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0% found this document useful (0 votes)
65 views26 pagesChapter 2 161 186
Uploaded by
Arielle CabritoCopyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF or read online on Scribd
EPARATE and CONSOLIDATED
DATE OF ACOUSTON FINANCIAL STATEMENTS 161
ing entries, and
. , inati
e Separate financial statements of the two comparies, he eliming ‘own in Figure 2-
Ne Consolated totals for the balance sheet on January 1, 20x4, are sm
| A, Date of
igure 2-&: Worksheet for Consolidated Balance Sheet, January | 20%
\cquisttion; 100%-Owned Subsidiary
ge ted tot are
‘Biminations
tone ; Batt
| Accounisecewabie era
jee tao900 goo samp m0 |
ee woe 2) 60) i
| Buildings and equipment (net) ee a . (a 10.000 50
| Goodwa 5,000 (2) 52500
| 300,000 (1) 225,000
| : (2 75000
<2... 1200.00 p500,000 _________——
| : -. Pioogog Prog S~*~*S
| Bonds povatie 2-0 """"" —" agno00 190000
| Premium on bonds payable... (a) 35000
| Common stock, P10 part* 6 600,000 in|
| Common stock, PIOpar.....-s 700,000 (1) 200,000 62,000 |
Poidin capital in excess ofpart** 62,000 :
Paid in capital in excess of par... 20000 (1) 20,00 738,000
Retoined eamings™ 238,000 :
| Retained eomings E 80,000 (1) 80,000
[seer bisa
Total Liabilities and Stockholders’ |
| Staion eam emma eazy ADD ES
(1) Eiminote investment against stockholders’ equily of Sky Co.
(2) Eliminate investment against allocated excess.
* P350,000 - P 180,000 ~ P12,000 ~P8,000 = P150,000.
“P500,000 + P100,000 (10,000 shares x 10 par) = 600,000.
*** 50,000 + P20,000 ~P8,00 = P62,000.
****P250,000 ~P12,000 = 238,000.
Incidentally, the non-controlling interest is computed as follows:
Se
Common stock ~ Sky Co... pers yes pone
Paid.in capital in excess of por - Sky Co
Retained eamings - Sky Co... oe
Book valve of stockholders’ equity - Sky CO...
Adjustments to reflect fair value (over/ undervaluation
of ossels and Kabilties) .........
Fair value of stockholders’ equity of subsidiary
Mullpied by: Non-controling interest percentage .
| Non-controing interes! (patio) .....--seones
Take note that in compliance with the entity theory the consolidated retained earnings
is equivalent to retained earings of the parent company on the date of acquisition.
The amounts that will appear on the consolidated balance sheet are shown in the final
column of Figure 2-6. Notice that the amount of goodwill reported is P35,000 (including
the recorded goodwill of P5,000).
ae aa — Peer Company and Subsidiary
Consolidated Balance Sheet
20x4
= ae
ae :
ACCOuntS receivables ° : 7
Inventories... . . 7500
| Lond ' 430,000 |
Buildings and equipment (net) Vows ” 51500 |
| Goodwat a : PLSIZS
[Total Asses =
P 200,000 |
| |
| : vos sso _a350)
| __ Premium on bonds payable nese oo 535,000
| Total Liabilities: ae |
Stockholders’ Equily. P 600,000
Common stock, PIOpar.......... 62.000 |
Poidin capital in excess of par 238,000 |
Retained eamings fn -
Parent's Stockholder’ Equity/Equiy Atibutable fo the > 900,
Owners of the Parent... os i
Non-controling interest pee 982.500 |
Total Stockholders’ Equity (Total Equity). a 12.500 |
Total iobiliies and Stockholden' Equity }
Full-goodwill Approach —_
The resulting Ownership situation can be viewed in the schedule of determination ang
allocation of excess as follows: ("refer to next page for the schedule)
Schedule of Determination and Allocation of Excess (Full-goodwill)
Date of Acquisition - January 1, 20x4
Foir value of Subsidiary (100%)
Consideration transfered
Cosh... eeessseeeeeticcsecesesereseeeseee P 180,000
Common stock: 10,000 shares x P12 per share 120,000
Total (P300.000/75%)....... fe P 400,000
Less: Book value of stockholders’ equity of Sky |
Common stock (P200,000 x 100%) .......... 200,000 |
Poictin capital in excess of par (P20,000 x 100%) 20,000
Retained eamings (P80,000 x 100%)......... 80,000 300,000
Allocated excess (excess of cost over book value}... P 100,000
Add: Existing Goodwil of Sky Co. (P5,000 x. 100%) =m
Adjusted allocated ex€55..... occ cceecs P 105.000
Less: Over/under valuation of assets and liabilties.
Increase in inventory (P15.000 x 100%) ...... P 15,000
Increase in land (40,000 x 100%) : 60,000
Decrease in buildings and equipment
(P10.000 x 1008)... ess: sseessesceecesssescee (10,000)
Increase in bonds payable 35000» 10. 35,000) 30,000
Positive excess: Ful-goodwil (excess of cost over foir
NOMC) Feces es P_75,000
The amount of unrecognized goodwill in the eliminating entry is P70,000, computed os
follows:
Acquired goodwill ae
Less: Recorded proportionate goodwill .....
Goodwill unrecorded eee SEPARATE and CONSOLIDA;
= DATE OF ACQUISITION TD FINANCIAL STATEMENTS 163
M .000 in the books of the subsidiary plus the ac
'0 be recorded of P70,009 in the consolidated workpaper).
Peer Company records the il oe
’ stock ac ks with the following
date of acquisition: ep mei atl Beil
January 1, 20x4 Sa OT |
(1) Investment in Sky ¢, ”
cin cmmpeny. : : cevssesss BOO 180,000
| Common stock Pio par led ‘aim
Poidin capital in excess of por snes .
Acquisition of ‘Sky! Company ae
|) Retained earnings (acquisition elated expenses - clove to retained
caring since only balance sheet accounts ore 2000
| amined)... ts
Cash . a i oo
| Acquistion. related.cosy 0st |
(3) Poid-in capitalin excess of oo
ah ene Rl _
The schedule of determination ond allocation of excess provides complete guidance
for the worksheet eliminating entries on January 1, 20x4:
| (El) Common stock Sky Co . 5
tis 200,000
| Additional paid.in capital -sky Co. 20,000
Retained eamings- sky Co. 80.000
Investmentin SkyCo..... 725,000
ehoncontoling intrest {P300,000 x 25%) .......... 75000
iminate investment against kholders’.
(E2) Inventory... aoe ‘eee ai eae 15,000
land... 0,000
Goodwill (P75,000 - P5,000) 70,000
Buildings and equipment .. 40,000
Premium on bonds payable .......... 3.000 |
Non-controling interest ((P30,000 x 25%) + (P70,000,
| unrecorded full-goodwill - P52,500, unrecorded |
portiak goodwill]... ; eat
Investmentin Sky Co 75,000 |
Eliminate investment against allocated excess.
