Consolidated Statement of Financial Position Date of Acquisition 137 ACQUISITION OF ASSETS AND STOCK ACQUISITION COMPARED In Chapter 14 the two methods of achieving control over the assets of another company are discussed. A company may directly acquire the assets of another company, or ft may acquire a controlling interest in the other company’s voting stock. In an asset acquistion, the comy whose assets were acquired is disselved. The assets acquired are recorded in the beoe of the acquirer and consolidation of statement of financial position amounts is automatic. On the other hand, under stock acquisition, the acquired Company (the subsidiary) remains as a separate legal entity with its own financial statements. While the initial accounting for the two types ofacquisitions differs significantly, a 100% stock acquisition and an asset acquisition produce the same consolidated statement of financial position after acquisition. There is, however, a difference if the stock acquisition is less than 00%. Then, there will be a non-controliing interest in the consolidated statement of financial position. This is not possible under assets acquisition. Asset Acquisition — A brief Review The following illustration will review an asset acquisition of S Company by P Company for cash. Part 1 presents the statement of financial position of the two. companies just pase to the acquisition. Part 2 shows the entry of P Sak torecord the payment of 100,000 in cash for the net assets of S Company. The book values of the assets and liabilities of S Company are assumed to be equal to their fair values, and no goodwill exists. Part 3 shows the statement of finaricial position for the combined com any. Note that the combined statement of financial position is produced automatically, and no consolidation process is necessary. Mlustration 15-1 Part 1 P Company and Company ‘Statement of Financial Position December 1, 2013 PCompany 5 Company Assets Cash 230,000 Accounts receivable 40,000 Inventory 50,000 Equipment (net) 180,000 Total 500,000 Liabilities and Equity Accounts payable 280,000 110,000 Common stock 100,000 Additional paid in capital 80,000 Retained earnings 40,000 Total 500,000138 Chapter 13 Part 2 Entry on P Company's books to record acquisition of S company’s net assets. Accounts receivable 32,000 Inventory 20,000 Equipment 158,000 Accounts payable 110,000 Cash 100,006 Part 3 P Company Statement of Financiat Position Subsequent to Net Asset Acquisition December 1, 20T3 Assets Current assets Cash P130,000 Accounts reccivable 72,000 Inventory 70,000 Total current assets 272,000 Non-current assets Equipment Total Liabilities and Equity Current liabilities Accounts paayble 390,000 Stockholders’ Equity Common stock 100,000 Additional paid in capital 30,000 Retained earnings 40,000 220,000 Total liabilities and equity P610,000 Stock Acquisition Assuming the same facts as those in Illustration 15-1, except that P Company will acquire all of the outstanding stock of S Company from its stockholders usually thru a stock broker for P100,000. P Company records the acquisition on its books with the following entry on the date of acquisition: Investment in S Company 700,000 Cash 100,000 Procedural explanations for the preparation of consolidated statement of financial Position on the date of acquisition are illustrated in the pages that follow:Consolidated Statement of Financial Position ~ Date of Acquisition 139 CONSOLIDATED STATEMENT OF FINANCIAL POSITION ~ Date of Acquisition Aseries of examples that follows will illustrate the ‘preparation ofa consolidated statement of financial position in various situations that might arise in acquisition of stock, Ineach case, P Company acquires all or part of the common stock of S$ C “ompany. The acquisition may be at book value or at other than book value. ACQUISITION OF WHOLLY OWNED SUBSIDIARY — (100% Interest) Asubsidiary is said to be a wholly owned subsidiary when the parent company acquires all ofits outstanding common stock from the present shareholders. To illustrate the preparation of consolidated statement of financial position under this case, the statement of financial position of P Company and S Company in Part | of Illustration 15-1 will be used. Case 1: Acquisition at Book Value The acquisition ofa subsidiary is said to beat book value when the consideration given (price paid) for the investment in the Subsidiary was equal to the book value of interest acquired from the subsidiary (subsidiary's stockholders’ equity x parent company company’s ownership interest). In this case, P Company acquires all of S Company's outstanding common stock for P100,000 cash. The consideration given (price paid) of P100,000 is equal to the book value of the subsidiary’s net assets as shown below: Consideration given (price paid) P100,000 Less book value of interest acquired (100%) Common stock, $ Company P50,000 APIC~ S$ Company 30,000 Retained eamings ~ S Company 20,000 100,000 Excess P ==9. After posting the entry in the Preceding page recording the stock acquisition in the books of P Company, the Separate statement of financial position of P Company and $ Company immediately after the acquisition is presented in Illustration 15-2. Note that only the statement of financial position has changed to reflect the P100,000 reduction in cash and the recording of the Investment in Company account for the same amount.140 Caper 15 Mlustration 15-2 P Company and S Company Statement of Financial Position December 1, 2013 P Company S