PFRS 10:

Consolidated Financial Statements

(Narrative Report)

Submitted by:
Lovely Katherine V. Custodio
BSACC 1-3

Submitted to:
Prof. Ma. Isolde Sustrina
I. Learning Objectives

1. State the element of control.

2. Describe the consolidation procedures.

II. Discussion

PFRS 10 prescribes the principles for the preparation and presentation of

consolidated financial statements.

 Consolidated financial statements - “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”

All parent entities are required to prepare consolidated financial statements,

except as follows:

1. A parent is exempt from presenting consolidated financial statements if:

a. It is a subsidiary of another entity (whether wholly-owned or partially-owned) and

all its other owners do not object to its non-presentation of consolidated financial

statements;

b. Its debt or equity instruments are not traded in a public market (or being

processed for such purpose); and

c. Its ultimate or any intermediate parent produces consolidated financial statements

that are available for public use and comply with the PFRSs.

2. Post-employment benefit plans or other long-term employee benefit plans to which

PAS 19 applies.

Control

Control is the basis of 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 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 over the investee;

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 current ability to direct the investee’s relevant activities.

 Relevant activities - “activities of the investee that significantly affect the

investee’s returns.

Examples of decisions about relevant activities:

a. Establishing operating and capital decisions of the investee, including budgets;

and

b. Appointing and remunerating an investee’s key management personnel or service

providers and terminating their services or employment.

Power arises from rights and it may be obtained directly from the voting rights

conferred by shareholdings. However, power may also arise from other sources,

such as contractual arrangements.

Administrative rights

When voting rights cannot have a significant effect on an investee’s returns,

such as when voting rights relate to administrative tasks only and contractual

arrangements determine the direction of the irrelevant activities, the investor needs to

assess those contractual arrangements in order to determine whether it has rights

sufficient to give it power over the investee.

Unilateral rights

If two or more investors individually have the ability to direct different relevant

activities, the investor that has the current ability to direct the activities that most

significantly affect the returns of the investee has power over the investee.

Protective rights

An investor can have power over an investee even if other entities have

existing rights that give them the current ability to participate in the direction of the

relevant activities, for example when another entity has significant influence.

 Protective rights - “rights designed to protect the interest of the party holding

those rights without giving that party power over the entity to which those rights

relate.”

Substantive rights

In assessing whether it has power, an investor considers only substantive

rights, I.e. rights where the holder has the ability to exercise.

Voting rights

The investor’s ability to direct the relevant activities of an investee is normally

obtained through voting or similar rights.

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 votes.

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)

Contractual arrangement with other vote holders

A contractual arrangement between an investor and other vote holders can give the

investor power if the contractual arrangement give the investor:

a. The right to exercise the voting rights of other vote holders sufficient to give the

investor power; or
b. The right to direct how other vote holders vote to enable the investor to make

decisions about relevant activities.

Potential voting rights

An investor with the current ability to direct the relevant activities has power

even if its rights to direct have yet to be exercised.

Substantive removal and other rights held by other parties

This may affect the decision maker’s ability to direct the relevant activities odf

an investee.

 Removal rights are “rights to deprive the decision maker of its decision-making

authority”

Exposure or rights to variable returns

An investor is exposed, or has a right, to variable returns if its returns from its

involvement with the investee vary depending on the investee’s performance.

Ability to use power to affect investor’s returns

The investor’s ability to use its power to affect its returns from its involvement

with the investee provides the link between power and variable returns. Only if this

ability is present along with power and exposure, or right, to variable returns does the

investor obtain control over the investee.

Accounting requirements

Reporting dates and Uniform accounting policies.

The financial statements of the parent and subsidiary used in preparing

consolidated financial statements should have the same reporting dates. If it does 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 losses 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;

b. In accordance with PFRS 9; or

c. Using the equity method

Measurement at cost

The investment in subsidiary is 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.

Measurement in accordance with PFRS 9

The investment in subsidiary is initially measured equal to the value assigned to the

consideration transferred at the acquisition date and subsequently measured at fair

value.

Measured using the equity method

The investment in subsidiary is 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) - “equity in a subsidiary not attributable, directly or

indirectly, to a parent.”

NCI in the net assets of the subsidiary

NCI in net assets is presented in the consolidated statement of financial position

within equity, separately from the equity of the owners of the parent.

NCI in the net assets of the subsidiary consists of:

a. The amount determined at the acquisition date using PFRS 3; and

b. 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. Owners of the parents

2. Non-controlling interests
Preparing the Consolidated financial statements

Consolidated financial statements are prepared by combining he 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 consolidation procedures at the acquisition date are simple in the sense that only

the statements of financial position of the combining constituents are consolidated.

These involve the following steps:

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 interests.

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

The consolidation procedures subsequent to the acquisition date involve the same

procedures as above, but changes in the subsidiary’s net assets since the acquisition

date are considered.

Illustration: Consolidation at acquisition date

The financial statements of a parent and its subsidiary at the acquisition date (I.e.,

business combination date) 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 carrying amounts of the subsidiary’s assets and liabilities approximate the

acquisition-date fair values, except for the following:

- Inventory, 30,000

- Equipment, net, 48,000

 The goodwill determined under PFRS 3 is 3,000

 The NCI in the net assets of the subsidiary, also determined under PFRS 3, is

18,000
Solution:

Step 1: Eliminate the “Investment on subsidiary” account and:

a. Measure the subsidiary’s assets and liabilities at their acquisition-date fair

values;

b. Recognize the goodwill; and

c. Replace the subsidiary’s pre-combination equity accounts with the NCI in net

assets.

Parent Subsidiary

Cash 10,000 5,000

Accounts receivable 30,000 12,000

Inventory 40,000 31,000

Investment in subsidiary (75,000) -

Equipment, net 180,000 48,000

Goodwill 3,000

Accounts payable 50,000 6,000

Share capital 170,000 (50,000)

Share premium 65,000 (-)

Retained earnings 50,000 (24,000)

NCI in net assets 18,000

Step 2: Add, line by line, similar items of assets and liabilities of the combining

constituents.

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 - -

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 - 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

III. References

Millan, Z. (2024) Conceptual Framework and Accounting Standard (pg. 546 - 559)

CFAS (Lecture Vid #11) - CFAS (Lecture Vid #11) - PFRS 10, 11, 12, 13, & 14

https://www.youtube.com/watch?v=xLWjf4giBeI

PFRS 10 — Consolidated Financial Statements

https://www.iasplus.com/en/standards/ifrs/ifrs10