The separate financial statements of the two companies, the eliminating entries, and
the consolidated totals for the balance sheet on January 1, 20x4, are shown in Figure 2-
it
Figure 2-7: Worksheet for Consolidated balance Sheet, January 1, 20x4. Date of
Acquisition; 100%-Owned Subsidiary
i
Fiminations
Assets PeerCo, Sky Co, a ce Consolidated
| Cash®. os... -. P- 150,000P 45,000 4
mnisreceivable ..... 75000 50,000 J
enone a 00.000 60.000 (2) 15,000 175,000
Land ae 175000 49.000 (2) 40,000 inal 27500
id ecuit 490/000 300,000 Y ’
eee ceed 5.000 (2) 70,000 1) mst 75,000
aoe 1) 225¢
investment in ky Co... am t sano ;
| 21535000
L_Totol Assets... ceoseuee. —P200000 ?500.000 | _Wobittes ond Secthoden? a oR |
| Accounts payable... 100,000 P100,000 300,000
| Bonds payable. 20000 1on000 ia se
Premium on bonds ead
Common stock, PIO por. 600.000 |
| Common tock, PlOpor ooon0 _(1)20000
| Poidin copitalin excess of these
Bar ee 62.000 |
Paidin capitalin excess of 20,000 (1) 20,000 238.000
Retoined eamings** ,000
| Retoned eon i ce 80.000 (1) 20.000 (1) 75,000 |
| Non-contoting interes! ; a. 25.000 1a |
Total Lobittes and Stockholders’ ~ ote 2445.09 PLSD |
{SOU oooesseeseessoovenvees Bhgonng eggnog e.44s.000 ‘
{1) Eiminote invesiment against stockholder’ equity of Sky Co.
(2) Eliminate
investment agoinst allocated excess.
£380,000 -P 180,000 - 12,000 ~P8,000 = P150,000.
**P500,000 + P100,000 (10.000 shares x p10 por) = P600,000.
{°° P50,000 + P20,000 = P8,000 = P6200.
“***P250,000 - P12.000 = 238,000.
Incidentally, the Non-controlling interest is computed as follows:
| Non-controling interest (portial) ......
P 82500
‘Add: Non-controling interest on umecorded goodwill 17.500 |
(P70,000, full--P52,500, partial). P00.000
Non-controling interest (full. J
Take note that in compliance with the entity theory the consolidated retained earings
is equivalent to ret
lained eamings of the parent company on the date of acquisition,
The amounts that will ‘Appear on the consolidated balance sheet are shown in the fina
column of Figure 2-7, Ni
lotice that the amount of goodwill reported is P35,000 (including
the recorded goodwill of P5,000).
Peer Company and Subsidiary
Consolidated Balance Sheet
ot January 1, 20x4
Assets |
P 195,000
125,000
175,000
275,000
690,000,
—15.0
21,535,000 |
P 200,000
P 300,000
35.000 __335,000
$35,000
‘Common stock, P10 par . P 600,000
Paid-n copital in excess of por 62,000
Retained eamings............. : i _ 238.000
Parent's Stockholders’ Equity/Equity Attributable to
‘Owners of the Parent . P 900,000
Non-controling interest _ 100.000
| Total Stockholders’ Equity y 1.000.000
Total Liabifties and Stockholders’ Equity 1.535.000
4
“Advanced Financtal Accounting - A Comprehensive: Conceptual & Procedural Approach SEPARATE ond CONHOUD,
= DATE OF AC ATED FINANCIAL STATEMENTS
peace aes ee eee
Mustration 2-12: Bargain Purchase Gain
Parade Company issueg 10,000 shores of its P1 por commo
scud Company. The fair va par ,
peen plagued by many tro :
intr bles, including a lawsuit from a Co! of
pe wire aby 7 the uncertainty of the outcome of he lawsuit ands ne
cud Company, the exit of Scud Company Was
to sell the company at a is yy, the existing owner of 9¢ he igentifcble
(© discount to ils net fair value, The fair value of the
aaa a SOROS interests and the consideration transfered were reassessed
and deemed to be reiaby determined, Far valve of the non-contoling interests 5 ©
acquisition date was P75,000, i
Eo eed balance sheets of the two companies immediately prepared b
C with acquiree's fair value were presented as follows:
n stock for 80% interest in
efore the
“parade Co, Scud Co. ‘Scud Co.
tor aes __- took valve _Bookvalue _Fairvalve_
arene |
Accounts receivable .... an a p 20000 © -P-20,000 |
vert apeava testi Z > |
IO ooo sesceesnseee 80,000 50,000 $5,000
J Lond. oss cee a 100,000 40,000 70,000 |
| Buildings ond equipment (net)... 620,000 185,000 310,000 |
Cc ate |
| Copyright... 0. — 90,000 |
et
abies and Stockholders’ Equily
Accounts poyable.......... P3500 P 35.000 |
| Estimated labiity for contingencies... eee : 5.000
| Bonds payable... i 200,000 100,000 100,000 |
| Common stock, PI par........ 26,800 10,000
| Paid in capitan excess of por... .sesvvv-- 368,200 90,000 |
Retained earings ...... Saynveniniee 0 argue]
Stockholders’ Equity.......... Piso © 25000 48.000 |
Partial-goodwill Approach (Proportionate Basis)
The resulting ownership situation can be viewed in the sched
allocation of excess.
Schedule of Determination and Allocation of Excess (Proportionate Basis)
Date of Acquisition - January 1, 20x4
| Fair value of Subsidiary (80%)
Consideration transfered:
ule of determination and
|
Common stock: 10,000 shares x P25 per share......... P 250,000 |
| Less: Book valve of stockholders’ equity of Scud: |
| ‘Common stock (P10,000 x 80%) ...... P 8,000 |
| Paid-in capital in excess of par (P90,000 x 80%) . 72,000 |
Retained earnings (P60,000 x 80%) ....... 48,000 128,000
| Allocated excess (excess of cost over book valve} P 122,000
Less: Over/under valuation of assets and liabilities:
Increase in inventory (P5,000 x 80%)... . P 4,000
| Increase in land{P30,000 x 80%) ....-. 24,000
Increase in buildings and equipment
(P125,000 x 80%)... padhad €ih & 100,000
Increase in copyrights (P50,000 x 80%) 40,000
Increase in contingent fabilties ~ estimate
Fabily for contingencies (P5,000 x 802)........... {4,000} 164,000
Negative excess: Bargain purchase gain (to controling (P-42000)
interest or attbutable to parent only) .....s.e0s2+-1 |
- ra —$_— Rea oF CHAPTER 2
i follows:
The over/under valuation of assets and liabiiies ore summarized s
inder
euda.——‘Sevdco. Oval
Valvation
Hook value_ Fak valve P5000
Inventory P $0000 P5500 30,000
Lond, 40,000 iitees 125,000
Buildings equipment (net) 185,000 coe 50,000
Copiight nea a aa {_§.000)
Estimated labiity for contingenc —2 £205,000
| Net undervatuation ezisom 2.400.000
Parade Company records the stock acquisifion on its books with the following entry on
the date of acquisition:
January 1, 20x4
(I) Investment in Scud Company + 250900 1000
| Common stock, PI par... d 240,000
| Paid.in capital in excess of paar (P250,000 ~ P10,000 par} te
Acquisition of Scud Company. ~
The schedule of determination and allocation of excess provides complete guidance
for the worksheet eliminating entries on January 1, 20x4:
(El) Common stock -ScudCo......... sone
‘Additional paid.n capital -
Retained eamings - Scud Co
Investment in Scud Co...
Non-controling interest (P160,000 x oe
Eliminate investment against stockholders’ equity of Scud Co
(E2) Inventory. : ee
Lond...
Buildings and equipment
Copyright... sc...
Estimated fcbilty for contingencies .
Investmentin Scud Co :..