Company Assets Cash 130,000 Pp -0- Accounts receivable 40,000 32,000 Inventory 50,000 20,000 Equipment — net 180,000 158,000 Investment in S Company stock 100,000 Total Assets P500,000 P210,000 Liabilities and Stockholders’ Equity Accounts payable 280,000 P110,000 ‘Commoh stock 100,000 50,000 Additional paid-in capital 80,000 30,000 Retained earnings 40,000 20,000 Total Liabilities and Stockholders’ Equity 500,000 P210,000 Working Paper Elimination Entry. Before the preparation of the consolidated statement of financial position, the Investment in S Company account balance should be eliminated, because the two companies will be treated as one. Similarly, the subsidiary's stockholders’ equity accounts are eliminated because its assets and liabilities belong to the parent, notto outside equity owners. This is accomplished by the following elimination entry in the consolidated working paper. EQ) Common stock— 5 Company 50,000 Additional paid-in capital — $ Company 30,000 Retained earnings — S Company 20,000 Investment in S Company 100,000 Take note that the above elimination entry decreases to zero the Investment in $ Company account of P Company and the three stockholders’ equity accounts of S Company. In the cases that follow all working paper climination entries are numbered sequentially. To avoid confusing the elimination entries with journal entries that appear on the separate books of the parent or subsidiary, all working paper elimination entries appearing in the text a URoeee an entry preceded byar anConsolidated Statement of Financial Position — Date of Acquisition ane Consolidation Working Paper. The working paper showing the elimination entry appears below (ZI/ustration 15-3). The first two columns of the working paper present the statement of financial position of P Company and S Company taken from Mlustration 15-2. The balances of like accounts are placed side by side so that they may be easily added together. Mlustration 15-3 P Company and Subsidiary ‘Consolidation Working Paper December 1, 2013 Eliminations {rp Company |S Company Debit Credit | Comvotidated Assets Cash Pi30.000| Pp -0- Accounts receivable 40,900 | 32,000 Inventory 50,000 | 20,000 Equipment ~ net 180.000 | 158,000 Investment in $ Company 100,000 1) 100,000 Se Total Assets 000 Liabilities and Equity ‘Accounts payable }- £289,000 | 110,000 390.000. ‘Common stock P Company 100,000 100,000 S Company 0,000 | (1) 0,000 ‘Additional paid-in capital: P Company 80,006 Kv.000 S Company 30,000 | (1) 30,000 Retained earnings: P Company 40,000 40.000 'S Company 20,000 | (1) 20,000 ee! ‘Total Liabilities and Equity 500,000 | 210,000 | _ P100,000 100,000 Po 10.000 The following features of the working paper forconsolidated statement of financial position on the date of acquisition should be emphasized: 1, The elimination entry is not recorded in either the parent company’s or the subsidiary’s accounting records; it is only a part of the working paper for the preparation of the consolidated statement of financial position. 2. The consolidated paid-in capital amounts are those of the parent company only. Subsidiaries’ paid-in capital amounts a/ways are eliminated in the process of consolidation.142 Chapter 15 3. _ Consolidated retained earnings include only the retained earnings of the parent company. This in accordance with the principle that acquisition accounting reflects a fresh start after acquisition of stock, nota combining of existing stockholders’ 4. amounts in the consolidated column reflects the financial position ofa single economic entity comprising two legal entities, after eliminating all intercompany balances. Take note that these are exactly the sameas in the statement of financial position prepared after the acquisition of asset (Part 3 of Illustration 15-1). Consolidated Statement of Financial Position, The amounts in the consolidated column of the working paper are presented in the usual manner in the consolidated statement of financial position of P Company and its subsidiary, S Company as follows: Mlustration 15-4 P.Company and Subsidiary Consolidated Statement of Financial Position December 1, 2013 Assets Current Assets Cash 130,000 Accounts receivable 72,000 Inventory 70,000 Total Current Assets 272,000 Non-current assets Equipment 338,000 Total Assets 610,000 Liabilities and Equity Current liabilities Accounts payable 390,000 Stockholders’ Equity Common stock 100,000 Additional paid-in capital 80,000 Retained earnings 40,000 220,000 Total Liabilities and Equity P610,000Consolidated Statement of Financial Position — Date of Acquisition 143 Case 2: Acquisition at More than Book Value When the book values of the net assets of the subsidiary are equal to their fair values. and the consideration given (price paid) is more than the book value of interest acquired from the subsidiary, the excess is treated as goodwill. Illustration: Assume that P Company acquires 100% of S Company's outstanding common stock for P110,000 in cash on December 1, 2013. S On the date of acquisition, P Company records the acquisition of stock on its books with the following entry: Investment in S Company 110,000 Cash 710,000. After the above entries has been posted, the affected assct accounts of P Company aie as follows: Cash P1200 Investment in S Company 110,000 The excess of the consideration given over the book value of interest acquired is computed below: Consideration given (price paid) P0000 Less book value of interest acquired: (100%) Common stock ~ $ Company 50,000 APIC — § Company 30,000 Retained earnings — S Company Goodwill The resulting excess is usually due to two factors: (1) a difference between the book value of the subsidiary’s assets and/or liabilities and their fair values, and (2) the existence of goodwill in the subsidiary company. Since the book valuc of the net asscts in this example is equal to their fair values, the excess is treated as goodwill.144 Chapter 15 Working Paper Elimination Entries. After the computation of the excess (goodwill), the elimination entry to be posted in consolidation working paper can now be prepared as follows: E(1) Common stock — S Company 50,000 Additional paid-in capital ~ S Company 30,000 Retained earnings — S Company 20,000 Goodwill 10,000 Investment in S Company 410,000 Consolidation Working Paper. The working paper showing the above elimination entry is presented below: Mlustration 15-5 P Company and Subsidiary Consolidation Working Paper December 1, 2013 : Eliminations: P Company | S$ Company Debit Credit Assets Cash P120,000| P -0- Accounts receivable 40,000 32,000 Inventory 50,000 20,000 Equipment — net 180,000 | 158,000 Goodwill = 188 Investment in $ Company 110,000 (4) 110,000 Total assets P500,000 210,000 Liabilities and Equity Accounts payable 280,000 | P110,000 Common stock P Company 100,000 $ Company 50,000 | (1) 50, ‘Additional paid-in capital r P Company 80,000 $ Company ‘ 30,000 | (1) 30, Retained earnings P Company 40,000 $ Company 20,000 | (1) _ 20, Total Liabilities and Equity | __P500,000 | _P210,000| _PL es 110,000 610,004Consolidated Statement of Financial Position - Date of Acquisition 145 Ananalysis of the consolidation working paper (Illustration 15-5) reveals the following: 1. PCompany’s Investment in S Company account is eliminated. 2. The stockholders’ equity accounts of S Company is eliminated. 3. Goodwill in the amount of P 10,000 (as computed) is inserted as an asset in the consolidated column: 4. Theassetsand liabilities of S Company are combined with thoseof P Company to arrive at the consolidated balances. 5. Only P Company's stockholders' equity accounts are extended in the consolidated column. Consolidated Statement of Financial Position. The formal consolidated statement of financial position resulting from the 100% acquisition of S Company taken from the consolidated column of the consolidation working paper is presented below: Mlustration 15-6 PCompany and Subsidiary Consolidated Statement of Financial Position December 1, 2013 Assets Current assets Cash Accounts receivable Inventory Total current assets Non-current assets Equipment Goodwill Total non-current assets Total assets Liabilities and Equity Accounts payable 390,000 Stockholders’ Equity Common stock 100,000 Additional paid in capital 80,000 Retained earnings : =n Total stockholders’ equity 220,000 Total liabilities and equity 610;146 Chapter 15 Case 3: Acquisition at Less than Book Value — Bargain Purchase A bargain purchase exists when the price paid is Jess than the fair value of the subsidiary's net identifiable assets. The excess is treated as gain on acquisition. IMustration: Assume that P Company paid only P80,000 for the 100% interest in the stockholders’ equity of S Company. P Company would make the following entry to record the acquisition: Investment in S Company 80,000 Cash 80,000 After posting the above entry recording the investment in S Company, the separate ‘statement of financial position of P Company will show the following balances of the affected accounts: Cash 150,000 Investment in S Company 80,000 Before the preparation of working paper elimination entry, the difference (excess) between the consideration given and the book value of interest acquired is computed as follows: Consideration given (price paid) P 80,000 Less book value of interest acquired (100%): Common stock — $ Company 50,000 Additional paid-in capital — $ Company 30,000 Retained earnings — S Company 20,000 100,000 Gain on acqusition (20,000) Working Paper Elimination Entry. After computing the income from acquisition, working paper elimination entry can now be prepared as follows: EQ) Common stock — S Company 50,000 Additional paid in capital - § Company 30,000 Retained earnings - § Company 20,000 Investment in S Company 80,000 Retained earnings ~ P Company (Gain) 20,000 Take note that since only a statement of financial position is being prepared, the gainon acquisition is closed directly to the parent's retained earnings.Consolidated Statement of Financial Position — Date of Acquisition 147 Consolidation Working Paper. The working paper showing the elimination entries and the consolidated amounts to be presented in the consolidated statement of financial position is shown below: Mlustration 15-6 P Company and Subsidiary Consolidation Working Paper December 1, 2013 Eliminaions P s Conso- Company | Company Debit Credit lidated Assets Cash P150,000 | P -0- 150,000 Accounts receivable 40,000 32,000 72,000 Inventory 50,000 20,000 70,000 Equipment 180,000 158,000 338,000 Investment in § Company 80,000 a4 (a) 80.000 Total Assets P500,000 000 | 630,000 Liabilities and Equity ‘Accounts payable 280,000 | P110,000 390,000 ‘Common stock: P Company 100,000 100,000, S Company 50,000 | (1) 50,000 ‘Additional paid-in capital: P Company 80,000 80,000 'S Company 30,000 | (1) 30,000 Retained eamings: P Company 40,000 (1) 20,000 60,000 S Company 20,000 | _ (1) 20,000 ‘Total Liabilities and equity 000 | _ F210,000 | 100,000 100,000 | P630,000 ‘Take note that the income from acquisition is not