PFRS 10: Consolidated Financial Statements

 A parent shall prepare consolidated financial statements using uniform accoun ng policies for like transac ons
and other events in similar circumstances.
 Consolida on of an investee shall begin from the date the investor obtains control of the investee and cease
when the investor loses control of the investee.

Non-controlling interests
 A parent shall present non-controlling interests in the consolidated statement of financial posi on within equity,
separately from the equity of the owners of the parent.
 Changes in a parent’s ownership interest in a subsidiary that do not result in the parent losing control of the
subsidiary are equity transac ons.
 If a parent loses control of a subsidiary, the parent:
a) derecognizes the assets and liabili es of the former subsidiary from the consolidated statement of financial
posi on.
b) recognizes any investment retained in the former subsidiary and subsequently accounts for it and for any
amounts owed by or to the former subsidiary in accordance with relevant IFRSs. That retained interest is
remeasured, as described in paragraphs B98(b)(iii) and B99A. The remeasured value at the date that control
is lost shall be regarded as the fair value on ini al recogni on of a financial asset in accordance with PFRS 9
or the cost on ini al recogni on of an investment in an associate or joint venture, if applicable.
c) recognizes the gain or loss associated with the loss of control a ributable to the former controlling interest.

Consolida on procedures
 Consolidated financial statements:
a) combine like items of assets, liabili es, equity, income, expenses and cash flows of the parent with those of
its subsidiaries.
b) offset (eliminate) the carrying amount of the parent’s investment in each subsidiary and the parent’s
por on of equity of each subsidiary.
c) eliminate in full intragroup assets and liabili es, equity, income, expenses and cash flows rela ng to
transac ons between en es of the group (profits or losses resul ng from intragroup transac ons that are
recognized in assets, such as inventory and fixed assets, are eliminated in full).

 Uniform accoun ng policies

- If a member of the group uses accoun ng policies other than those adopted in the consolidated financial
statements for like transac ons 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 accoun ng policies.

 Measurement
- An en ty includes the income and expenses of a subsidiary in the consolidated financial statements from
the date it gains control un l the date when the en ty ceases to control the subsidiary.
- Income and expenses of the subsidiary are based on the amounts of the assets and liabili es recognized
in the consolidated financial statements at the acquisi on date.

 Poten al vo ng rights
- When poten al vo ng rights, or other deriva ves containing poten al vo ng rights, exist, the propor on
of profit or loss and changes in equity allocated to the parent and non-controlling interests in preparing
consolidated financial statements is determined solely on the basis of exis ng ownership interests and
does not reflect the possible exercise or conversion of poten al vo ng rights and other deriva ves.
 - In some circumstances an en ty has, in substance, an exis ng ownership interest as a result of a
transac on that currently gives the en ty access to the returns associated with an ownership interest. In
such circumstances, the propor on allocated to the parent and non-controlling interests in preparing
consolidated financial statements is determined by taking into account the eventual exercise of those
poten al vo ng rights and other deriva ves that currently give the en ty access to the returns.

 Repor ng date
- The financial statements of the parent and its subsidiaries used in the prepara on of the consolidated
financial statements shall have the same repor ng date.
- When the end of the repor ng period of the parent is different from that of a subsidiary, the subsidiary
prepares, for consolida on purposes, addi onal financial informa on as of the same date as the
financial statements of the parent to enable the parent to consolidate the financial informa on of the
subsidiary, unless it is imprac cable to do so.
- If it is imprac cable to do so, the parent shall consolidate the financial informa on of the subsidiary
using the most recent financial statements of the subsidiary adjusted for the effects of significant
transac ons or events that occur between the date of those financial statements and the date of the
consolidated financial statements.

 Non-controlling interests
- An en ty shall a ribute the profit or loss and each component of other comprehensive income to the
owners of the parent and to the non-controlling interests.
- The en ty shall also a ribute total comprehensive income to the owners of the parent and to the non-
controlling interests even if this results in the non-controlling interests having a deficit balance.
- If a subsidiary has outstanding cumula ve preference shares that are classified as equity and are held
by non-controlling interests, the en ty shall compute its share of profit or loss a er adjus ng for the
dividends on such shares, whether or not such dividends have been declared.

Changes in the propor on held by non-controlling interests

 When the propor on of the equity held by non-controlling interests changes, an en ty shall adjust the carrying
amounts of the controlling and non-controlling interests to reflect the changes in their rela ve interests in the
subsidiary.
 The en ty shall recognize directly in equity any difference between the amount by which the non-controlling
interests are adjusted and the fair value of the considera on paid or received, and a ribute it to the owners of
the parent.

