MGMT Assignment

CHAPTER SIX
Consolidated financial statements-

Subsequent to date of acquisition
Reading(s): Thomas H. Beechy, V. Umashanker Trivedi, Kenneth E.
MacAulay (2015). Advanced financial accounting -- 7th ed.,
Pearson Canada Inc (Chapter 4, 5&6)
In Subsequent Years
• At acquisition date, we recognize:
• Fair value of identifiable net assets of acquiree as at
acquisition date,
• Intangibles, contingent liabilities,
• Deferred tax assets or liabilities; and
• Goodwill as a residual
In Subsequent Years
• Subsequent extinguishment of assets and liabilities of subsidiary
must be determined based on the fair values at acquisition date.
• Therefore, subsequent amortization, depreciation and cost of
sales of acquired assets are determined based on fair value as at
acquisition date
• Elimination of consideration transferred, recognition of fair value
adjustments and amortization entries must be repeated until:
• Date of disposal of the investment in subsidiary; or
• Date when control is lost
In Subsequent Years…
• Acquisition method only recognizes fair value at critical event:
acquisition date
• New internally-generated goodwill or subsequent appreciation
in fair values are not recognized subsequent to acquisition
date
• Since net assets are carried at book value in the separate
financial statements, the subsequent amortization/depreciation/
disposal are adjusted in the consolidation worksheet
In Subsequent Years…
BV of (FV- BV) FV of
expense in + adjustment to = expense in
separate expense consolidated
financial financial
statements Adjusted in statements
consolidation
worksheet
Accounting for Investments -Equity Method
• Percy Company purchased 80% of the outstanding voting shares
of Song Company at the beginning of 2009 for $387,000. At
the time of purchase, Song Company’s total stockholders’ equity
amounted to $475,000. Income and dividend distributions for
Song Company from 2009 through 2010 are as follows:
2009 2010 2011

Net income (loss) $ 63,500 $ 52,500 $ (55,000)
Dividend distribution 25,000 50,000 35,000
• Percy Company uses the equity method to record its investment.
The difference between book value of equity acquired and the
value implied by the purchase price was attributed solely to an
excess of market over book values of depreciable assets, with a
remaining life of 10 years.
Required: Prepare journal entries for Percy Company from the

date of purchase through 2011 to account for its investment in
Song Company under each of the following assumptions:
2009 2010 2011
Net income (loss) $ 63,500 $ 52,500 $ (55,000)
2009
JE 1 Investment in Song 387,000
Cash 387,000
JE 2 Investment in Song 50,800

Equity in sub. income (.8 x $63,500) 50,800
JE 3 Cash 20,000
Investment in Song (.8 x $25,000) 20,000
A journal entry is required to adjust for depreciation related to
the excess of market over book values of depreciable assets.
Cost of investment $387,000

Book value acquired ($475,000 x 80%) 380,000
Difference between Cost and Book value $ 7,000
2009 Equity in sub. income ($7,000 / 10 yrs.) 700

JE 4
Investment in Song 700
2009 2010 2011
Net income (loss) $ 63,500 $ 52,500 $ (55,000)
2010 Investment in Song 42,000

JE 1
Equity income (.8 x $52,500) 42,000
JE 2 Cash 40,000
JE 3 Equity in sub. income ($7,000 / 10 yrs.) 700
2009 2010 2011
Net income (loss) $ 63,500 $ 52,500 $ (55,000)
2011
JE 1 Equity in sub. Loss (.8 x $55,000) 44,000
Investment in Song 44,000
JE 2 Cash 28,000
JE 3 Equity in sub. income ($7,000 / 10) 700
Illustration 1: Consolidation after a year of acquisition
On January 1, 2010, Parker Company purchased 90% of the
outstanding common stock of Sid Company for $180,000. At that time,
Sid’s stockholders’ equity consisted of common stock, $120,000; other
contributed capital, $20,000; and retained earnings, $25,000. Assume
that any difference between book value of equity and the value
implied by the purchase price is attributable to land.
Required: Prepare a consolidated statements workpaper on Dec.