presented in the above working paper, because it is closed directly to the retained earnings of P Company (P40,000 + P20,000). Consolidated Statement of Financial Position. From the consolidated column, a formal consolidated statement of financial position can now be prepared.148 ACQUISITION OF PARTIALLY OWNED SUBSIDIARY (Less than 100% interest) The consolidation of a parent company and its partially owned subsidiary differs from the consolidation ofa wholly owned subsidiary in one major respect — the recognition ofnon-controlling interest (Gormerly: called minority interest). Non-controlling interest (NCI) is a term applied to the rights of stockholders other than the parent company (controlling interest) to the net income or loss and net assets of the subsidiary. The non-controlling interest in the net income of the subsidiary is presented in the consolidated statement of comprehensive income (to be discussed in Chapter 16) and the non-controlling interest in the subsidiary's net assets is shown in the consolidated statement of financial position in total and is not broken into common stock, additional paid in capital, and retained earnnings. The NCI must be shown as a component of stockholders’ equity. MEASUREMENT OF NON-CONTROLLING INTEREST IFRS 3 provides two options of measuring non-controlling interest in an acquiree: 1. at fairvalue, or 2. atthe non-controlling interest’s proportionate share of the acquiree's identifiable net assets. Under option I, any goodwill that arises at the time of acquisition is allocated between the parent and the non-controlling interest (NCI). Under option 2, any goodwill that arises at the time of acquisition is assigned only to the parent. There is no requirement within IFRS 3 to measure non-controlling interest on a.consistent basis for similar types of business combinations and therefore, an entity has a free choice between the two options for each transaction undertaken. The option to value NCI at fair value will be used throughout (unless stated). For the purpose of measuring non-controlling interest at fair value, i itmaybe possible: to determine the acquisition-date fair value on the basis of active market prices of the equity shares not held by the acquirer. When a market price is not available, the acquirer should measure the fair value of the non-controlling interests using other valuation techniques (IFRS 3). Fora detailed illustration of the consolidation procedures fora partially owned the statement of financial position of P Company (I//ustration 15-7) and the statement of financial position amounts and the fair values of the assets and liabilities of S Company in the next page (Ii/ustration 15-8) before acquisition will be used.Consolidated Statement of Financial Position — Date of Acquisition 149 Mlustration 15-7 P ‘Statement of Financial Position December 1, 2013 Assets Liabilities and Equity Current assets Liabilities Cash P 218,000 Accounts payable P 160,000 Accounts receivable 144,000 Bonds payable 400,000 Inventory 160,000 Total liabilities 560,000 Total $22,000 Non-current assets: ———~ Stockholders’ Equity Land 200,000 Common stock, P10 par value 400,000 Building (net) 840,000 APIC 500,000 Equipment (net) 400,000 Retained earnings 502,000 Total 1,440,000 Total equity 1,402,000 Total. assets P1,962,000 Total liabilities and equity 1,962,000 IMustration 15-8 S Company Statement of Financial Position December 1, 2013 é Assets Book Value Fair Value Accounts receivable P 40,000 = P_40,000 Inventory 100,000 110,000 Land 80,000 130,000 Buildings (net) 300,000 500,000 Equipment (net) 80,000 120,000 Total assets P_ 600,000 P_ 900,000 Liabilities and Equity Accounts payable P 80,000 P_80,000 Bonds payable 200,000 200,000 Total iiabilities P_ 280,000 P_280,000 Stockholders’ Equity: so ‘Common stock, P1 par P_ 20,000 Additional paid in capital 180,000 Retained earings 120,000 Total equity 320,000 Net assets P320,000150 Chapter 15 Case 4: Acquisition at More than Fair Value with Adjustment of Subsidiary accounts. Mustration: Assume that instead of paying cash, P Company issued 16,000 shares ofits P10 par value common stock for 80% (16,000 shares) of the outstanding shares of S Company. The fair value of P Company's stock is P50 and the fair value of the 20% NCI is assessed to be P170,000. P Company also pays P50,000 in professional fees to accomplish the acquisition. P Company would make the following entries: (1) To record the acquisition of S Company stock: Investment in S Company (16,000 shares x P50) 800,000 Common stock (16,000 shares x P10) 160,000 Additional paid in capital 640,000 (2) Torecord acquisition-related costs: Retained earnings — P Co. (Acquisition expense) $50,000 Cush 50,000 Acquisition expense is to be closed directly to retained earnings of P Companysince only the statement of financial positions are being consolidated. The consolidation proceduers for this case are as follows: 1, Compute goodwill. In accordance with IFRS 3 goodwill is the excess of. + The aggregate of (i) the acquisition date fair value of the consideration transferred, (ii) the amount of NCI, and (iii) the fair value of the parent's ‘previously —held interest in the subsidiary; over * Theacquisition-date fair value of the net assets acquired. Using the above, goodwill is computed as follows: Price paid P 800,000 Non-controlling interest (at fair value) 170,000 Total 970,000 Less fair value of net assets acquired 620,000 Goodwill 350,000 SSConsolidaied Statement of Financial Position — Date of