES
 preparing consolidated financial
When
statements, an entity must use uniform
accounting policies for reporting like transactions
and other events in similar circumstances. If a
member of the group uses accounting policies
other than those adopted in the consolidated
financial statements for like transactions and
events in similar circumstances, appropriate
adjustments are made to that group member's
financial statements in preparing the
consolidated financial statements to ensure
conformity with the group's accounting policies.
Consolidated FS are prepared using the
following basic accounting procedures:

a) Combine like items of assets, liabilities, equity,
income, expenses and cash flows of the parent with
those of its subsidiaries.
 b) Eliminate the carrying amount of the parent's
investment in each subsidiary and the parent's portion
of equity of each subsidiary

 c) Eliminate in full intercompany assets and liabilities,

equity, income, expenses and cash flows relating to
transactions between entities of the group (profits or
losses resulting from intercompany transactions that are
recognized in assets, such as invertory and fixed assets
Intercompany losses may indicate an impairment that
requires recognition in the consolidated FS
CONSOLIDATED COMPREHENSIVE
INCOME
 Consolidated comprehensive income may be
computed usingtwo approaches:
 A. Parent company approach
 B. Entity approach

 In the consolidated statement of comprehensive

income and retained earnings, consolidated
comprehensive income is allocated to non-
controlling interests (NCT) and the controlling
interest(equityholders oftheparent company)
 Parent Company Approach
Under the parent company approach, consolidated
comprehensive income is that part of the total
enterprise's income that is assigned to the parent
company's stockholders For wholly owned
subsidiary, all income of the parent and its
subsidiaries accrue to the parent company. For
partially owned subsidiary, a portion of its income
accrues to its no controlling shareholders and is
excluded from consolidated net income.
Illustration
 Assume that P Company owns 80 percent of the stock of S Company
which was purchased at book value. In 2017, S Company reported
comprehensive income of P50,000, while P Company reported
comprehensive income of P120,000 including dividend income from
Company of P20,000. Consolidated comprehensive income for 2017 is
computed as follows:

P Company Comprehensive Income P120,000

Dividend Income (20,000)
Comprehensive Income From own operations 100,000
S Company Comprehensive Income 50,000
Total P150,000
Less: NCI Comprehensive Income (P50,000x20%) 10,000
Consolidated Comprehensive Income P140,000
 Entity Approach

When a subsidiary is wholly owned by the parent, the
consolidated CI computed similarly as that of the
parent company approach. On the other hand,
when a subsidiary is partially owned by the parent,
the portion of its income accruing to NCI is included
in the consolidated comprehensive income.

 Stated differenly. consolidated comprehensive

income under the entity approach equals total
earnings of all companies consolidated, less any
income recorded by the parent from the
consolidating companies.
Using the data in the illustration for P Corporation and
S Company, consolidated comprehensive income (CI)
computed
is and allocated as follows:

P Company Comprehensive Income P120,000

Dividend Income (20,000)
Comprehensive Income
from own operations 100,000
S Company CI from own operations 50,000
Consolidated CI P150,000
Attribute to NCI (P50,000x20%) 10,000
Attribute to Parent P140,000
ACCOUNTING FOR INVESTMENT
IN SUBSIDIARY
 IAS 27 provides that in the separate financial
statements of an entity who have investment in
subsidiaries, joint ventures and associates it may
elect to account for its investments either

 a.) at cost, or
 b.) at fair value in accordance with IFRS 9. financial
instruments; or
 c.) using the equity method as described in PAS 28
 Cost Method
 The cost method is used when the acquirer
(Parent) owns directly or indirectly more than half
of the voting power of the acquire (Subsidiary),
thereby exercising control (AS 271).

 Under this method, the Investment in Subsidiary

account is retained at its original cost-of acquisition
balance Income on the investment is limited to
dividends received from the subsidiary. This
method is usually used in practice, therefore
detailed explanation will be presented in this
chapter involving the preparation of consolidated
statements subsecquent to acquisition.
 Fair Value Method
 IRS 10, IFRS 12 and IAS 27 require a parent that is an
investment entity to measure its investments in particular
subsidiaries at fair value through profit or loss in
accordance with IFRS 9 (or IAS 39) instead of consolidating
those subsidiaries in its consolidated and separate
financial statements. An investment entity is defined as an
entity that:
 a) Obtains funds from one or more investors for the
purpose of providing those investors with investment
management services;
 b) Commits to its investors that its business purpose is to
invest funds solely for returns from capital appreciation,
investment income or both and
 c) Measures and evaluates the performance of
substantially all of its investments on a fair value basis
 Equity Method