31,2010.
Begin the consolidating process by preparing a Computation and Allocation
Schedule, as follows: 90% 10% 100%
Parent NCI Total
Share Share Value
Purchase price and implied value $ 180,000 $ 20,000 $ 200,000
Less: Book value of equity acquired:

Common stock 108,000 12,000 120,000
Other contributed capital 18,000 2,000 20,000
Retained earings 22,500 2,500 25,000
Total book value 148,500 16,500 165,000
Difference between implied and book value 31,500 3,500 35,000

Allocated to land (31,500) (3,500) (35,000)
Balance $ - $ - $ -
Difference between implied and book values is

established only at the date of acquisition.
Parker Sid
Cash $ 65,000 $ 35,000
On December 31, Accounts receivable 40,000 30,000
2010, the two Inventory 25,000 15,000
Investment in Sid 184,500 -
companies’ trial Plant and equipment 110,000 85,000
Land 48,500 45,000
balances were as Dividends declared 20,000 15,000
follows: Cost of goods sold 150,000 60,000
Operating expenses 35,000 15,000
Total debits $ 678,000 $ 300,000
Accounts payable $ 20,000 $ 15,000

Other liabilities 15,000 25,000
Common stock 200,000 120,000
Other contributed capital 70,000 20,000
Retained earnings 55,000 25,000
Sales 300,000 95,000
Equity in subsidiary income 18,000 -
Total credits $ 678,000 $ 300,000
Eliminations Consolidated
Income Statement Parker Sid Debit Credit NCI Balances
Sales $ 300,000 $ 95,000 $ 395,000
Equity in subsidiary income 18,000 18,000 -
Total revenue 318,000 95,000 395,000
Cost of goods sold 150,000 60,000 210,000
Other expenses 35,000 15,000 50,000
Total cost and expense 185,000 75,000 260,000
Net income 133,000 20,000 135,000
Noncontrolling interest 2,000 (2,000)
Net income $ 133,000 $ 20,000 $ 18,000 $ - $ 2,000 $ 133,000
Retained Earnings Statement

Retained earnings, 1/1/10 55,000 25,000 25,000 55,000
Net income 133,000 20,000 18,000 2,000 133,000
Dividends declared (20,000) (15,000) 13,500 (1,500) (20,000)
Retained earnings, 12/31/10 $ 168,000 $ 30,000 $ 43,000 $ 13,500 $ 500 $ 168,000
Eliminations Consolidated
Balance Sheet Parker Sid Debit Credit NCI Balances
Cash $ 65,000 $ 35,000 $ 100,000
Accounts receivable 40,000 30,000 70,000
Inventory 25,000 15,000 40,000
Investment in Sid 184,500 - 184,500
Plant and equipment 110,000 85,000 195,000
Land 48,500 45,000 35,000 128,500
Total assets $ 473,000 $ 210,000 $ 533,500
Accounts payable $ 20,000 $ 15,000 $ 35,000

Other liabilities 15,000 25,000 40,000
Common stock 200,000 120,000 120,000 200,000
Other contributed capital 70,000 20,000 20,000 70,000
Retained earnings 168,000 30,000 43,000 13,500 500 168,000
Noncontrolling interest 1/1 20,000 20,000
Noncontrolling interest 12/31 $ 20,500 20,500
Total liabilities & equity $ 473,000 $ 210,000 $ 218,000 $ 218,000 $ 533,500
Illustration 2: Amortization of Fair Value Differentials
P Co paid $6,200,000 and issued 1,000,000 of its own shares to acquire
80% of S Co on 1 Jan 20X5. Fair value of P Co’s share is $3 per share. Fair
value of net identifiable assets is as follows:
Book value Fair value Remaining useful life
Leased property 4,000,000 5,000,000 20 years
In-process R&D 2,000,000 10 years
Other assets 1,900,000 1,900,000
Liabilities (1,200,000) (1,200,000)
Contingent liability (100,000)
Net assets 4,700,000 7,600,000
Share capital 1,000,000
Retained earnings 3,700,000
Shareholders’ equity 4,700,000
Additional information:
• Contingent liability of $100,000 was recognized as a provision loss by
the acquiree in legal entity financial statement on Dec 20X5
• FV of NCI at acquisition date was $2,300,000
• Net profit after tax of S Co for 31 Dec 20X5 was $1,000,000
• No dividends were declared during 20X5
• Capital gain Tax 20%
• Shareholders’ equity as at 31 Dec 20X5 was $5,700,000
Required:
Q1 : Prepare the consolidation adjustments for P Co for 20X5
Q2 : Perform analytical check on balance of NCI as at 31 Dec 20X5
• Consideration transferred = Cash consideration + Fair value
of share issued
= $6,200,000 + (1,000,000 x $3)
= $9,200,000
• Deferred tax liability = 20% x ($7,600,000 - $4,700,000)