Non-controling interest (P205,000 x 20%) ie
Retained eamings (bargain purchase gain - closed to |
etoined eamings since only bolance sheets ore being
examined) . ee
Eiminate investment:
10,000 ]
90,000 |
60.000 |
80m)
The separate financial statements of the two companies, the eliminating entries, and
the consolidated totals for the balance sheet on January 1, 20x4, are shown in Figure 2-
I.
Figure 2-11: Worksheet for Consolidated Balance Sheet, January 1, 20x4. Date of
Acquisition: 807%-Owned Subsidiary (Proportionate Basis)
Porade Scud Eiminations i
So. a i. eT)
P 279,000
P 20,000 92.000 |
50.000 (2) 5000 135.000 |
40,000 (2) 30,000 170,000
185000 (2) 125000 e000
(2) 50000 5000, EPARATE and CON
DATEOFAcoun ee FINANCIAL STATEMENTS 167
et
Cc Uobiies ond Sectoid Equity
| AccounI Bayabie | ew
| Estimated habit for i
1 Contingencies
| Bonds payable
| Common stock PI pa
Ragen Stock Py par ma
| ROH coita in excess sgn ane so
| Rot capita in excess ot poy oil
| Retoined eamings : pian
| Retoineg Samings cn : -
| Nomcontoting inter ee
4
523000 |
| TOES ondStockhakes |
: _emmooy —_€30000
me
21.686,000
sores» (P25 ~ Pi] =Pe03 200
‘Owing features of the workp. ‘ortionate basis):
* Incidentally, the non. ; > Workpapers (proportionate basis): ted as folows:
ole -Controliing interest If isition is computed
Tae tthe non. in ete! on the date of gcquition er OT
| Common stock = Scud Co ae
| Paidtin capital in excess of d ‘oom |
| Par~SCUd CO... eeeree ve
| Retained eomings-Scudco
800k value of stockholders equity Scud Ca versseee P1600
| Aclustmentstoretiect fo vale (over/ undervaivation 205,000
| 7 Of assets and iabilties) blab . ateenaee . 000
Gtr value of stockholders’ equity of subsidio ate
oe een
Multiplied by: Non-controling Interest percentage ...... =H
Non-controlling interest (partial =
Take note that in compliance with the entity theory the consolidated retained earings is
Equivalent to retained eamings of the parent Company plus bargain purchase gain on
the date of acquisition,
1€ AMounts that will oy
Figure 2-11:
Pear on the consolidated balance sheet are shown in the final column
Parade Company and Subsidiary
Consolidated Balance Sheet
January 1, 20x4
‘sel oy ]
COM seossscnnseeae P 279,000 |
| Accounts receivables 92,000 |
inventories a9 «ie 135,000 |
| Land So ere 170,000
Buildings and equipment (net} 930,000
COpHFQH eee 50,000
Total Assets... 7 656.000 |
_Liabilties and Stockholders’ Equity
bites
ACCOUNIS POYODIE ees cee P 115,000
Estimated liability for contingencies... $,000
Bonds payable... i — 300,000
Total Lobilfles........ 420000
Stockholders’ Equity
‘Common stock, PI par... P 36,800
Poid-in capital in excess of par. 603,200
Retained eomings......... : 573000
Parent's Stockholders’ Equity/Equity Attributable to the
Owners of the Porent......-...ceseeses a 1,163,000
Non-controling inlerest........-.eseeses _ 73.000
| Total Stockholders’ Equity (Total Equity) . 1,236,000
Total Liabities and Stockholders’ Equity 1.656.000,
A unting - A Comprehensive: Conceptual & Procedural Approach Full-goodwill Approach (Fair Value Basis)
termination gn,
dule of del id
The resulting ownership situation can be viewed in the sche
allocation of excess as follows: (refer to next Pagel ) odwill or Fair value Basis)
Schedule of Determination and Allocation of Excess _ 9°
Date of Acquisition - January 1,20x4_ a
Foir valve of Subsidiary (100%)
Consideration transfered: Fee |
Common stock: 10,000 x P25 (80%)
| Fair value of NCI (given) (20%) . ve saan eee
Farr valve of subsidiary (100%) .
| Less: Book value of stockholders’ equity of Scud: P_10,000
‘Common stock (P10,000 x 100%) . 90,000
Poidin capital in excess of por (P90,000 x 1008). soo 160000
Retained earnings (P60,000 x 100%)... 209+ F aR
Atocated excess (excess of cost over book valve)
Less: Over/under valuation of assets and liabilities: p 5,000 |
Increase in inventory (PS,000 x 100%) .......2-50+ 30,000 |
Inctease in land (P30,000 x 100%) : |
Increase in buildings and equipment 125,000 |
(P125,000 x 100%) . 50,000
Increase in copyrights (PS0,000 x 100%)
Increase in contingent labilties - estimated 05,000
fiabilty for contingencies (P5,000 x 100%) .....+:25+2+ {5,000} |
Negotive excess: Bargain purchase gain to controling {P.40.000) |
interest or attributable to parent only) ....-. A |
Parade Company records the stock acquisition on its books with the following entry on
the date of acquisition:
January 1, 20x4
(1) Investmentin Scud Compan hte 250,000 |
‘Common stock, P1 par..
Paid-in capital in excess
Acquisition of Scud Company.
$0,000 -P10.000 por...» 240,000)
The schedule of determination and allocation of excess provides Eoinplele guidance
for the worksheet eliminating entries on January 1, 20x4:
{E1) Common stock - Scud Co 10,000
‘Additional paid-in capital - eae . 90,000
Retained eamings - Scud Co abana Ee eo es 60.000
Investment in Scud Co.......
Non-controling interest (P160,000 x 20%) .
Eliminate investment against stockholders’ eat of Scud Co
(€2) Inventory .
Land
Buildings and equipment
Copyright...
Estimated liability for contingencies .
Investment in Scud Co
Non-controlling interest
Retained eamings (bargain purchase gain - “closed to
retained eamings since only balance sheets are being
examined) ....
Eliminate investment against allocated excess.
128,000 |
122,000 |
43,000
s
Ls
SL Sines 4 169
Figure 2-12: Worksheet for Consolidated Bolance sheet, January 1. 20x4, Date of
Acquisition: 80%.
4 — Owned Subsidiary (Fair Value Basis)
; ar _
| Assets Porade Scud Elininalions consolidated |
| cosh... So Oo a 790 |
| Accounts receivable... ‘ ae ° “200 |
Weetoyeet te 1000 P 20000 i
i Fl 22000 soot 2) som im
Scocenoncinn EAE 8 2 rae
‘ eee M (2) 125. 50,000
investment in Scud Co. 250,000 Aer (1) 128.000 |
Totol Assets Palos BSc ia am usa |
| Unites and Stockholden' guy #01000 ezi002
| Accounts payable P s000 Pp 115,000
Eslimated lability for ed
| contingencies. mn
2) 5,000 §
Bonds payable. 200000 100000 ’ smn
Common stock. PI port, 3680 a
Common stock. PI por... :
Poid-n copitalin excess of pare 603.200 eeeeeleeae =
| Pain cep exces cfr 90000 ((1) 90000
| Retoined earnings ato ay 40000 521,000
| Retained earings... ; ;
| Non-controliing interest. baal liaand (1) 32,000
Y 1500 |
| Totol Liobilties and Stockholders’
{__Equity pla 21,656,000 |
(1) Biminate Teter ops dectheaesecutylscoa Co LSet
2) Bliminate investment against allocated excess.