Acquisition 15] The following assumptions should be noted in the computation of goodwill: Non-controlling interest is measured at fair value (170,000). If the fair value ofthe non-controlling interest is not given, its fair value may be estimated by making an assumption. it may assumed that if the parent would pay P800,000 foran 80% interest, then it maybe implied that the entire subsidiary company is worth P1,000,000 (P800.0 000/80%). Assuming this is true, the NCI is worth P200, ,000 (PI, 000,000 x 20%). The goodwill then would be P380,000 [(P800,000 + P200,000) — P620,000)}. . Non-controlling interest may also be measured on the basis of its proportionate interest in the acquiree's identifiable net assets. Under this option NCI is equal to P124,000 (P620,000 x 20%). The goodwill then would be P304,000 [(P800,000 + P124,000) — P620,000]. 2. Preparea Determination and Allocation of excess Schedule. the D & A schedule that follows revalue the entire entity, including NCI. Parent NCI Fair Value (80%) (20%) Fair value of subsidiary P_970.000 800,000 P170.000 Less book value of interest acquired: Common stock P 20,000 Additional paid in capital 180,000, Retained eamings 120.000 Total equity P_320,000 P320,000 P320,000 Interest acquired 20% 20% Book value P256,000 PF 64.000 Excess £1650.000 544.000 Adjustment of idenutiable accounts: = Inventory (P110,090 FY = P100,000 BV) ( 10,000) Land (P130,000 FV — P80,000 BV) (50.000) Buildings (P500,000 FV ~ P300,000 BV) (200,000) Equipment (P120,000 FV - P80,000 BY) 40,000) Total P(300,000) Goodwill P 350,000 Note the following features of the D & A of excess schedule fora less than 100% Parent ownership interests. The “fair value of subsidiary" line contains the fair value of the entire company, the price paid by the parent, and the fair value of the NCL * — Thetotal stockholders' equity of the subsidiary (book value of net asscts) is allocated 80% to controlling interest (P256,000) and 20% to NCI (P64,000). The entire adjustments of subsidiary net assets (P650,000) will be allocated P544,000 to controlling interest and P106,000 to NCI. + When the fair value of an asset exceeds the book value, thedifference reduces the excess. Conversely, when an asset's book value is higher than its fair value. the difference increases the said excess.152 Chapter 13 Working Paper Eliminations Entries. Base on the D & A of Excess schedule, working paper elimination entries can now be prepared as shown below: * — Tecliminate subsidiary stockholders’ equity against the investment account (80%) and NCI account (20%) as follows: E(1) Common stock ~ S Company 20,000 Additional paid in capital — S Company 180,000 Retained earnings - S Company 120,000 Investment in S Company 256,000 Non-controlling interest (NCI) 64,000 * — Toallocate excess by adjusting the net assets to their fair values, The total adjustment is allocated to parent company (P544,000) and to NCI (P136,000). EQ) Inventory 10,000 Land 50,000 Buildings 200,000 Equipment 40,000 ‘Goodwill 350,000 Investment in S Company 544,000 Non-controlling interest (NCI) 186,000 Consolidation working Paper. The working paper for the consolidated statement of financial position is shown in Illustration 15-9 in the next page. The following should be noted in the working paper. * — The total stockholders’ equity of S Company is eliminated. + The investment account is totally eliminated. * Allsubsidiary assets are adjusted to 100% of fair value, regardless of parent's interest. * The total fair valueofthe NCI (P170,000) is extended in the consolidated column. * 100% ofthe fair values of subsidiary accounts are consolidated with the existing book values of theparent company accounts. * The amounts that will appear in the formal consolidated statement of financial position are shownin the last column of the working paper. * Thestockholders' equity of the consolidated column shows the components of the controlling interest (common stock, APIC and retained earings) and the total non-controlling interest (NCI).Consolidated Statement of Financial Position — Daie of Acquisition 153 Mlustration 15-9 + P Company and Subsidiary Consolidation Working Paper December 1, 2013 ae ‘Piminations and Adjustments P 5 Conso- Company | Company Debit | Credit lidaied Assets Cash. P 168,000 | po P 168,000 ‘Accounts receivable 144,000 40,000 184,000 Inventory 160,000 100,000 | @) 10,000 270,000 Land 200,000 80,000 | (2) 50,000 330,000 Buikiing 40,000 300,000 | (2)200,000 1,340,000 Equipment 400,000 80,000 | (2) 40,000 520,000 Investment in $ Company 800,000 (1) 256,000 # 2) 544,000 ater F @3159,000 |___350,000_ Toaal 2,712,000 | _ P600,000 3,162,000 Se Liabilities and Equity ‘Accounts payable P 160,000 | P 80,000 P 240,000 Bonds payable 400,000 200,000 600,000 Common stock: P Company 560,000 - 560,000 S Company 20,000 | (1) 20,000 ‘Adsitional paid-in capital: P Company 1,140,000 1,140,000 $ Company 180,000 | (1)180,000 Retained earnings: P Company 452,000 452,000 $ Company 120,000 | (4)120,000 NCI to consolidated a) 64, 170,000 LL |_@) 106, Total 2,712,000 | 600,000 | P1970,000 Eliminations and adjustments (2) Eliminate 100% subsidiary equity against investment account and NCI account. @) Allocate excess by adjusting the following asset accounts that are undervalued: ventory —_- ‘Goodwill Total adjustment is allocated to Investment account and NCI. fap gee Bi15% ~ Chapter 15 Consolidted Statement of Financial Position. The formal consolidated statement of rane postion resulting fom 80/4 acquisition of S Company m exchange foc 000 Parent's shares has been taken from the consolidated column of consolidating working paper (Illustration 15-9). 