Loss of control
 A parent might lose control of a subsidiary in two or more arrangements (transac ons). However,
some mes circumstances indicate that the mul ple arrangements should be accounted for as a single
transac on.
 In determining whether to account for the arrangements as a single transac on, a parent shall consider
all the terms and condi ons of the arrangements and their economic effects.
 One or more of the following indicate that the parent should account for the mul ple arrangements as a
single transac on:
a) They are entered into at the same me or in contempla on of each other.
b) They form a single transac on designed to achieve an overall commercial effect.
c) The occurrence of one arrangement is dependent on the occurrence of at least one other
arrangement.
d) One arrangement considered on its own is not economically jus fied, but it is economically jus fied
when considered together with other arrangements. An example is when a disposal of shares is
priced below market and is compensated for by a subsequent disposal priced above market.

 If a parent loses control of a subsidiary, it shall:

a) derecognize:
ii. the assets (including any goodwill) and liabili es of the subsidiary at their carrying amounts
at the date when control is lost; and
iii. the carrying amount of any non-controlling interests in the former subsidiary at the date
when control is lost (including any components of other comprehensive income a ributable
to them).
b) recognize:
i. the fair value of the considera on received, if any, from the transac on, event or
circumstances that resulted in the loss of control;
ii. if the transac on, event or circumstances that resulted in the loss of control involves a
distribu on of shares of the subsidiary to owners in their capacity as owners, that distribu on;
and
iii. any investment retained in the former subsidiary at its fair value at the date when control is
lost.
c) reclassify to profit or loss, or transfer directly to retained earnings if required by other PFRSs.
d) recognize any resul ng difference as a gain or loss in profit or loss a ributable to the parent.
- If a parent loses control of a subsidiary, the parent shall account for all amounts previously recognized
in other comprehensive income in rela on to that subsidiary on the same basis as would be required if
the parent had directly disposed of the related assets or liabili es.
Consolida on: Date of Acquisi on
In a group of companies (parent and its subsidiaries) there are at least three sets of financial statements:
At least 2 Separate Financial Statements One Consolidated Financial Statement
One set for the parent company One set of consolidated financial statements
One set for each subsidiary

Parent Company Subsidiary Company Consolidated FS

Working
Company A Company B Group of Companies
Paper
Balance Sheet or Statement + Balance Sheet or Statement + = Balance Sheet or Statement
Elimina ng
of Financial Posi on of Financial Posi on of Financial Posi on
Entries
Statement of + Statement of + = Statement of Comprehensive
(temporary
Comprehensive Income Comprehensive Income Income
entries)
Statement of Cash Flows + Statement of Cash Flows + = Statement of Cash Flows
At the Date of Acquisi on:
Parent Journal Entry: Subsidiary Journal Entry:
Investment in Subsidiary xxx None
Cash xxx
Liabili es xxx
Shares (Common or Preferred) xxx
Working Paper Elimina ng Entries
1. Eliminate the pre-acquisi on equity of the subsidiary
Common Shares xxx
Addi onal Paid-in Capital xxx
Retained Earnings xxx
Investment in Subsidiary xxx
Non-Controlling Interest xxx

2. Remeasure the assets and liabili es to its fair values

(Example: The PPE and the Inventory are undervalued: Fair Value > Book Value/Carrying Amount)
Property, Plant and Equipment xxx
Inventory xxx
Investment in Subsidiary xxx
Non-Controlling Interest xxx
(Example: The PPE and the Inventory are overvalued: Fair Value < Book Value/Carrying Amount)
Investment in Subsidiary xxx
Non-Controlling Interest xxx
Property, Plant and Equipment xxx
Inventory xxx

3. Recogni on of Goodwill
(Full Goodwill Method)
Goodwill xxx
Investment in Subsidiary xxx
Non-Controlling Interest xxx
(Par al Goodwill Method)
Goodwill xxx
Investment in Subsidiary xxx
(In case of Gain in Bargain Purchase)
Investment in Subsidiary xxx
Gain in Bargain Purchase xxx
Problem 1
On January 1, 2022, the Statements of Financial Posi on of Kislap Company and Anthony Company prior to the
combina on are:

Kislap Co. Anthony Co.

Cash P 150,000 P 50,000
Inventory 120,000 45,000
Property and equipment (net) 550,000 130,000
Total Assets 820,000 225,000

Current Liabili es P 120,000 P 52,000

Common Shares (P100 par) 160,000 30,000
Add’l Paid in Capital 220,000 80,000
Retained Earnings 320,000 63,000
Total Liabili es and Equity 820,000 225,000
The fair value of the property and equipment of Anthony Co. is P155,000.

Assume the independent cases:

a. Kislap Co. acquired 100% of the outstanding common shares of Anthony Co. resul ng to a goodwill of
P75,000, con ngent considera on is P25,000, how much is the price paid to the previous shareholders
of Anthony Co.?

b. Kislap Co. acquired 70% of the outstanding common shares of Anthony Co. for cash amoun ng to
P100,000, how much is the goodwill or the gain on bargain purchase?

c. Kislap Co. acquired 80% of the outstanding common shares of Anthony Co. for P145,000. NCI is
measured at the propor onate share in fair value of net assets. How much is the Stockholder’s Equity on
the date of acquisi on?

d. Kislap Co. acquired 90% of the outstanding common shares of Anthony Co. for P200,000. NCI is
measured at fair value. How much is the consolidated assets on the date of the acquisi on?
Consolida on: Subsequent to the Date of Acquisi on
For every prepara on of consolidated financial statements, the working paper elimina ng entries as previously
illustrated are required. A er the date of acquisi on, addi onal working paper elimina ng entries are required.