* P26,800 + (10,000 shores xP1 par) = P34,800,
‘* P363,200 + [10,000 shares x (P25 -P1)] = P603,200
Notice the following features of the workpapers (proportionate basis):
* Goodwill - there can be no goodwill when the price paid is less than the fair valve of the
parent's share of the fair value of net identifiable assets.
«The NCI (full) can never be less than the NCI percentage of the fair value of the
stockholders’ equity of subsidiary (or net assets, in this case, it cannot be less than 20% x
365,000 (or P160,000 + P 205,000, net undervaluation) = P73,000.
* Bargain purchase gain (gain on acquisition) - the only gain recognized is that applicable
to the controling interests whether under the proportionate basis (option 2) or fair value
(option 1).
« Howis the NCI is affected by the existence of a bargain purchase gain?
It is a rare case that a bargain purchase gain may arise, such gain has no effect on
the calculation of the NCI share of equity. The gain is made by the parent paying less
than the net fair value of the acquirer's share of the identifiable assets, liabilities and
contingent liabilities of the subsidiary. The NCI receives a share of the fair value of the
subsidiary, and has no involvement with the bargain purchase gain,
Since the fair value of the NCI is given which is P75,000 higher than the P73,000, the
NCI on the fair valve of the stockholders’ equity is subsidiary, then there is no need
determine its accuracy.
Toke note thot in compliance with the entity theory the consolidated retained eamings is
equivalent to retained eamings of the parent company plus bargain purchase gain on
the date of acquisition. ee,
The Omounts that will appear on the consolidated balance sheet are shown in the thy
Column of Figure 2-19.
Parade Company and Subsidiary
Consolidated Balance Sheet
—___Janwary 1, 204_
[Cosh
Accounts receivables |
Inventories oe
land .,
Buldings and equipment re
Copytight ent
Tc
Non-controling interest.
Total Stockholders’ Equity Total Equity).
Total Utiities ang Stockholders Equity .
Subsidiary’s Treasury Stock
Otol Assets
Llcbilties and Stockholders’
Liobittes ae oe “op 115.00 |
Accour oyabl ae epee 5,00 |
mated lobiity for contingencies . mou |
Bonds pay Frag ges etsey Pp 2.000 |
Total abies. |
Stockholders’ Equity...” |
Gemmmon sock. Pi par... theese canvantaeregeeeeeee * gab
‘aic-n capital in excess of par vite 7 521.000
Retained e: iia . ee on
Parent's Stockholders’ ‘uitVEquity Attibutable fo the 1,161,000 |
ers of the Parent . . a |
|
|
|
A subsidiary may hold some of its own shares as treasury stock at the time the paren
Company acquires its interest. Recall that treasury stock is a contra-equity accoyn:
debit balance on the books of the subsidiary. The computation of the
Percentage interest Acquired, as well as the total equity Acquired, is based on share;
outstanding and should, therefore, exclude treasury shares,
Mlustration 2-13; Subsidiary has Treasury Stock
For example, Assume that P
which has a
Company acquired 18,000 shares of $ Company common
|
Stock on January 1, 20x4, for a Payment of P3,000,000 when $ Company's stockhoider
equity section Appeared as follows: |
Common stock, P100 par, 25,000 shares sued. P 2.500.000 |
Paid-in capital in excess of par : 700,000
MOR CRI os ts weer eather |
P 4,000,000
Less: Treasury stock, at cost, 1,000 ‘shares . —200,000
Total stockholders’ equity... 3,800,000
P Company's interest in § Company is 75% computed as follows:
Issued shores... 25,000
Less: Treasury shares . 1,000
Shares outstanding 24,000 |
% of ownership:
‘Acquired shares : an
Divided by: Shares outstanding a
of ownership
al Accounting ~ A Comprehensive: Conceptual & Procedural Approach SEPARATE and CONSOLIDa: FINANCIAL STATEMENTS
~ DATE OF ACQUISITION ded m :
; IS
Assuming the use of TUl-goodwill approach, and assets ond labiftes of S oli
book values APPrOKIMately equal to their respective foir values except the oi :
= Over
ey —— Sher Prout? 290
Ce
| Valuation
Schedule of Determi
inati
Date of Acquistion a2" ard Alocaton of Exces(Ful-goodval
January 1, 20x4
Fait value of Subsidiary (100%)
| Consideration tronsterred (P3,000,000 / 75%) ........ in
| Less: Book value of Stockholders’ equity of § Co:
| Common stock {P2.500,000 x 1005)
pOcincopitaln excess of par P700000 x Tod)
|
| Retoined eamings Peon ops 100%)
Treasury stock, at cost... trdeuse vont au
| Alocated exCess (excess of Cost over book value) ... al
| Less: Prevhunder Valuation of assets and liabilities:
| Increase in inventory {P30,000 x 100%) . 50,000
| poy tea in and 20.0 10). is moon
‘ositive excess: Full -oodwill (excess of cost boa |
foi value) os he Gas aw
Company records the stock acquistion on is books withthe folowing entry on the
date of acquisition:
| January 1, 20x4
| {1} Investment in $ Company
| Cash...
a 3,000,000
Acquisition of § Company.
Because the treasury stock account represents a contra stockholders’ equity account,
it must be eliminated by o credit when the investment account and subsidiary
company's equity accounts are eliminated ‘on the workpaper.
The schedule of determination and allocation of excess provides complete guidance
for the worksheet eliminating entries on January 1, 20x4:
(El) Common stock=SC0...........0. 2,500,000
Paid-in capital in excess of par-$ Co 700,000
Retained eamings-$Co.......... 800.000
Treasury stock, at cost ae 200.000
Investment in S Co (P3,800,000 x 75%) 2,850,000
Non-controling interest (P3,800,000 x 25%) 950,000
Eliminate investment against stockholders’ equity
(€2) Inventory... 30,000
Lond... , - 20,000
Goodwil..... . » 180,000
Non-controling interest [(P50,000 x 25%) + (P150,000 x 25%)". 50,000
Investment in § Co (P3,000,000 - P2,850,000) 150,000
Elminate investment against olocated excess.
i i if there i no fa to Wustraion 15-10, ful-goodwal) in
“This opproach is applicable only if there isno far vale of NCI given (refer
determining the NCI of ful goodwil amounting to P9000. 7 PTER
a a =
Reverse Acquisition (Takeovers)
: ip of the shor
A reverse acquistion occurs when on enterprise obtains ania voting hae: ot
Gnother enterprise but, as part of the transaction, issues to the shareholders of th,
Consideration that control of the combined enterprise Passes
acquired enterprise.
. as the parent
Although, legally, the enterprise that issues the shares Is regarded ae say : .
Continuing enterprise, the enterprise whose former shorehi eee s
Combined enterprise is treated as the acquirer for reporting purposes.
AS Q result, the issuing enterprise (the legal parent) is deemed fo oe eamegiee at
the company being acquired in appearance (the legal subsidiary) i ave
SCquited control of the assets and business of the issuing enterprise (the Iegol parent
effectively the acquiree while the legal subsidiary is effectively the acquirer, althoug,
the legal parent is the entity that issues shares to acquire a legal subsidiary, a revere
Acquisition is often initiated by the legal subsidiary)
While not a common event, this form of business combination is often used by Scie
Non-public companies as a means to obtain a stock exchange listing without having jy
Qo through the listing procedures established by the exchange.