The equity method is used when the
investor/acquirer owns 20% or more
(less than 50%) of the voting power of
the investee/acquiree, thereby
exercising significant influence over
the operations of the investee. This
method is applied to investments in
associates and joint ventures.
 CONSOLIDATION: WHOLLY OWNED
SUBSIDIARY- Acquisition at Book Value
FIRSTYEARAFTERACQUISITION

Assume that on January 2, 2017, Pete Corporation acquires all
the common stock of Sake Company for P300,000. At that time,
Sake Company has P200,000 of common stock outstanding and
retained earnings of P100,000. Analysis of the acquisition is as
follows:
Price Paid P300,000
Less: Book Value of interest acquired (100%)
CommonStock P200,000
Retained Earnings P100,000 P300,000
Excess P 0
On December 31,2017, Sake Company reported the following results of its
operations:
Net Income P50,000
Dividends Paid P30,000
Parent Company entries
 Using the cost Method, Pete Corporation would make the
following entries:
Jan. 2 Investment in Sake Company 300,000
Cash 300,000
To record the purchase of Sake Company stock

Dec. 31 Cash 30,000

Dividend Income 30,000
To record 100% of dividend from Sake Company
After posting the above journal entries, Pete Corporation’s
investment in Sake Company and Dividend Income accounts will
have a balance of;
Investment in Sake CompanyP300,000
Dividend IncomeP 30,000
Working Paper Elimination Entries
 When the acquisition of a subsidiary is at book value, the
following working paper elimination procedures are used
before the consolidation of the financial statements:
(1) Eliminate Dividend Income account against the Dividend
Declared by the Subsidiary
(2) Eliminate the parent's equity in the subsidiary's stockholders'
equity at date of acquisition
Using the above procedures, the working paper elimination
entries for Pete Corporation and subsidiary on December 31,
2017, one year after acquisition, are as follows:
E(1) Dividend Income P30,000
Dividends Declared- Sake Company P30,000
To eliminate inter-company dividends
E(2) Common Stock- Sake Company
Retained Earnings- Sake Company
Using the above procedures, the working paper
elimination entries for Pete Corporation and subsidiary
on December 31, 2017, one year after acquisition, are
as follows:
E(1) Dividend Income`P30,000
Dividends Declared-Sake Company P30,000
To eliminate inter-company dividends

E(2) Common Stock-Sake Company P200,000

Retained Earnings-Sake Company 100,000
Investment in Sake Company P300,000
To eliminate investment and equity accounts
at date of acquisition
 Consolidation Working Paper-First Year
 A number of different working paper formats for
preparing consolidated financial statements are
used in practice. One of the most widely used format
is the three section working paper, consisting of one
section for each three basic financial statements: the
Income Statement, the Statement of Retained
Earnings, and the Statement of Financial Position
(FP).

Other format such as the trial balance approach
format may also be used This fomat has the following
columns: Trial Balances of the parent and the
subsidiary, eliminations and adjustments. Statement
of CI, NCI (if any), Controlling Retained Earnings, and
the Consolidated Statement of Financial Position.
Working Paper Relationships
 The following aspects of the working paper for
consolidated financial statements of Pete
Corporation and Subsidiary should be emphasized:
1 The two elimination entries have been entered in the
working paper and the amounts totaled across and
down to complete the working paper.
2. Each of the first two sections of the working paper
"telescopes" into the section below in a logical
progression. As part of the normal accounting cycle,
net income is closed to retained earnings and
reflected in the statement of financial position. Similarly,
in the consolidation working paper the retained
earnings is carried forward to the statement of financial
position.
3. Using the double-entry bookkeeping, total debits must
equal total credits for any single elimination entry and for
the working paper as a whole. The totals of all debits and
credits at the very bottom of the statement of financial
position section are equal because the cumulative balances
from the two upper sections are carried forward to the
statement of financial position section.
4. Elimination (2) deals with the intercompany investment
and subsidiary equity accounts on the date of acquisition.
This accounting technique is necessary because the
parent's Investment in Sake Company account is
maintained at the cost of the original investment under the
cost method.
5. The consolidated Cl and consolidated retained earnings
in the working paper may be verified as follows, to assure
their accuracy:
Consolidated CI:
Pete Corporation CI P170,000
Sake Company CI 50,000
Dividend Income (30,000)
Consolidated CI P190,000

Consolidated Retained Earnings:

Retained of Pete Corporation, December 31 P410,000
Add: Pete’s share of net increase in Sake’s
Retained earnings [(P50,000- 20,000
P30,000)x100%] Consolidated Retained P430,000
Earnings
CONSOLIDATED
FINANCIAL STATEMENTS
 The consolidated statement of
comprehensive income and retained
earnings, and statement of financial position
of Pete Corporation and Subsidiary for the
year ended December 31, 2017, are presented
on the next page. The amounts of the
consolidated financial statements are taken
from the consolidated column of the
consolidation working paper (Illustration 15-
1).
 SECOND AND SUBSEQUENT
YEARS AFTER ACQUISITION