= $580,000
• Goodwill = Consideration transferred + NCI – Fair value of net

identifiable assets, after-tax
= $9,200,000 + $2,300,000 – ($7,600,000 - $580,000)
= $4,480,000
• P’s share of goodwill = Consideration transferred – 80% x Fair
value of net identifiable assets, after tax
= $9,200,000 – 80% x $7,020,000
= $9,200,000 – $5,616,000
= $3,584,000
• NCI’s share of goodwill = Consideration transferred – 20% x Fair

value of net identifiable assets, after tax
= $2,300,000 – 20% x $7,020,000
= $2,300,000 – $1,404,000
= $896,000
• Consolidation adjustments for 20X5
CJE 1: Elimination of investment in Subsidiary
Share capital 1,000,000
Opening retained earnings 3,700,000
Leased property 1,000,000
In-process R&D 2,000,000
Goodwill 4,480,000
Contingent liability 100,000
Deferred tax liability (net) 580,000
Investment in S 9,200,000
Non-controlling interests 2,300,000
CJE 2: Depreciation and amortization of excess of FV over book value
Depreciation of leased property 50,000
Amortization of in-process R&D 200,000
Accumulated depreciation 50,000
Accumulated amortization 200,000
Under dep. by Under amort. by
$50k Dep exp: $200k
$50,000
Amort exp:
Dep. of $200,000 $250,000 $200,000
Amort. of
leased
R&D
property
$0
Based on Based on
Based on FV Based on FV
book value book value
CJE 3: Reversal of entry relating to provision for loss
Provision for loss 100,000
Loss expense 100,000
Note: Contingent liability was already recognized in CJE 1. The recognition

by the acquiree in its legal entity financial statement results in double
counting; hence this reversal entry is necessary
CJE 4: Tax effects on CJE 2 & CJE 3

20% * (200k
Deferred tax liability (net) 30,000 +50k -100k)
Tax expense 30,000

CJE 5: Allocation of current year profit to non-controlling interests (NCI)
Income to NCI 176,000
NCI 176,000
Net profit after tax 1,000,000
Excess depreciation (50,000)
Excess amortization (200,000)
Reversal of loss from contingent liability 100,000
Tax effects on FV adjustments 30,000
Adjusted net profit 880,000
NCI’s share (20%) 176,000
Explanatory note to CJE 5:
• NCI have a share in the extinguishment of the initial FV differences
and in the impairment of goodwill.
• Net profit after tax represents that increase in the book value of
equity of the subsidiary
• Other adjustments relate to the extinguishment of the FV differentials
• NCI have a share of $176,000 of adjusted profit which represents
• Increase in book value
• Decrease in fair value differentials
NCI balance:
NCI at acquisition date (CJE1) $2,300,000
Income allocated to NCI for 20x5 (CJE 5) 176,000
NCI as at 31 Dec 20x5 $2,476,000
Q2 : Perform an analytical check on the balance of NCI as at 31
Dec 20X5
1st Step: reconstruct the balance of non-controlling interest as at
31 Dec 20x5
NCI as at acquisition date (CJE 1) 2,300,000
Income allocated to NCI for 20x5 (CJE5) 176,000
NCI as at 31 December 20x5 2,476,000
• 2nd step: reconcile the balance to the three components that NCI
have -
Non – controlling
interests
Share of
Share of book value Share of
of net assets Unamortized
unimpaired goodwill
FV adjustment
$5,700,000 x 20% + ($1,000,000 x 19/20 + $896,000 = $2,476,000