A takeover of a public company that has a stock exchange listing is arranged in such g
way that the public Company emerges as the legal parent, but the former shareholdey
of the non-public company have control of the public company.
Mlustration 2-14: Reverse Acquisition (Takeover)
The balance sheets of RR Co. and TT Co, on the date of a reverse acauisiion busines
Combination are shown below:
RRCo. RCo. TICo.
} Book valve Fairvalue Book Valve __
| Curent asset... cssssssssssnnnoen P iim P 1400 P 3i0
Land, buildings and equipment (nel) 3.200 — 3300 — 10.200
4s =P 4700 P1330
idiot ceca P 1.440 1,440 P 61a)
| Common stock (320 shares 1.000
| Retained eomings....... 1,880
Common stock (192 shar 2160
| Retained eamings...... sn 500
P4320 213.220
‘the shares of TT Co. have a fait value of P30 share
Notice the following principles and procedures:
1. RR is a public company engaged in business activity with a listing on a major
stock exchange. TTis a (private) company not listed on any stock exchange.
2. A business combination is initiated by TT (private company-legal subsidiary-the
acquirer) whereby RR (public company-legal parent-the acquire) issues 4
shares to the shareholders of TT for 100% of their shareholdings.
3._ By structuring the combination in this manner, RR becomes the legal parent ond
TI the legal subsidiary.
‘An examination of the shares held by the two shareholder groups in the following
manner clearly indicates that TT is identified as the acquirer:
rn Accounting = A Comprehensive: Conceptual & Procedural Approach before and after Exchanges A Shores |
y before ond chet
116, - Private Co. |
(legal subs
| Fair value of net assets P *,
| Book value of net Assets Pe 5260 7,200
Lor value per share of stock a £9
“The numberof shares can be determined os lolows
3, Before the combination he shareholders of hold 192 shares in hat COmeOnY fat
2 Ti Mould hove fo sve "x additonal shares such thatthe 192 curently owned snares wi rers0r"
60% of the total shares outstanding, °
3 Mehe ate sue he otal sores oustanding wil be 192 shoes + x" acstona shoves 0 :
1@ legal subsidian ry-1
4. Teteoe, he mathemaiod eauotes Ie delomine adfonl shores oso:
192 = 60% (192+ x)
192=115.2+ ox
192-115.2= 40x
768.60 = 60X/.60
X= 128
Or, sino (refer to No. 2 above): 192 shares/60% = 320 total shares x 40% = 128 shares of TT to be
issued.
Under the acquisition method of accounting for a business combination: :
G. the fair value of the net assets of the acquiree [RR Co. - the legal parent) is
combined with the Carrying amount of the net assets of the acquirer (IT Co. -
the legal subsidiary).
b. Because TT is the acquirer, the acquisition cost is determined as if TT had issued
shares to the shareholders of RR. A calculation has to be made to determine the
number of shares that TT would have issued to achieve the same result (i.¢., 50
that its shareholders would end up holding 60% of IT's outstanding shares).
The acquisition cost is the number of shares that TT would have issued, measured at
their fair value, and is allocated in the following manner:
The consideration transferred is P3,840 (128 shares at fair value of P30 per share.
Goodwill from the business combination is as follows:
Consideration transferred (128 shares x P30 per share) fs P 3.840 |
| Less: Book valve of net ossets/stockholders’ equity of RR (P1.000 + P1880) x100% 2.880
Allocated exCeS 2.2.0.2. cesses ae eee ee P 960 |
Less: Over/under valuation of assets and liabilities : |
Increase in current assets (P1,400 -P1,120) x 100%. . P 280
Increase in plant assets (P3,300 - P3,200) x 100%. 10 320 |
Positive excess: Goodwill aes B30
The following items should be noted in relation to the preparation of the balance sheet:
a. The balance sheet of the consolidated company immediately after the business
combination is prepared by combining the fair value of the net assets of RR, a CHAPTER 9
: ing amount of the
Including the goodwill from the combination, with the carry! i mt
assets of TT.
ined stock! 4
The stockholders’ equity of TT Company becomes the oe oo
equity of the company. The peso amount shown mon shares of TT belo,
determined by summing the peso amount of the oa ir value. i
the combination and the deemed issue of 128 shares at fait
hi of o
~ However, the number of shares shown as issued is the number of outstanding
shares of the legal parent RR.
The Consolidated balance sheet of RR immediately affer the reverse Acquistion
Or takeover takes Place is shown below:
— —
jee naa Cy
= ce %
| Current asset (P1400 + P3,120).. : 1330
| Lond, buildings and equipment (net. P3,300 + P10,200)
| Goodwill F i z i 7
Total Assets...
| Uobilties (P1440 + P6120) S
Common stock *(P2,160 + P3 840), 800 shares @ P7 5
Retained eamings,
re Total iaities and Stockholders Eauiy
m
he number of shares issued and outstanding would be shown as 800 shares (320 + 480)
Are there Non-controlling Interests in a Reverse Acquisition?
Non-controlling interest is zero, if all of T's stockholders accept the offer to exchange
their shares.
IF not all of TT's stockholders agree to the exchange of shares, TT will have on
Controlling interests
In the above example, there are no Non-controlling interests as all of TT's stockholdes
accept the exchange.
Fair Value Adjustment Calculations
Fair value is defined under by PFRS 13 as “the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between markets at the
measurement date.”
With the definition above, there is a need to look at some practical matters in relation
fo the requirements of PFRS 3 and PFRS 13 regarding the fair value in more detail.
In this chapter and the succeeding chapters, goodwill was calculated as the difference
between the cost of investment and the book value of the net assets acquired by the
group.
In this calculation, there is a need to comply with the definition above to ensure that ihe
book value of the subsidiary’s net assets is the same as thejr fair value,
There are two possible ways of achieving this:
* No push-down accounting - the revaluation may be made as a consolidation
adjustment without being incorporated in the subsidiary company’s books. In ths
“Advanced Financial Accounting ~ A Comprehensive: Conceptual & Procedural Approach SEPARATE and CONSOLIDATED FINAN
“DATE OF ACQUISITION UAL STATEMENTS et toe
Sa eee eee eee
case. there is a neeq to
iary's balance
make ji sidiary's BO
eet as eliminatin, Necessary adjustments to the sub:
'9 entries. Oniy then, we can proceed to the consolidation.
Mtoe aud Push-d chapter and the
succeeding chapters, own accounting) being used in this chap!
« Push-down Accounting - the sub: it peal
sidiary company might incorp
necessary revalvations in its own books eo case, we can proceed
directly to the consolidation, faking asset values and equity accounts figures
straight from the subsidiary company’s balance sheet.
Fair values are "
Pused-down tot ree’ is is known as push-
down accountin he acquiree's books. This
19 Which is not in Compliance with PFRS 10.
Push-down Accounting ‘
ne term “push-down accounting” refers to the ‘an acquired
"1 i practice of revaluing
subsidiary’s assets and liabilities to their fair values directly on that subsidiary's books ai
the date of acquisition,
if this practice is followed, the revalvations are Tecorded once on the subsidiary’s books
at the date of acquisition, nd, therefore, ore not made in the consolidation
workpapers each time consolidated statements are Prepared.
Those who favor push-down argue:
« that the change in the Subsidiary's ownership in an acquisition is reason for
adopting a new basis of OCCounting for the subsidiary’s assets and liabilities, and
this ~ basis of accounting should be teflected directly on the subsidiary's
books.