15-10 ‘i and Subsidiary Conolidated Statement of Financial Position December 1, 2013 Assets Current assets Cash P 168,000 Accounts receivable 134,000 Inventory ; 270,000 Total 622,000 Non-current assets Land 330,000 Building 1,340,000 Equipment 520,000 Goodwill 350,000 Total 2,540,000 Total assets 3,162,000 Liabilities and Equity Liabilities Accounts payable P. 240,000 Bonds payable ; 600,000 Total liabilities —840,000 ‘Stockholders’ Equity: Common stock 560,000 Additional paid in capital 1,140,000 Retained earnings 452,000 Total controlling equity 2,152,000 Non-controlling interest 170,000 Total equity 2,322,000 Tofal liabilities and equity P3,162,000 Take note the above consolidated statement of financial position is prepared on the date of acquisition. Thenext chapter will illustrate the effect of subsequent period activities on the consolidated financial statements.Consolidated Statement of Financial Position - Date of Acquisition 155 Adjustment of Goodwill Applicable to NCI. In Case 4, the total goodwill is P350,000. This is allocated between the parent company and the NCL. The allocation is calculated using the following value analysis: Total Parent Price NCI Fair Value (80%) (20%) Company fair value 970,000 800,000 P170,000 Fair value of net assets excluding goodwill 620,000 496,000 124,000 Goodwill 350,000 P304,000 46,000 The NCI share of goodwill of P46,000 could be reduced to zero, but the NCI share of the fair value of net identifiable assets is never reduced. This means that the total Sair value of NCI can never be less than the NCI percentage of the fair value of the net assets. In this case, it cannot be less than P124,000 (P620,000 x 20%). ilustration: To illustrate the above principle, assume that the assessed fair valueof NCI is P120,000 which is less than P124,000. Since, the NCI value can never be less than its share of net identifiable net assets. The value of NCI would therefore be raised to P] 24,000 (replacing the P120,000). The goodwill computation and allocation would be modified as follows: Total Parent Price NCT Fair Value (80%) (20%) Company fair value 924,000 800,000 P124,000 Fair value of net assets excluding goodwill 620,000 496,000 124,000 Goodwill 304,000 304,000 PS -- ‘Take note the following in the above. assumptions: * Ifthe P120,000 fair value of NCI is used, the NCI share of the total goodwill of P300,000 (P920,000 ~P620,000) is negative P4,000 whichis not permitted. * The total goodwill of P304,000 is only allocated to the parent company. If goodwill becomes impaired in future periods, the impairment loss would be allocated tothe Controlling interest only.156 Cnapter 15 Case 5: Acquisition at Less than Fair Value with Adjustment of Subsidiary accounts. Illustration: Using the same data, except that P Company issued 8,000 shares of its P10 par value common stock for 80% of the outstanding shares of § Company. The fair value ofa share of P Company stock is P50, P Company also pays PS0,000 in professional fees to complete the combination. P ‘Company would make the following entries: (i) To record the acquisition of S ‘Company stock: Investment in S Company (8,000 shares x P50) 400,000 Common stock (8,000 shares x P10) 80,000 Additional paid in capital 320,000 @)_ Torecord acqusition-related costs: Retained earnings — P Co (acquisition expense) 50,000 Cash $0,000 Assuring that the fair value of the 20% NCTis not given, the following assumptions would be made to estimate its value. if the parent Pays P400,000 for an 80% interest, then itmay be assumed that the entire subsidiary company is worth P500,000 (P400,000/ 80%). Refer this as the "implied value" of the Subsidiary company. Assuming this is to be true, the NCIis worth 20% ofthe total subsidiary ‘company value (P500,000 x 20% =P100,000). The NCI value, however can never be less that its share of net identifiable assets (P124,000). Therefor, the NCI share of company value is to be increased to P124,000 (replacing the Pi00,000). The consolidation procedures for this case would be the following: 1. Compute the gain on acquisition (excess of the FV of net assets acquired over the aggregate of the consideration transferred, the NCL and the FV of. ‘any previously- held equity interest in the acquiree) as follows: Price paid P 400,000 Non-controlling interest (at fair value) 124,000 Total s 524,000 Less fait value of net assets acquired (excluding goodwill) 620,000 Gain on acquisition P(96,000)Consolidated Statement of Financial Fosition— Date of Acquisition 157 The gain is to be recognized only by the controlling interest (IFRS 3) as shown below: Total implied Parent NCT Fair Value (80%) (20%) Company fair value 524,000 P 400,000 P124,000 Less FV of net assets (excluding goodwill) 620,000 496,000 124,000 Gain on acquisition - 796,000) P(96,000) P oi 2. Prepare the Determination and Allocation of Excess Schedule: Implied Parent Price NCI Fair Value (80%) (20%) Fair value of subsidiary 524,000 400,000 P124,000 Less book vaiue of interest acquired: res SEE SE RES Common stock 20,000 Additional paid in capital 380,979 Retained earnings 120,000, Total equity 320,000 Interest acquired ie Book value Excess 204,000 Adjustments of identifiable assets: Inventory - { 10,000) Land (50,000) Buildings (200,000) Equipment (40,000) Total e )) Gain on acquisition P( 96,000) Working Paper Elimination Entries. The D & A of excess