= $1,140,000 x 80% x 20%) +
($2,000,000 x 9/10 x
80% x 20%) =
$440,000
Non-controlling interest
• NCI only arises in consolidated financial statements where:
• One or more subsidiaries are not wholly owned by the
parent (IFRS 10)
• NCI are entitled to their share of retained earnings of the
subsidiary from incorporation
• No distinction between pre-acquisition and post-acquisition
retained earnings for NCI
Non-controlling interest
• Same applies to OCI
• NCI collectively have a share of accumulated OCI arising
from incorporate date to the current date
• NCI are normally a credit balance
• Share of residual interests in the net assets of a subsidiary
• Total equity (parent’s and NCI) = Assets - Liabilities
Non-controlling interest…
• IFRS 3 Para 19 allows NCI to be measured in either of two ways
Non-controlling interests
Measured at Fair value Measured as a proportion

at acquisition date of the recognized amounts
(include goodwill) of the identifiable assets
“ Fair value basis” as at acquisition date
• Under the fair value basis:
– FV is determined by either the active market prices of
subsidiary’s equity share at acquisition date or other
valuation techniques
– FV per share of NCI may differ from parent because of
control premium paid by parent (e.g. 20% premium over
market price to gain control)
• NCI comprises of 3 items:
Non – controlling
interests
Share of
Share of book value unamortized Share of
of net assets FV adjustment unimpaired goodwill
(FV - BV)
• Under the fair value option:
– Journal entry to record NCI at fair value (re-enacted each year):
Dr Share capital of subsidiary
Dr Retained earnings at acquisition date
Dr Other equity at acquisition date
Dr FV differentials (FV- BV)
Dr Goodwill (Parent & NCI)
Dr/Cr Deferred tax asset/ (liability) on fair value adjustment
Cr Investment in subsidiary
Cr FV differentials (BV – FV)
Cr Non-controlling interests (At fair value)
• Under the 2nd option:
– NCI is a proportion of the acquiree’s identifiable net assets
(i.e. not full fair value)
– NCI comprises of 2 items: Non – controlling
interests
Share of
Share of book value unamortized
of identifiable net assets of FV adjustments
(FV- BV)
• Under the 2nd option:
– Journal entry to record NCI (re-enacted each year):
Dr Share capital of subsidiary
Dr Retained earnings at acquisition date
Dr Other equity at acquisition date
Dr FV differentials (FV – BV)
Dr Goodwill (Parent only)
Dr/Cr Deferred tax asset/ (liability) on FV adjustment
Cr FV differentials (BV – FV)
Cr Investment in S subsidiary
Non-controlling interests
Cr (NCI % x FV of identifiable net assets)
NCI measured as a
NCI measured proportion of the
at FV acquiree’s
identifiable net
assets
Book value of net assets
Fair value – Book value of net assets
Goodwill
Illustration 3:Non-Controlling Interests’ Share of Goodwill
The FV of NCI that owned 10% of Subsidiary A as at 31 Dec
20x1(Acquisition date) was $25,000. The financial statements of
Subsidiary A as at acquisition date are as shown below. Subsidiary
A had unrecognized intangible assets with fair value of $40,000.
Tax rate is 20%. Determine NCI’s good will as at acquisition date.
Subsidiary A’s Statement of Financial Position as at 31 December 20x1:
Net assets 160,000
Equity 140,000
Share Capital 20,000
Retained Earnings 160,000
Illustration 3:Non-Controlling Interests’ Share of Goodwill
Fair value of NCI 25,000
Fair value of identifiable net assets
Book value of equity 160,000
Fair value of intangible assets 40,000
Deferred tax on intangible assets (8,000) 192,000
NCI's share of FV of identifiable net assets (10%) 19,200
NCI's goodwill (25,000 - 19,200) 5,800

Under alternative basis where NCI are measured as a proportion of the
recognized amounts of the identifiable assets as at acquisition date:
 NCI’s goodwill is zero
 Amount to be recognized as NCI is $19,200 only
Accounting for Non-Controlling Interests under IFRS 3
• In consolidation, non-controlling interests have a share of:
 Profit after tax
 Dividends declared
 Share capital
 Retained earnings and other comprehensive income (eg. Revaluation
reserve) at acquisition date
 Change in retained earnings and other comprehensive income from the
date of acquisition to the current period
 Fair value differential of a subsidiary’s net assets at acquisition date
 Subsequent extinguishment of the different between the fair value and
book value of identifiable net assets; and
 Goodwill (if the fair value alternative is adopted)
Reconstructing NCI on Statement of Financial Position
Incorporation Date of Beginning of End of