+ The above argument is most persuasive when the subsidiary is wholly-owned
nd is consolidated or has its separate financial statements included with the
statements of the parent,
Further, those who oppose push-down accounting believe:
that, under the historical cost Concept, a change in ownership of an entity does
not justify a new accounting basis in its financial statements.
* Push-down accounting results in the revaluation of assets and liabilities of a
continuing enterprise, a practice that is not normally acceptable.
Exemptions from Preparing Consolidated Financial Statements
However, the accounting standards allow exemptions for the presentation of
consolidated financial statements by a parent if and only if;
1. The parent is itself a wholly-owned subsidiary, or is a partially-owned subsidiary
of another entity and its other owners, including those not otherwise entitled to
vote, have been informed about, and do not object to, the parent not
presenting consolidated financial statements;
2. Its debt or equity instruments are not publicly traded:
3. Itis not in the process of issuing securities in public securities markets; and
4. The ultimate or intermediate parent publishes consolidated financial statements
that comply with Philippine Financial Reporting Standards,
‘Advanced Financial Accounting ~ A Comprehensive: Conceptual & Procedural Approach 16 gHAr tit a
Pee
SSS
7 ach i Following are
Where an investee or acquiree is controlled, it is consolidated. the
Quidance on the consolidation process:
* The parent company should prepare consolidated finan
uniform accounting policies; 7
+ Like items of the parent's and subsidiaries’ assets, liabilities. equity,
expenses are combined; ‘
* The camying amount of the parent's investmet
Parent's portion of equity of each subsidiary is ©!
‘accounted for in accordance with PFRS 3;
* Intra-group assets, liabilities, equity, income, expenses and cash flows ae
eliminated in full, as are any unrealized profits;
cial statements Using
income ang
nt in each subsidiary and the
ffset, with any related goodwi
* Non-controlling interests are presented within equity:
+ Changes in a parent's ownership interest in a subsidiary that do not result in the
Parent losing control of the subsidiary are accounted for within equity; and
+ Where control is lost, a gain or loss on disposal arises, and the carrying valve o:
any remaining investment is revalued to fair value.
Exclusion of a Subsidiary from Consolidation
Where a parent controls one or more subsidiaries, PFRS 10 requires that consolidated
financial statements are prepared to include all subsidiaries, both foreign and domestic
other than:
* Those held for sale in accordance with PFRS 5; and
+ Those held under such long-term restrictions that control cannot be operated,
The rules on exclusion of subsidiaries from consolidation are necessarily strict, because
this is a common method used by entities to manipulate their results. If a subsidiary that
cares a large amount of debt can be excluded, then the gearing of the group as.a
whole will be improved. In other words, this is a way of taking debt out of the
consolidated balance sheet.
PFRS 10 is clear that a subsidiary should not be excluded from consolidation simply
because it is a loss making or its business activities are dissimilar from those of the group
as a whole. PFRS 10 rejects the latter argument: exclusion on these grounds is not
justified because better information can be provided about such subsidiaries by
consolidating their results and then giving additional information about the different
business activities of the subsidiary, e.g. under PFRS 8 Operating Segments.
Different Reporting Dates
In most cases, all consolidated companies will prepare accounts to the same reporting
date. One or more subsidiaries may, however, prepare accounts to a different
reporting date from the parent and the buk of other subsidiaries in the group.
ee =e — yaaa ane SEPARATE and co,
NSOLp,
~ DATE OF ACQUIS gg ATED FINANCHA
———— a L STATI
“TION _ EMENTS =a
In such cases th ERE eae eae eet
© SUbsiqi
oe 'he group, or’ May prepare Gdditional statements to the reporting date of
aa Otnt may sti be Useg (eScliaton Purposes. If this is not possible, the subsidiary's
Porting dates ig three months ore CoRsokdaton, Provided that the gap between the
t less,
Uniform Accounting Policies
Consolidateq
‘ 'aNncia}
Policies for the hronsactong omens should be Prepared using uniform accounting
: Other events in simi
Adjustments must similar circumstances.
Policies, so that their fname where members of a group use different accounting
Ncial statements Fe suitable for consolidation
Date of Inelsion/Exchjon
The results of su
statements: Bsichry Undertakings are included in the consolidated financial
* From the date of “qi
* To the date of"
Once an inve:
under PAS 28 i: eh N39 subsidiary, i shoud be realed as an associote
PERS 9, PICable) oF joint venture under PERS 11 cr os an investment under
_ ACQuisition", ie., the date on which the investor obtains control
Gisposal,"
Le. the date when the investor loses control.
Investment Entity
An entity that:
7 a funds ftom one or more investors for the purpose of providing those
inves Oris) with investment Management services;
7 can to its 'Vvestor(s) that its business Purpose is to invest funds solely for
Mi ums from capital appreciation, investment income, or both; and
. leasures ‘Ond evaluates the Performance of substantially all of its investments on
fair value basis,
Investment Entities Consolidation Exemption
PFRS 10 contains special Qccounting requirements for investment entities. Where an
entity meets the definition of an “investment entity” it does not consolidate its
subsidiaries, or apply PFRS 3 Business Combinations when it obtains control of another
entity.
An entity is required to consider all facts and Circumstances when assessing whether it is
Gn investment entity, including its Purpose and design. PFRS 10 provides that an
investment entity should have the following typical characteristics:
+ ithas more than one investment;
+ ithas more than one investor:
+ ithas investors that are not related parties of the entity: and
« it has ownership interests in the form of equity or similar interests,
‘Advanced Financial Accounting ~ A Comprehensive: Conceptual & Procedural Approach 7 CHAPTER 2
The absence of any of these typical characteristics does not necessarily disquality an
entity from being classified as an investment entity
An investment entity is required fo measure an investment in a subsidiary at falr value
through profit or loss in accordance with PFRS 9 Financial Instruments.
However, an investment entity is still required to consolidate a subsilory at
Subsidiary provides services that relate to the investment entity's investment activities,
Because an investment entity is not required to consolidate its subsidiaries, intragroup
telated party transactions and outstanding balances are not Sane . pecia
fequirements apply where an entity becomes, or ceases to be, an investment entity.
The exemption from Consolidation only applies to the investment entity
itself, Accordingly, a parent of an investment entity is required to consolidate all entities
that it controls, including those controlled through an investment entity subsidiary, unless
the parent itself is an investment entity.
Appendix A: Variable Interest Entities (VIEs) or Structured Entities
A second type of controlled enterprise is a structured entity, also known as variable
inter
fest entity or a special purpose entity. PFRS 10 provides guidance on when q
structured entity (SE) should be consolidated, An SE is set up the reporting enterprise (or
‘sponsor’) fo perform a very specific and narrow function.
The difference between a subsidiary and an SE is that an SE is not controlled through
voting power. Indeed, an SE may not even be a corporation but could instead be q
Partnership. An SE also can be created simply by delegating specific powers to certain
individuals to act on behalf of the “sponsoring” corporation - in effect, by creating sort
of “agency” relationship with individuals instead of corporate entities.
Consolidated financial statements are usually necessary for a fair presentation if one of
the entities in the consolidated group directly or indirectly has a controlling financial
interest in the other entities. The usual condition for a controlling financial interest is
Ownership of a majority voting interest.
However, application of the Majority voting interest requirement may not identify the
Party with a controlling financial interest because the Controlling financial interest may
be achieved through arrangements that do not involve voting interests.