schedule above provides the data to prepare the following elimination entries: * Eliminate 100% of the subsidiary stockholders’ equity againstine (80%) and the NCI(20%) as follows: ‘estment account E(1) Common stock — § Company 20,000 Additional paid in capital = § Comany 180,000 Retained earnings ~ $ Company 120,000 Investment in S Company 256,000 Non-controlling interest (NCI) 64,000158 Chepuer i5 Adjust the assets of the subsidiary to their fair values and allocate the total adjustment to controlling interest (P144,000) and NCI (69,000): EQ) Inventory 10,000 Land 50,000 + Buildings 200,009 Equip-sent 49,000 Retained earnings — P Company 96,000 Invesimens in S 144,000 Non-controlling interest (NCI) 60,000 Take note that the gain on acquisition is closed directly to the retained earnings the parent company, size only the statement of financial position is to be prepared on the date of acquisition. The consolidation working paper for this case is presented below: Mlustration 15-9 P Company and Subsidiary Consolidation December 1, 2013 Eliminations P s Conso~ Company | Company idated Assets Cash P 168,000 | Po. ‘Accounts receivable 48,000 40,000 Inventory 360,000 100,000 | (2) 10,000 Land 200,000 80,000 | (2) 50,000 Bulking 840,000 300,000 | (2)200,000 i 400,000 80,000 | (2) 40,000 Investment in S Company 400,000 (1) 256,000 @) 144,000 | Totat P2,312,000_| _P600,000 2,812,000 _ Liabilities and Equity ‘Accounts payable F 160,000 | P 80,000 P 240,000 Bonds payable 400,000 200,000 600,000 ‘Common stock: P Company 480,000 re ; 480,000 S Company 20,000 | (1) 20,000 P Company 820,000 820,000 S Company 180,006 | (1)180,000 Retained earings. P Company 452,000 (2) 96,000 | 548,000 8 Company (120,000 NCI to consolidaten ‘tal 2,312,000Consolidatest Statement of Financial Position — Date of Acquisition i3y TECHNIQUES IN THE CALCULATION AN’ ALLOCATION OF GOODWILLAND/OR GAIN ON ACQUISITION The following are the steps that will always work if used inthe ordershown below WITH GOODWILL: Assume the price paid by the parent is P600,000. Step 1; Enter the value for column A2 (sum of fair values of contpany's net identifiable assets). Then enter apprepriate Percentage of that value into column B2 and C2. These amounts are fixed regardiess of the price paid by the parent. 3 @) Gs Oo Company —ParentPrice —_NCI-Value ImpliedFV (80%) (20%) 1. Company fair value 2.__Feir value of net assets excluding goodwill $20,000 496,000 124,000 3. Goodwill interest in 1 Step 2: Enter the price paid b; 1. Company fair value 600,000 2,_Fair value of net assets excluding goodwill 620,000 496,000) 3.__ Goodwill ane Step 3: Compare B1, the price paid by the parent, and B2, the parent's share of the fair value of the company’s net identifiable assets. IF B}'is more than B2, enter B3 the difference,w hich is the goodwill applicable to the parent. Then complete Cl. Normally, this amount will be proportionate to BI. It can bea different amount (based on estimated! fair value) but never less than C2. In this case it is assessed to be P180,000 even though the proportionate value would be P150,000 forthis example. Compute now the value ofC3 and complete the remaining colums. a) 6) Company Parent Price Lrplied FV (80%) 1. Company fair value P780,000 600,000 P180,000* .2._Fair value of net assets excluding goodwill 620,000 496,000 124,000 3._ Goodwill P160,000 P104,000 _P56,000 must be more than PI24,000 and ean be diffrent than the proportionate Value uf £150,000 (a0 otxisir x 20%).160 ‘WITH GAIN ON ACQUISITION: Assume the price paid by the parent is P450,000. Step 1: Enter and allocate fair values. & @ ®) Oo Company Parent Price NCI Value Implied FV (80%) (20%) 1. Company fais value 2. Fair value of net assets excluding goodwill $26,000 496,000 124,000 3._ Gain on acquisition Step 2: Enter the price paid oy the parent. ) ®) © Company ParentPrice NCI Value ImpliedFV (80%) 20%) 1. Company fair value 450,000 2._ Fair value of net assets excluding goodwill 620,000 496,000 124,000 3._ Gain on acquisition ‘Step 3: Calculate the gain applicable to the parent (B2 is more: mies Bl) andcomplete theremaining columns. a) ) oO Company Parent Prive. NCI Value Implied FV (8%) 20%) 1. Company fair value PS74,000 450,000 P124,000 2,_Fair value of net assets excluding goodwill __620,000.__496,000 124,000 3. Gain on acquisition 1P(46,000) (46,000) PCO Take note that C1 cannot be less than C2. Ifthe fair value of the NCI exceeded P124,000, the excess would be an offset to the gain on the controlling interest. To illustration assume the NCI has fair value of P130,000. “@ @) © Company Parent Price NCI Value 1. Company fair value PS86,000 ‘P450,000 ‘P130,000 2. _ Fair value of net assets excluding goodwill 620,000, _496,000 124000 3._ Gain on acquisition P(40,000) (46,000) 6,000 The working paper elimination entry to allocate the excess would be: Inyesiment in S Company 46,000 NCI Retained earnings — P Company (gain on acquisition) 40,000Consolidated Statement of Financial Position — Date of Acquisition 161 SUBSIDIARY'S PREEXISTING GOODWILL Ifthe acquired subsidiary has goodwill on its books at time of acquisition, that goodwill is ignored in the computation and allocation of excess. The D & A schedule adjust existing goodwill, rather thanonly recording new goodwill. Tllustration: Assume the same example involving the 80% acquisition of S Company in Case 4 on page 150. Assume further that S Company in its statement of financial position on page 149 (Ilustration 15-8) has a goodwill of P50,000 and the retained