date acquisition current year current year
NCI have a share of NCI have a share of NCI have a share of
1. Share capital 1. Change in share 1. Profit after tax
capital
2. Retained earnings 2. Current amortization
2. Change in retained of fair value
3. Other equity earnings differential
4. Fair value 3. Change in other equity 3. Current impairment of
differentials goodwill
4. Past amortization of
5. Goodwill fair value differential 4. Dividends as a
repayment of profits
5. Past impairment of
goodwill 5. Change in other equity
Reconstructing NCI on Statement of Financial Position
• At each reporting date, group will re-create NCI account in the
consolidated financial statement by recognizing the sequential
build up:
• As of acquisition date
• From acquisition date to beginning of the current period
• During the current period
• Known as the “re-enactment process” of the attribution of equity
to NCI
Allocation to Non-controlling Interests
1. Allocation of the change in equity from date of acquisition to
the beginning of the current period
Dr Retained earnings (NCI % x in RE from acquisition date to
beginning of current period)
Cr NCI
• No distinction between pre-acquisition or post-acquisition

profits
• To transfer the NCI’s share of subsidiary’s retained
earnings to NCI
Allocation to Non-controlling Interests…
2. Allocation of current profit after tax to NCI
Dr Income to NCI
Cr NCI
• Attribution of profit to NCI is not expense item and should not be shown
above the profit after tax line
• Without attribution, retained earnings of the group would be over-
stated and NCI’s share of equity would be under-stated
• The same attribution principle applies to Other Comprehensive Income
(OCI) – NCI are attributed their share of OCI arising during a period
 Examples: Revaluation surplus or deficit on property, PPE and
intangible assets etc.
Allocation to Non-controlling Interests
3. Allocation of dividends to NCI
• Reverses the profit and loss effects of dividends in
consolidated income statement
• A repayment of profits by a subsidiary
• Reduces the NCI’s residual stake in the net assets of the
subsidiary
Dr Dividend income (Parent)
Dr NCI (Equity)
Cr Dividends declared (Subsidiary)
Can NCI be a debit balance?
• IFRS 10 paragraph B94 (Appendix B) requires NCI to have a
debit balance if:
• NCI share of losses > NCI existing share of the subsidiary’s
share capital, retained earnings and other equity items
• Departure from an earlier version of IAS 27 that requires NCI
to be carried at zero balance
• Losses being borne by majority shareholders unless the NCI
have binding obligation to make further investments to make
good the losses
Can NCI be a debit balance?...
• Opposing views on NCI being a debit balance
• Parent who has control of subsidiary should bear the
responsibility of supporting an insolvent subsidiary
• Limited liability argument: NCI stand to lose only their
investment and have no legal obligation to bear any further
losses
Can NCI be a debit balance?
• IASB’s support for NCI to be a debit balance
• NCI participate proportionally in the risks and rewards of a
subsidiary
• Limited liability argument: Parent stand to lose only their
investment and have no legal obligation to bear any further
losses in the absence of guarantees
Analytical check on Non-controlling Interests’ balance
• If the fair value basis is adopted
• NCI in a subsidiary have a share in the same three components that the
parent has under the acquisition method
• If NCI are recognized as proportion of FV of identifiable net assets
• Only two components apply to non-controlling interests
• Share of book value of net assets or shareholders’ equity of a
subsidiary
• Share of the balance of unamortized fair value adjustments
• If NCI have both present ownership interests (e.g. ordinary shares) and
potential ownership interests (e.g. options)
• Only present ownership interests may be measured as a proportion of
identifiable net assets
Analytical check…
NCI’s share of (NCI % multiply by):
a) Book value of net assets of subsidiary at year-
end +/- unrealized profit/loss from upstream
sale
NCI’s balance = b) Unamortized balance of FV adjustments at year-
end
at year-end
c) Unimpaired balance of goodwill at year end
([Acquisition-date FV of NCI – NCI % x
acquisition-date FV of identifiable net assets] less
any cumulative impairment)
Goodwill Impairment Test
• IAS 36: Goodwill has to be reviewed annually for impairment
loss
– Reviewed as part of a cash-generating unit (CGU)
• CGU is the lowest level at which the goodwill is monitored
for internal management purposes and
• Not larger than a segment determined under IFRS 8
Operating Segments
– Goodwill will be allocated to each of the acquirer’s CGU, or
group of CGUs
Goodwill Impairment Test…
1. Carrying amount:
– Net assets of the cash-generating unit
– It includes entity goodwill attribute to parent and NCI
2. Recoverable amount:
– IAS 36 allows the higher of the below two metrics to
determine recoverable amount:
 Higher of FV less cost to sell (an arms-length measure)
 Uses market based inputs or market participants’
assumptions in the valuation process
 Value-in-use (VIU)
 Present value of future net cash flows
 Uses internal or entity-specific input to determine the future
cash flows
 VIU likely to be more discretionary as assumptions about
future cash flows are required
3. If carrying amount > recoverable amount
• Impairment loss is first allocated to goodwill
• Then to other assets in proportion to their individual carrying
amounts
• Impairment tests to be carried out on annual basis; regardless of
whether indications of impairment exists
• Impairment once made is not reversible, as it may result in the
recognition of internally-generated goodwill which is prohibited
under IAS 38
• Steps for
impairm Determine the carrying amount of the CGU
ent test
Determine the recoverable amount of the CGU
Recoverable amount: Higher of fair value or value in use
If carrying amount ≤ If carrying amount ≥