Working Paper Elimina ng Entries Subsequent to the Date of Acquisi on

In rela on to No. 2 of the previously illustrated entries, the effect of the fair values remeasurement to the subsequent
events shall also be recognized. These effects shall also be allocated to the controlling and non-controlling interests.
(Example: The PPE is undervalued: Fair Value > Book Value/Carrying Amount)
Deprecia on Expense xxx
Accumulated Deprecia on xxx
(Example: The Inventory is undervalued: Fair Value > Book Value/Carrying Amount)
Cost of Goods Sold xxx
Inventory xxx
(Example: The PPE is overvalued: Fair Value < Book Value/Carrying Amount)
Accumulated Deprecia on xxx
Deprecia on Expense xxx
(Example: The Inventory is overvalued: Fair Value < Book Value/Carrying Amount)
Inventory xxx
Cost of Goods Sold xxx

Intercompany transac ons should also be eliminated.

(Example: The subsidiary paid dividends to the parent) (Example: Intercompany Sales of Inventory)
Dividend Income xxx ***Beginning Inventory
Non-Controlling Interest xxx Retained Earnings, Beginning xxx
Retained Earnings xxx Cost of Goods Sold xxx
***Ending Inventory
(Example: Sale of asset resul ng to a gain) Sales xxx
Gain on Sale of Asset xxx Cost of goods sold xxx
Asset xxx Inventory xxx

(Example: Sale of asset resul ng to a loss)

Asset xxx
Loss on Sale of Asset xxx
Problem 2
On January 1, 2022, Perez Corp. acquired 80% of Quezon Corp.’s ordinary shares for P3,240,000. P150,000 of the excess
is a ributable to goodwill and the balance to a depreciable asset with an economic life of 10 years. Non-controlling
Interest is measured at its fair value P810,000 on date of acquisi on. On the date of acquisi on, the Stockholder’s Equity
of the two companies were as follows:
Perez Corp. Quezon Corp.
Ordinary Shares P5,250,000 P1,200,000
Retained Earnings 7,800,000 2,100,000

On December 31, 2022, Quezon Corp. reported a net income of P525,000 and paid dividends of P180,000 to Perez Corp.
Perez Corp. reported a net income of P1,425,000 and paid dividends of P690,000.

Compute for the following:

a. How much is the profit a ributable to NCI of Quezon Corp.?

b. How much is the consolidated profit on December 31, 2022?

c. How much is the consolidated Retained Earnings on December 31, 2022?

d. What amount of NCI is presented in the consolidated statement of financial posi on on December 31, 2022?
Consolida on: Intercompany Transac ons
 Intercompany Transac ons are transac ons between the parent and its subsidiary/ies which should be eliminated
due to the principle in consolida on that the parent and its subsidiary/ies are one en ty.
o Types of Intercompany Transac ons:
 Downstream Transac on – the transac on originated from the parent to the subsidiary
- These transac ons are not allocated to the NCI.
 Upstream Transac on – the transac on originated from the subsidiary to the parent
- These transac ons are allocated to the parent and NCI.

Problem 3

On January 1, 2022, Vela Co. acquired 90% of the outstanding common shares of Flancia Co. at book value. During 2021
and 2022, intercompany sales amounted to P2,000,000 and P4,000,000, respec vely. Vela Co. consistently recognize a
20% mark up based on sales while Flancia Co. had a 25% gross profit on sales.

The inventories in the buyer’s books, which all came from intercompany sales show:

December 31, 2021 December 31, 2022

Vela Co. P240,000 P160,000
Flancia Co. 100,000 40,000

On October 1, 2022, Flancia Co. purchased a piece of land cos ng to P1,000,000 from Vela Co. for P1,500,000. On the
other hand, on July 1, 2022, Flancia Co. sold an equipment with a carrying value of P60,000 and remaining life of 3 years
to Vela Co. for P42,000.

Separate Statements of Comprehensive Income for the two companies for the year 2022 follow:

Vela Co. Flancia Co.

Sales P25,000,000 P14,000,000
Cost of Sales (15,000,000) (8,400,000)
Gross Profit P10,000,000 P5,600,000
Opera ng Expenses (6,000,000) (3,800,000)
Opera ng Profit P4,000,000 P1,800,000
Loss on Sale of Equipment (18,000)
Dividend Revenue 40,000
Net Income P4,000,000 P1,822,000

Compute the following amounts for/as of December 31, 2022:

a. Consolidated Gross Profit

b. Consolidated Net Income a ributable to the parent

c. Non-Controlling Interest (NCI) in Net Income