The first step in determining whether the financial statements should be consolidated is
to determine if the reporting entity has a variable interest in another entity, referred fo as
@ potential variable interest entity.
Transactions involving VIEs have become increasingly common. Some reporting entities
have entered into arangements using VIEs that appear to be designed to avoid
reporting assets and liabilities for which they are responsible, to delay reporting losses
that have already been incurred, or to report gains that are not real.
The root of the issue is that sometimes the party that owns the majority of the equity of a
variable interest entity does not actually contol the entity because it is thinly
“Advanced Financial Accounting ~ A Comprehensive: Conceptual & Procedural Approach SEPARATE ond CONSOL)
= DATE OF ACOUITion = INANCIAL STATEMENTS "9
cnby re ae Ord, the majority of the financing Is through debt rather _
determine wh Punting standards board developed a tisk sand rew aa
2 0 should Consolidate such a partnership or other variable interest entity.
The investments or oth
er Interests that absorb portions of a variable inferest entiy’s
variable ier or Tecelve portions of the ones expected residual efuns ore caled
sts. The identification of variable interests requires an economic analysis
of the rights on sn ther
emia 'd obligations of @ legal entity's assets, liabilities, equity. and o}
Variable interests ore cor
entity that move with che
of variable interests.
ntractual, ownership, or other pecuniary interests in a hen
‘anges in the fair value of the legal entity's net assets excIUSY
Operations of an entity and its ass enerally not
ets tend to create variability (and are g
variable interest) while Habitties and equity tend fo absorb that variabilt.
Appendix 8: Deferred Taxes in Consolidations
A common motivation for the selling firm in a business combination is to structure the
deal so that any gain is taxstee at the time of the combination. To the extent that the
seller accepts Common stock rather than cash or debt in exchange for the assets, the
sele's may not have to pay faxes unt alater date when the shares accepted are sold.
In this sation, the aequiing fim inherits the book values of the assets acquired for tax
purposes. When the acquirer has inherited the book values of the assets for tax
purposes but has recorded market values for re joses, a deferred tax liability
needs to be recognized. porting PU
!f a purchase acquisition is fox-free to the seller, the tax bases of the acquired assets
ond liabilities ore coried forward at historical book values. However, the assets and
fiabiliies of the acquired company are recorded on the consolidated books at
adjusted fair value. Under current guidelines, the tax effects of the difference between
Consolidated book values and the fax bases must be recorded as deferred tax liabilities
or assets,
Mlustration 2-15: Determination of Goodwill with Deferred Tax Implications
On July 1, 20x4, Par Co purchased 1,500,000 shares from Sub Co's existing owners, The
total number of shares issued by Sub Co was 2,000,000. A reliable measure of the fair
value of Sub Co's share was P5 per share. Par Co was obligated to pay an additional
P1,000,000 to the vendors of Sub Co if Sub Co maintained existing profitability over the
subsequent two years from July 1, 20x4.
It was highly likely that Sub Co would achieve this expectation and the fair value of the
contingent consideration was assessed at P500,000.
Fair value of non-controlling interests as of July 1, 20x4 was P2,500,000. The tax effects on
fair value differences are recognized in this illustration on the basis that the tax bases on
the identifiable assets acquired and liabilities assumed are not affected by the business
combination. Assume a tax rate of 20%.
ay = Comprehensive Comeptoal & Proced = | Accounts receivable.
Inventory cae
Buildings and equipment (nel
Other intangible assets
| in-process Tese
CHAPTER 2
“Fub Co Over/Under |
“Sub Co SubCo —Over/|
an ra wohe- Valuation |
50.000 P 50.
* mooco 380000 040g
! 450,000 00 |
somooo 2900000 | zo. |
Voo000 7500000 10000 |
0.000 © _1.000,000
‘earch and development... ee 000 __P2.200,000
Total Assets. P5150 ao
| Accounts payable... ~—® s00a00 — P500000
Estimated liability for contingencies .. paeyeed
Bonds payable ‘900.900 1.900.000
Common stock..." 2,000,000
| Paid in copitalin excess of par $50,000
fetoined eamings..__ ee 1.000000 ____ __
Stockholders’ Equity 5.150.000 _ 5.3 sai
P Company's interest in $ Company is 75% computed as follows:
{ Sof ownership |
| Acquitedshores. yeoon0n |
| DMided by: Shores outstanding |
| Kotownership. =
Partial-goodwill Approach
The fesulting owners
allocation of excess,
Schedule of Determ
Date of Acquisition - Janvai
hip situation cay
In be viewed in the schedule of determination and
ination and Allocation of Excess (Full-goodwill)
ary 1, 20x4
Foir value of Subsidiary (75%)
Consideration transfered: Cosh: 1.500000. PS....... Panam |
Les: Book valve of stockholders’ equity of Sub Co: |
Common stock (P2000.000.x788)...00 1,500,000 |
Paid-in capital in excess of ar (P650,000 x 75%) ... 487,500
Retained earnings (P1,000,000 x 75%) ....... 7 750,000 -2737,500
Allocated excess (excess of cost over book vole) . P 4,762,500 |
Less: Over/under valuation of assets and labiltes, |
Decrease in receivables (P50,000 x 75%) (P 37,500) |
"crease in inventory (P150,000x 75%)... 112,500 |
Decrease in buildings and equipment P200,000 x 75%) {150,000} |
fhctease in other intangible assets (P1,300,000 x 73%} 975,000
Inctease in in-process research and i |
development (1,000,000 x 753%)... 750,000
Inctease in contingent licbilties - estimated |
lability for contingencies (P500,000 x 75%)... ( 375,000) |
Increase in defered tax lability |
(P1,700,000 x 20%) .
Positive exces: Partial-goodwil excess of cost over for valve) z
Par Company records the stock act
date of acquisition:
July 1, 20x4
(1) Investment in Sub Company ..
Cash.....
Acquisition of Sub Compan)
quisition on its books with the following entry on the
7,500,000 |
7,500,000
‘Adwanced Financial Accounting ~ A Comprehensive: Conceptual & Procedural Approoch SEPARATE and CONSOLID Ay FINANCIAL STATEMENTS
= DATE OF ACQUISITION ™ _
Heiss : determination and allocation of excess provides ee
[Common sat a ens on January 1.20: __ gp |
ere ay
| Saari
Eiminate investment agains
ons stockholders’ equity of Sub Ci
(€2) inventory... :
Oherntongbie oes
IN-PrOCeSS research and de elopn
5 velopment
Accounts receivable...
Buildings and equipment
Estimated abity for contingent consideration
Deferred tax ability fe
Non-controling interest (P,700,000 x25)...
anvesinent in Sub Co (P7,500,000 - 2,737,500)
note investment against located excess.
Full-goodwill Approach
X ination and
The resulting ownership situation can be viewed in the schedule of determination a
allocation of excess as follows:
Schedule of Determination and Allocation of Excess (Full-goodwill)
Date of Acquisition - January 1, 20x4 =
Fair value of Subsidiary (100%) ~ |
Consideration transfemed: a (75%) P 7.500.000
Fair value of NCI (giver) (25%)...