recoverable amount recoverable amount
Allocate impairment loss

No impairment loss to goodwill first and
balance to other net assets
NCI as a proportion of
NCI at FV at acquisition date identifiable net asset at
acquisition date
Goodwill on
Includes NCI’s goodwill Excludes NCI’s goodwill
consolidation
Goodwill has to be grossed
Goodwill is allocated to cash-
up to include NCI’s share
Carrying amount of generating unit without further
Notionally adjusted goodwill
cash-generating unit adjustment
= Recognized goodwill/
parent’s interest
Impairment loss is shared between Impairment loss is borne only

Impairment loss parent and NCI on the same basis on by parent as goodwill for
which profit or loss is allocated NCI is not recognized
Illustration 4:Goodwill Impairment Test
Company X has 80% ownership in a CGU with identifiable net assets
of $6 million as at 31 Dec 20x1. The recoverable amount of the CGU
as an entity was $5 million as at that date. Determine the impairment
loss of goodwill in the CGU under two alternative measurement basis:
(a) NC measured at FV at acquisition date. Goodwill recognized by
CGU was $1.2 million
(b) NCI measured as a proportion of FV of identifiable net assets at
acquisition date. Goodwill recognized by CGU was $1 million
Question (a)
Goodwill Identifiable net assets Total
Carrying amount 1,200,000 6,000,000 7,200,000
Recoverable amount 5,000,000
Impairment loss 1,200,000 1,000,000 2,200,000
Impairment loss borne by Parent