The consolidation procedures to be used at the end of

the second year, and in periods thereafter, are basically
the same as those used at the end of the first year. In
essence, each year's consolidation procedures begin as
if there had never been a previous consolidation.
Consolidation two years after combination is illustrated
by continuing the example of Pete Corporation and
Sake Company. On December 31, 2018, Sake
Company reported net income of P75,000 and paid
dividends of P40,000.
Parent company entries

 Pete Corporation will only record the dividends

received from Sake Company by the following entry
on December 31, 2018:
Cash P40,000
Dividend Income P40,000
To record dividends received from Sake (100%)
On December 31, 2018, the balance of investment in
Sake Company account and dividend income
account are:
Investment in Sake Company (at original Cost) P300,000
Dividend Income 40,000
Working paper elimination entries

Two elimination entries to be presented in the

working paper are as follows:
E(1) Dividend Income40,000
Dividend Declared-Sake Company 40,000
To eliminate inter-company dividends

E(2) Common Stock-Sake Company 200,000

Retained Earnings-Sake Company100,000
Investment in Sake company 300,000
To eliminate investment and subsidiary’s
equity accounts at date of acquisition
 Take note that after posting the above elimination
entries in the working paper, the Retained Earnings
account of Sake Company is not fully eliminated. The
difference of P20,000 represents Pete Corporation's
share in the undistributed earnings of Sake Company in
prior years [(P50,000-P30,000) x 100%). This is because the
earnings of the subsidiary under the cost method are
not recorded by the parent company.
Consolidation Working Paper-Second year. After
posting the elimination entries E(1) and E(2) in the
consolidation working paper, the working paper as
completed is shown below. All the working paper
relationships discussed in relation with Illustration 15-1
continue in the second year as well
CONSOLIDATION: PARTIALLY OWNED
SUBSIDIARY -Acquisition at Book Value


When a subsidiary is partially owned by the
parent company, the consolidation
procedures must be slightly modified from
those discussed earlier to include
(NCI).recognition of non controlling interest
 FIRST YEAR AFTER ACQUISITION
 Assume that on January 2, 2017, Pete Corporation purchases
80% of the common stock of Sake Company for P240,000. All
other data are the same as those used in the previous
example. The following D & A schedule was prepared on the
date of acquisition:
Consolidation Working Paper -First Year

 The following should be

noted in the working paper:
1. Although only 80% of Sake Company stock is owned
by Pete Corporation, 100% of sales, cost of goods sold
and operating expenses are carried to the
consolidated column.

2. Elimination entry (2) eliminates the investment

account balance at its acquisition cost (P240,000).
3. Elimination entry (1) eliminate the inter-company
dividends and NCI share of dividends paid by Sake
Company.

4. Elimination entry (3) recognizes the NCI in CI of

subsidiary for year 2017.
CONSOLIDATION: PARTIALLY OWNED
SUBSIDIARY -Acquisition at Other Than Book
Value
In some cases, the consideration given of the parent
is not equal to the book value of the interest
acquired from the subsidiary.This allocation must
be made in the consolidation
paper each time consolidated statements are
prepared. In addition, if the allocation relates to
assets subject to depreciation or amortization,
appropriate entries must be made in the working
paper for the depreciation or amortization to
reduce consolidated net income accordingly.
 The following elimination procedures may be used to
eliminate inter-company transactions when the
investment cost is not equal to the book value of the
interest acquired:
(1) Eliminate intercompany dividends and recognize
NCI share of subsidiary's dividends declared
(2) Eliminate equity accounts of subsidiary at date of
acquisition against investment account and NCI.
(3) Allocate excess to the specific assets and liabilities of
the subsidiary. The allocation should be in accordance
with the principles discussed in Chapter 15.
(4) Amortize the allocated excess except goodwill in
accordance with accounting for the asset to which it is
assigned.
(5) Assign income of subsidiary to NCI.
FIRST YEAR AFTER COMBINATION-2017

 Using the data in our previous example, assume that

Pete Corporation purchases 80% of the common stock
of Sake Company on January 2, 2017, for P300,000.
Assume further that on the date of the combination,
all assets and liabilities of Sake Company have fair
market values equal to their book values, except for the
following:
 For the first year immediately after the
acquisition, Sake Company reported the
following:
Comprehensive IncomeP50,000
Dividend Income30,000
Parent Company Entries
During 2017, under the cost method, Pete Corporations records
the following entries on its books:
Jan. 2 Investment in Sake Company300,000
Cash 300,000
To record purchase of Sake Company Stock
Dec. 31 Cash 24,000
Dividend Income 24,000
To record dividend received from Sake Company
(P30,000x80%)
 The working paper elimination entries for Pete Corporation and
subsidiary on December 31, 2017, are as follows:

E(1) Dividend Income 24,000

NCI 6,000
Dividends Declared-Sake Company 30,000
To eliminate inter-company dividends and
minority Interest share of dividends
(P30,000x20%)
E(2) Common Stock-Sake Company200,000
Retained Earnings-Sake Company100,000
Investment in Sake Company240,000
NCI 60,000
Consolidation Working Paper-First Year


The working paper for consolidated
financial statements for Pete Corporation
and partially owned subsidiary, Sake
Company for the year ended December
31, 2017 showing the five elimination
entries.
The following are the features of the working paper for the second year
after acquisition:

1. Elimination entry (1) eliminates the total dividend

declared by Sake Company against the dividend
income recorded by the parent and the share of the
NČI.
2. Elimination entry (2) eliminates the total equity
accounts of Sake Company against the investment
account (parent's interest) and NCI.
3. Elimination entry (3) allocates excess by adjusting the
assets of Sake Company to fair values.
4. Elimination entry (4) amortizes the allocated excess.
5. Elimination entry (5) recognizes the NCI in the Clof
Sake Company, adjusted for amortization and
depreciation.
Second year after combination-2018


Consolidation procedures in the second
year follow the same procedures in the first
year. From our previous example, assume
that on December 31,2018, Sake Company
showed the following results of operations:

ComprehensiveIncome P75,000
DividendsPaid P40,000
Parent company entries

On December 31,2018, Pete Corporation under the
cost method of accounting would record only the
dividends received from Sake Company by the
following entry:
Cash 32,000
Dividend Income32,000
To record dividends received from sake company
 SUBSIDIARY THAT HAS A DIFFERENT
REPORTING DATE
 IFRS 10 generally requires that "the financial statements of
the parent and its subsidiaries used in the preparation of the
consolidated financial statements shall be prepared as of the
same reporting date. When the reporting date of the parent is
different from that of a subsidiary, the subsidiary prepares
for consolidation purposes, additional financial statements
as of the same date as the financial statements of the parent
unless it is impracticable to do so."
 However, IFRS 10 permits consolidation of a subsidiary's

financial
statements with a different reporting date, provided that the
difference between the reporting dates of the parent and any
of
its
if subsidiaries shall be no more than 3 months. For example,
the financial year ended of a parent is 31 December 2016, it
In practice, one way of consolidating the financial
statements of a subsidiary with a different reporting
date is to adjust the subsidiary's financial
statements (for the purpose of consolidation only)
so that its revised financial statements have a
financial year that coincides with the year end of the
parent. For this purpose, management accounts for
the period of the difference in dates may be
required to make those adjustments. The
alternative way is to consolidate the subsidiary's
accounts as they stand and adjust only the effects of
significant events or transactions that occurred in
the period of the difference in dates. Irrespective of
which way the financial statements of the subsidiary
are to be consolidated, it is important that the
length of the reporting period and any difference in
reporting dates shall be the same from period to
period.
ACCOUNTING FOR LOSS OF
CONTROL

Whenever a parent ceases to have a
controlling interest in a subsidiary, that
subsidiary should be deconsolidated
(eliminated from the consolidated
financial statements). Usually, this
would result from a sale of an interest
in the subsidiary, which reduces the
50%parent company share to less than
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 at its fair value when control is lost
and subsequently accounts for it and for any
amounts owned by or to the former subsidiary in
accordance with relevant IFRS
 (c) Recognizes the gain or loss associated with the
loss of control attributable to the former controlling
interest.
The gain or loss is included in net income attributable
to the parent company. The gain or loss is the
difference between
a. The aggregate of

1. The fair value of any consideration

2 The fair value of any retained non-controlling
investment in the former
 controlling interest in the former subsidiary (including
3 subsidiary at the date the subsidiary is
deconsolidated The carrying amount of the non-

any accumulated other comprehensive income

attributable to the non-controlling interest) at the
date the subsidiary is deconsolidated
Sale of Interest Not Resulting in
Loss of Control:
 A parent company may sell a portion of its
investment in a subsidiary but still have an interest
that provides control even after the sale. There can
be no income statement gains or losses resulting
from any stock issuances by the consolidated entity.

Gain on sale of investment in a subsidiary is recorded
as an addition to additional paid-in capital (APIC).

Loss on sale of the investment in subsidiary is treated
as a reduction from additional paid-in capital. If the
additional paid-in capital is inadequate, the
Retained Earnings should be debited.