earnings balance is P170,000. The revised statement of financial position of S Company on the date of acquisition would be as follows: Mustration 15-10 Company Statement of Financial Position December 1, 2013 Assets Book Value Fair Value Accounts receivable P 40,000 P 40,000 Inventory 100,000 110,000 Land 80,000 130,000 Buildings (net) 300,000 500,000 Equipment (net) 80,000 120,000 Goodwill 50,000 Total assets P 650,000 P-900,000 Liabilities and Equity Accounts payable P 80,000 P_ 80,000 Bonds payable 200,000 200,000 Total liabilities P.280,000 —_-P_280,000 Stockholders' Equity: ‘Common stock, P1 par P 20,000 Additional paid in capital 180,000 Retained earnings =a Total equity P 370,000 Net assets P370,000° 620,000 se. Soea Chapter 15 e that issued 16,000 shiares of its P10 par value common stock for ¥% (16,000 shares) the outstanding shares of S Company. The fair value of P n stock is P50 and the fair value of the 20% NCT is assessed to be 200,000. Pi ly also pays 50,000 in professional fees to accomplish the acquisition. P ty would make the following entries: () To record the acquisition of S Company stock: Investment in S Company (16,000 shares x P50) 800,000 ‘Common stock (16,000 shares x P10) 160,000 Additional paid in capital 640,000 (2) - lo record acquisition-related costs: Retained earnings — P Co. (Acquisition expense) 50,000 Cash : 50,000 Computation and allocation of the goodwill: Total —ParentPrice NCI Value FairValue (80%) (20%) ‘Company fair value “ P1,000,000 —_P 800,000 —_P200,000 Fair value of net assets excluding goodwill 620,000 496,000 124,000 Goodwill P 380,000 __'P304,000 76,000, ‘The Leiensunation and Allocation of Excess Schedule is as follows: Total Parent NCI Fair Value (80%) (20%) Fair value of subsidiary 1,000,000 800,000 200,000 Legs book value of interest acquired: * Common stock P 20,000 Additional paid in capital 180,000 Retained earnings 170,000 Total equity P 370,000 P370,000 ‘370,000 acquired es 80% 20% Book value 296,000 P 74,000 Excess P 630,000. PS04,000 126,000 Adjustment of identifiable accounts: agree Inventory P110, —P100,000 BV) P( 10,000) Land (130,000 FV —P80,000 BV) (50,000) ~ Buildings (P500,000 FV~ P300,090 BV) (200,000) Equipment (P 120,000 FV — P80,000 BV), (40,000) Total (300,000) Goodwill P330,000 ==Consolidated Statement of Financial Position — Date of Acquisition 163 ‘The working paper elimination entries based on the D & A ofexcess schedule are: EQ) Common stock - S Company 20,000 Additional paid in capital = S Company 130,000 Retained earnings ~ S Company 170,000 Investment in S Company 296,000 Non-controlling interest (NCI) 74,000 EQ) Inventory 10,000 Land $0,000 Buildings 200,000 Equipment 40,000 Goodwill (P380,000 — P50,000) 530,060 Investment in S Company $04,000 Non-controlling interest (NCI) Z 126.000 solidation Working Paper December 1, 2013 - 7 ois Company Company Debit Credit dated Assets ‘Cash P 168,000 P 168.000 ‘Accounts receivable 144,000 184,000 Inventory 160,000, (2) 10,000 270,000 Land _ 200,000 (2) 50,000 330,000 Building 840,000 (2) 200,000 1,340,000 ‘Equipment 400,000 . (2) 40,000 $20,000 Investment in S Company 800,000 (1) 296,000) (2) 504.0004 ‘Goodwill (2) 330,000 380,000 Total P2,712.000 650,000 P3,192,000 Liabilities and Equity Accounts payable P 160,000 | P 80,000 P 240,000 Bonds payable 400,000 | 200,000 600,000 ‘Common stock: P Company $60,000 560.000 S Company 20,000 (1) 20,000 Additional Paid in Capital: P Company 1,140,000 1,149,000 ‘S Company 180,000 (1) 180,000 Retained eamings P Company 452,000 452,000 S Company 170,000 | (1) 170,000 | NCI to consolidated C) 74,0008, 200,000 (2)126,000$ Total | 2,712,000 P670.000 | + P1,000,000. | P1,000.000 | 3,192,000164 Chapter 13 PARENT'S PREVIOUSLY —- OWNED SECURITIES IN THE SUBSIDIARY ‘The acquirer who already owns a non-controlling interest (less than 50%) in a company may decidgito buy additional shares of common stock to achievea controlling interest. ‘The previously owned shares are adjusted to fair value and a gain or loss is recorded in the investment. The ‘air value of the shares is then added to the price paid for the new shares. The prior interest plus the new interest is treated as one price paid for a controlling interest. Normally, the fair value of the previously owned shares is based on the price paid for the controlling interest. Illustration: ‘Assume P Company owns a 30% interest (20,000 shares) in S Company that P Company purchased at a prior date for P40 per share. Ata later date, P Company acquires another 100,000 shares (50% interest) for P60 per share. The 20,000 previously acquired shares would be adjusted to fair value as follows: Investment in S Company (20,000 shaers x P20 increase) 400,000 Unrealized gain on revaluation of investments 400,000 The above entry increased the book value of the 20,000 previously owned shares to P1,200,000. The total price paid for the controlling 80% interest would be computed as follows: Fair value of previously owned 30% interest P1,200,000 Acquisition of 100,000 shares at P60 6,000,000 Total = 7,200,000 Assuming cash is paid for the 100,000 shares, the entry to record the acquisition would beas follows: Bs Investment in S Company ~ 7,200,000 Cash 6,000,000 Investment in S Company (20,000 shares x P60) 1,200,600 Note that the total acquisition price of P7,200,000 will be used in the computation of goodwill and or gain on acquisition. The D & A of Excess Schedule will also be _ constructed fora single 80% interest with an acquisition price of P7,200,000.