and NCI 1,200,000 1,000,000 2,200,000
Explanatory notes:
• Goodwill allocated to a CGU to enable comparison between carrying
amount of all assets of the unit and recoverable amount
• Goodwill attributable to NCI is included under recognized goodwill (no
further adjustment is required)
Question (b)
Goodwill Identifiable net assets Total
Carrying amount 1,000,000 6,000,000 7,000,000
250000 (20% x
NCI's stet share of goodwill $1million/0.8) 250,000
Notionally adjusted carrying
amount 1,250,000 6,000,000 7,250,000
Recoverable amount 5,000,000
Impairment loss 1,250,000 1,000,000 2,250,000
1000000 (80% x $1.25
Impairment loss recognized million) 1,000,000 1,000,000
Explanatory notes:
• Since comparison is done against the carrying amount of assets of a CGU, goodwill is
regrossed under alternative (b) to show theoretical goodwill as at date of acquisition
• NCI unrecognized share of goodwill is included
Conclusion
• Two sets of financial statements must be presented:
– Investor’s separate financial statements for the legal entity
– Consolidated financial statements for group of companies
• Although two sets of accounts exist, only one set of “books” has
to be kept by the legal entity
Conclusion
• Consolidation worksheets are used to prepare consolidated
financial statement
• Summation of line items of the financial statements of parents
and subsidiaries
• Incorporation of adjustments to eliminate and adjust
intragroup transactions and balances
• Transactions and balances in consolidated financial statement
reflect group’s perspective
Conclusion
• All business combinations are accounted for using the acquisition method
– Entails an “asset substitution process”
– Acquirer is deemed to have obtained control of all assets and liabilities
of acquiree.
– Acquisition date is a critical economic event (exchange of economic
resources between acquirer and the former-owners)
– Use of fair values to recognize assets and liabilities
– Unrecognized intangible assets and contingent liabilities recognized if
they meet criteria in IFRS 3
– NCI included as a component in equity
Conclusion
• Under the acquisition method:
– Consideration transferred = Fair value of (assets transferred +
liabilities incurred + equity interests issued by acquirer + contingent
consideration)
– Asset substitution process: Investment account is eliminated and
substituted with:
• Subsidiary’s identifiable net assets; and
• Goodwill
– Goodwill = Fair value of (consideration transferred + non-controlling
interests + acquirer’s previously held interest in the acquiree) –
acquiree’s recognized net identifiable assets
Class Exercise 1
Assume that ABC Company obtains all of the outstanding common
stock of XYZ Company on January 1, 2011. ABC acquires all of
XYZ’s stock for Br 900,000 in cash. The following are assets and
liabilities of the subsidiary at book value and fair value on the date
of combination.
Book values Fair Values
Assets
Cash Br 100,000 Br 100,000
Inventory 200,000 220,000
Trademarks (indefinite life) 100,000 180,000
Patented technology (10-year life) 200,000 300,000
Building (20- years life) 180,000 150,000
Liabilities (80,000) (90,000)
Net assets 700,000 860,000
Common Stock 400,000
Additional Paid-in Capital 100,000
Class Exercise 1…
• Assume that XYZ earns income of Br 200,000 during the year
and pays Br 30,000 cash dividend on May 1. In addition
Assume ABC used equity method.
Required:
1. Record the necessary entries
2. Prepare consolidated financial statement at the end of the year;
December 31, 2011
• Financial statements for the parent and the subsidiary at the end of the
accounting period December 31, 2011 are given in the next slides.
ABC COMPANY AND XYZ COMPANY
Financial Statements
For Year Ending December 31, 2011
ABC
XYZ Company
Company
Income Statement
Revenues 1,000,000 500,000
-Cost of goods sold 500,000 200,000
-Amortization expense 100,000 25,000
-Depreciation expense 80,000 75,000
+Equity in subsidiary earnings 191,500 –0–
Net income 511,500 200,000
Statement of Retained Earnings
Retained earnings, 1/1/11 800,000 200,000
+Net income (above) 511,500 200,000
-Dividends paid 100,000 30,000
Retained earnings, 12/31/11 1,211,500 370,000
ABC XYZ
Balance Sheet
Company Company
Cash 800,000 270,000
Inventory 236,000 200,000
Investment in XYZ Company (at equity) 1,061,500 –0–
Trademarks 600,000 100,000
Patented technology 300,000 200,000
Building 200,000 180,000
Total assets 3,197,500 950,000

Liabilities 86,000 80,000
Common stock 900,000 400,000
Additional paid-in capital 1,000,000 100,000
Retained earnings, 12/31/11 (above) 1,211,500 370,000
Total liabilities and equity 3,197,500 950,000
ABC XYZ Consolidation Consolidated
Accounts Company Company entries Totals
Debit Credit
Income statement
Revenues 1,000,000 500,000
+Equity in subsidiary earnings. 191,500 –0–
=Net income 511,500 200,000

Statement of retained earnings
0
+Net income (above)
-Dividends paid
511,500
100,000
200,000
30,000
=Retained earnings, 12/31/11 1,211,500 370,000
Balance sheet
Cash 800,000 270,000
Inventory 236,000 200,000
Investment in XYZ Company 1,061,500 –0–
Trademarks 600,000 100,000

Patented technology. 300,000 200,000
Building 200,000 180,000
Goodwill
Total assets 3,197,500 950,000
Common stock 900,000 400,000
Take home exam
Assume that ABC Company acquires 80 percent of XYZ
Company’s 120,000 outstanding voting shares on January 1,
2011, for Br 8 per share or a total of Br 768,000 cash
consideration. Further assume that the 20 percent non-controlling
interest shares traded both before and after the acquisition date
at an average of Br 8 per share. The following are assets and
liabilities of XYZ at book values and fair values;
Book values Fair Values
Assets
Cash Br 100,000 Br 100,000
Inventory 200,000 220,000
Trademarks (indefinite life) 100,000 180,000
Patented technology (10-year life) 200,000 300,000
Building (20- years life) 180,000 150,000
Liabilities (80,000) (90,000)
Net assets 700,000 860,000
Common Stock 400,000
Additional Paid-in Capital 100,000
Cont’d…
• Assume the subsidiary earned net income of Br 200,000 during the
period and paid cash dividend of Br 30,000. Assume ABC used equity
method.
Required:
1. Record the necessary entries on the book of ABC
2. Prepare consolidated financial statement at the end of the year;
December 31, 2011
• Assume in the following slides are separate financial statements for
the parent and the subsidiary at the end of the accounting period
ABC COMPANY AND XYZ COMPANY
Financial Statements
For Year Ending December 31, 2011
ABC XYZ
Company Company
Income Statement
Revenues 1,000,000 500,000
+Equity in subsidiary earnings 153,200 –0–
Net income 473,200 200,000
Statement of Retained Earnings
Net income (above) 473,200 200,000
Dividends paid 100,000 30,000
Balance Sheet
Cash 800,000 270,000
Inventory 262,000 200,000
Investment in XYZ Company (at equity) 897,200 –0–
Trademarks 700,000 100,000
Building 200,000 180,000
Total assets 3,159,200 950,000
Common stock 900,000 400,000