Fair value of subsidiary ioe 10,000,000
Less: Book value of stockholders’ equity of Scud
Common stock (P2,000,000 x 100%%)........ ated
Poictin copital in excess of par (P650,000 x 100%) , |
Retained earrings (P1,000,000 x 100%) ...... 1.990.000 3.650.000 |
Allocated excess (excess of cost over book value) ....... |
Less: Over/under vaiuation of assets and iabiltes:
| Decrease in receivables (P50,000 x 100%) (P $0,000)
Increase in inventory (P150.000 x 100%) ........... 150,000
| Decrease in buildings and equipment
| {200,000 x 100%) osc sesesseeeee
Increase in other intangible assets
(P1,300,000 x 1008) ......cssssecssseeseseeseee 1,300,000
Increase in in-process esearch and
development (P1,000,000 x 100%) ........sess++ 1,000,000
Increase in contingent ibis - estimated
| lability for contingencies (P500,000 x 100%} ...... { $00,000)
Increase in deferred tax lability
(P1,700,000 x 20%) 340,000) 1,360,000
4,990,000
Positive excess Ful-goodwil (excess of cost over
fou volve) seers
Par Company records the stock acquisition on its books with the following entry on the
date of acquisition:
July 1, 20x4
(1) Investment in Sub Company...
(200,000)
7,500,000
7,500,000
“Advanced Financial Accounting ~ A Comprehensive: Conceptual & Procedural Approach eee
The schedule of d
letermination
lor the worksheet
| (EX) Common stock Sub Co.
Retained eamings ~sub Co
| evesimentins
Non-controlin
Eliminote inves
[ antory
| Other intangible assets
nent aga
| Inprocessreseorch ond development
Goodwill...
| Accounts receivable
| Buildings and equipment
Estimoted habit
eliminating entries on January 1, 20x4:
Paidin copitalin excess of par Sub Co
Co (P3,650,000 x 75%)
1g interest (P3,650,000 x 25%)
Hy for contingent consideration
CHAPTER 2
__ ohare s.
. juidan
and allocation of excess provides complete guidance
ickholders' equity of Sub Co.
4,990,000
|
| Deferred tax tabilty
| Non-conoling interest {(P1700,000 x 25% +
| (4.650.000 - P3,487.500)}..... .
| investment in Sub Co (7,500,000 - P2737 S00}
——flminate investment a, ist allocated ex ee Pere erect
Notice that goodwill is increased when deferred foxes are computed on the fiming
diflerence related fo the over/under valuation of assets and liabilities. Deferred taxes
are classified in th
PFRS/IFRS for Small ‘ond Medi
' balance sheet according fo the item that gave rise fo them.
lum. Sized Entities (SMEs) ~ Business Combination and Goodwill Consolidated
ond Separate Financial
AeQs Covered in IFRS
* Loss of control,
* Transactions with minorities.
a
| ]
IFRS for SMES - Section 9
Scope
This section defines the
| circumstances in which an entity
| Presents Consolidated financial
| statements ond the procedures
for preparing those statements. It
so includes guidance on
| separate financial statements and
Combined financial statements,
Except as permitted or fequired
by paragraph9.3 (see discussion
of exemptions), a parent entity
must present consolidated
financial. statements in which it
Consolidates its investments in
subsidiaries in accordance with
this IFRS. Consolidated financial
statements shall include all
subsidiaries of the parent
Exemption — from preparing
Consolidated financial statements
| exemptions in the next row), must |
A _porent need not present
‘Dut not in IFRS for SMEs include:
PAS 27 Separate Financial T
| Statements and PFRS 10
|
Consolidated Financial Statements | Impact assessment |
This standard must be applied in the | IFRS for SMES ond IFRS have a |
Preparation and presentation of | similar scope for consolidated
Consolidated financial statements | financial statements, 1FRS for
for a group of entities under the | SMES permits combined
Control of a parent, financial statements to be |
Prepared. Combined
Of | financial statements may
include entities outside the
Present consolidated financial | group or be created from |
Statements in which it consolidates | selected entities within the |
lis investments in. subsidiaries is | goup Provided they oe
Occordance with this standard. | under common contol
Consolidated financial statements | Combined
shall include oll subsidiaries of the | financial statements are not
parent,
| addressed in IFRS,
A parent (see discussion SEPARATE and
_=DATEOF Apu CUDATEO NANCIAL STATEMENTS
eAcoUNTION a
4 | -
Hed finoncolstalemenis | A” parent need” not” present | Similar exomphons under IF
* Both of the fotowi Consolidated financial statements it | for SMEs and RS toting int |
| creme, ND Condon | and oi it | occount that enties that |
|The paren | a} The parent is ite a wholy- | have their secuties sted |
| is ise |) owned subsichary, ors a pasty | cannot use eS
vttimat | owned subsidiary of another | Specific diferencesinclude: |
| rhe Parent (or any | al Ghd ik, other owners, | * TERS for SMES. does not
| Produces Parent} | including those not otherwise require party owned |
general Consolidated | entitled to vole, have been| — parents to seek peso |
stotemente ren’ Mencia | informed about and do not of other shareholders for
ful iFRS ‘hat comply with | object to, the parent not the exemption
|* thasno base Ee | presenting ——_consoldated +The exemption | Om
| one that other thon | financial statements preparing consolidated
| the Iieetion Acquired with |b) The parent's debt or equity, financial statements. if
disposing of witin oa OF | isuments ore not raded ina} the parent ready |
A parent Ott within one year. | public market (a domestic or prepares IFRS financial
Subsiddang U1" such a | foreign stock exchange or an | statements, Ros been
* AM fair value wit over-the-counter morket,| expanded to also include
fair with changes in|} including local ond regona the case where the |
(Gr Oe Tecognied in pofi| mate parent prepares IFRS for |
the foir valve of the | c) The parent did not fle, norisitin | SMES financial statements
shores can be
Measured
relably or |
Otherwise ot cost less
Impairment
the process of fiing, its financial |
statements with a secutiies |
‘commission or other reguiatory |
‘organization for the purpose ot |
issuing ony class of instruments in
a public morket
The ulimate or any intermediate
orent of the parent produces
consolidated financial
statements available for public
Use that comply with IFRS.
qd
IFRS for SMEs does not
require the consolidated |
financial statements of
the ulfimate parent [or |
any intermediate parent) |
to be made available for
public use in order for the |
‘exemption to apply
© IFRS for SMEs permits on |
additional exemption for
a subsidiary acquired with
the intention of seling it
within one year, provided
itis the only subsidiary.
| Consolidation procedures
This section includes consoldation
| Procedures, requirements to
| eliminate intra-group balances and
| the requirement to have uniform
| reporting dates and —urifom
[accounting policies.
This section includes consoldation
procedures, requirements to
eliminate intra-group balances and
the requirement to have uniform
reporting dates and uniform
accounting policies. |
|
IFRS for SMEs and ful IFRS have |
the some consolidation |
procedures.
| Definition of control
| Controlis the power fo govern the
| financial and operating policies of
| an entity so as to obtain benefits
| from its activities,
| Control is presumed to exist when
the parent owns, directly or
indirectly through subsidiaries,
more than half of the voting
power of an entity. That
presumption may be overcome in
exceptional circumstances if it
can be clearly demonstrated thet
such ownership does not
Constitute control, Control also
exists when the parent owns half
‘An investor determines whether itis
@ parent by assessing whether it
controls one or more investees, An
investor considers all relevant facts
‘and circumstances when assessing |
whether it controls an investee. An |
investor controls an investee when it
is exposed, or has rights, to variable
retuins from its involvement with the
investee ond has the abilly to affect
those retuns through its power over
the investee.
PERS 10 uses control as the single
basis for consoldation. An investor
controls an investee if and only if the
investor has all of the following three
There are differences as to