ABC XYZ Consolidation Non- Consolidat
Accounts Company Company Entries controllin ed
Debit Credit g Totals
interest
Income statement
Revenues 1,000,000 500,000
+Equity in subsidiary earnings. 153,200 –0–
Separate company net income 473,200 200,000

Consolidated net income
-Noncontrolling interest in Xyz NI
Net income to controlling interest
Statement of retained earnings
Non- Consolida
controllin ted total
Dr. Cr. g interest
+Net income (above) 473,200 200,000
-Dividends paid 100,000 30,000
Retained
1,173,200 370,000
earnings,12/31/11
Balance sheet Dr. Cr.
Cash 800,000 270,000
Inventory 262,000 200,000
Investment in XYZ Company 897,200 –0–
Trademarks 700,000 100,000
Building 200,000 180,000
Goodwill
Total assets 3,159,200 950,000
Common stock 900,000 400,000
Noncontrolling interest Jan 1/11
Non-controlling interest 12/31/11


End of Chapter six

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CHAPTER SIX

Consolidated financial statements-

2009 2010 2011

Required: Prepare journal entries for Percy Company from the

JE 2 Investment in Song 50,800

Cost of investment $387,000

2009 Equity in sub. income ($7,000 / 10 yrs.) 700

2010 Investment in Song 42,000

Required: Prepare a consolidated statements workpaper on Dec.

Less: Book value of equity acquired:

Difference between implied and book value 31,500 3,500 35,000

Difference between implied and book values is

Accounts payable $ 20,000 $ 15,000

Retained Earnings Statement

Accounts payable $ 20,000 $ 15,000 $ 35,000

• Deferred tax liability = 20% x ($7,600,000 - $4,700,000)

• Goodwill = Consideration transferred + NCI – Fair value of net

• NCI’s share of goodwill = Consideration transferred – 20% x Fair

Note: Contingent liability was already recognized in CJE 1. The recognition

CJE 4: Tax effects on CJE 2 & CJE 3

Tax expense 30,000

$5,700,000 x 20% + ($1,000,000 x 19/20 + $896,000 = $2,476,000

Measured at Fair value Measured as a proportion

NCI's share of FV of identifiable net assets (10%) 19,200

NCI's goodwill (25,000 - 19,200) 5,800

Incorporation Date of Beginning of End of

• No distinction between pre-acquisition or post-acquisition

Recoverable amount: Higher of fair value or value in use

If carrying amount ≤ If carrying amount ≥

Allocate impairment loss

Impairment loss is shared between Impairment loss is borne only

Impairment loss borne by Parent

Total assets 3,197,500 950,000

Revenues 1,000,000 500,000

-Cost of goods sold 500,000 200,000

-Amortization expense 100,000 25,000

-Depreciation expense 80,000 75,000

+Equity in subsidiary earnings. 191,500 –0–

=Net income 511,500 200,000

Investment in XYZ Company 1,061,500 –0–

Trademarks 600,000 100,000

Trademarks 700,000 100,000

Patented technology 300,000 200,000

Building 200,000 180,000

Total assets 3,159,200 950,000

Liabilities 86,000 80,000

Common stock 900,000 400,000

Additional paid-in capital 1,000,000 100,000

Separate company net income 473,200 200,000

Retained earnings, 1/1/11 800,000 200,000

+Net income (above) 473,200 200,000

-Dividends paid 100,000 30,000

Noncontrolling interest Jan 1/11

Non-controlling interest 12/31/11

Total liabilities and equity 3,159,200 950,000

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