ACCOUNTING FOR BUSINESS COMBINATION

CONSOLIDATED FINANCIAL STATEMENTS (PFRS 10)

Topics Outline
• Financial statements of parent and • Consolidation Period and Procedures
subsidiary • Consolidated financial statement at
• Investment in Subsidiary acquisition date
• Non-controlling interest

Notes/Discussion
DEFINITIONS OF TERMS INVESTMENT IN SUBSIDIARY
Parent – an entity that controls one or Investments in subsidiaries are accounted
more entities. for in the parents separate financial
Subsidiary – an entity that is controlled statements either:
by another entity.
Group – a parent and its subsidiaries. a. At cost - Initial measurement is
Consolidated financial statements – the equal to the value assigned to the
financial statements of a group presented consideration transferred at the
as those of a single economic entity. acquisition date and subsequently
measured at that amount, unless the
investment becomes impaired
b. In accordance with PFRS 9 - Initial
FINANCIAL STATEMENTS OF PARENT AND measurement is equal to the value
SUBSIDIARY assigned to the consideration
transferred at the acquisition date
The financial statements of both the parent and subsequently remeasured to fair
and subsidiary shall have the same reporting value at each reporting date
period and apply uniform accounting policies. c. Equity method – Initial measurement
If differences exist, the subsidiary’s is equal to the value assigned to the
financial statements should be adjusted to consideration transferred at the
conform to the parents reporting period and acquisition date and subsequently
accounting policies before preparing the increased or decreased for the
consolidated financial statement. investors share in the changes in
equity of the investee.

NON-CONTROLLING INTEREST
However, a parent need not present
consolidated financial statements if it NCI is presented in the consolidated
meets all of the following conditions: statement of financial position within
equity, separately from the equity of the
a) It is a subsidiary of another entity
owners of the parent. NCI in the net assets
and its other owners have been
of the subsidiary consists of:
informed about, and do not object to,
the parent non-presentation of a. The amount determined at the
consolidated financial statements. acquisition date using PFRS 3; and
b) Its debt or equity instruments are b. The NCIs share in the subsidiary's
not traded in a public market changes in equity since the
c) It did not file, nor is it in the acquisition date
process of filing any class of
instruments in a public market
d) Its ultimate or any intermediate
parent of the parent produces
financial statements available for
public use in compliance with IFRS.

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 ACCOUNTING FOR BUSINESS COMBINATION

CONSOLIDATION PERIOD AND PROCEDURES AT DATE OF ACQUISITION

CONSOLIDATION PERIOD: Begins on the day the investor obtains control of the investee and ceases
when it loses control.

CONSOLIDATION PROCEDURES:

Consolidated financial statements are prepared by combining the financial statements of the
parent and its subsidiaries line by line by adding together similar items of assets, liabilities,
equity, income and expenses.

Consolidation at date of acquisition

1. Eliminate the "Investment in subsidiary' account.

a. Measuring the identifiable assets acquired and liabilities assumed in the
business combination at their acquisition-date fair values.
b. Recognizing the goodwill from the business combination.
c. Eliminating the subsidiary's pre-combination equity accounts and replacing them
with the non-controlling interest.
2. Add, line by line, similar items of assets and liabilities of the combining entities.
The subsidiary's assets and liabilities are included in the consolidated financial
statements at 100% of their amounts irrespective of the interest acquired by the parent.

Included in the consolidated financial statements of the reporting entity are the income and
expenses of a subsidiary from the date it gains control until the date it ceases to control the
subsidiary.

Illustration: Consolidation at acquisition date

On January 1, 20x4, ABC. Co (parent) acquires 80% interest in XYZ, Inc. (subsidiary). The
financial statements of the combining entities immediately after the business combination are
shown below:

Parent Subsidiary
Additional information:
Cash P10,000 P5,000
Accounts Receivable 30,000 12,000 • The subsidiary's accounts
Inventory 40,000 23,000 are stated at their
Investment in Subsidiary 75,000 - acquisition-date fair
Equipment, net 180,000 40,000 values, except for the
Total Assets 335,000 80,000 following:
Accounts Payable 50,000 6,000 - Inventory, ₽31,000
Share Capital 170,000 50,000 - Equipment, net, #48,000
Share Premium 65,000 -
Retained Earnings 50,000 24,000 • The goodwill determined
Total Liabilities and Equity 335,000 80,000 using PFRS 3 is ₽3,000.

• The NCI in the net assets

Requirement: Prepare the consolidated statement of financial of the subsidiary, also
position. determined using PFRS 3, is
P18,000.

Requirement:

Step 1: Eliminate the "Investment in subsidiary' account.

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

Parent Subsidiary
Cash P10,000
Accounts Receivable 30,000
Inventory 40,000
Investment in Subsidiary 75,000
Equipment, net 180,000

Accounts Payable 50,000

Share Capital 170,000
Share Premium 65,000
Retained Earnings 50,000

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 ACCOUNTING FOR BUSINESS COMBINATION

After this, we can now create our consolidated financial statement.

ABC Group
Consolidated statement of financial position
As of January 1, 20x4 Notes:
ASSETS P359,000
Cash P15,000
1. 100% of the assets and liabilities
Accounts Receivable 42,000
of the subsidiary are included in the
Inventory 71,000
consolidated financial statement even
Equipment, net 228,000
though the parent holds only 80%
Goodwill 3,000
interest. This is an application of
substance over form and entity theory.
LIABILITIES AND EQUITY P359,000
Accounts Payable 56,000 2. The subsidiary's pre-combination
Share Capital 170,000 equity accounts are eliminated in full
Share Premium 65,000 and replaced with the non-controlling
Retained Earnings 50,000 interest account.
Equity – Owners of the parent 285,000
Non-controlling interest 18,000

Traditional Accounting Method

The consolidated financial statements can also be prepared by using (a) consolidation journal
entries and (b) consolidation worksheet.

Inventory 8,000
Equipment 8,000
Share Capital 50,000
Retained Earnings 24,000
Goodwill 3,000
Investment in subsidiary 75,000
Non-controlling interest 18,000
to adjust the subsidiary assets to acquisition date fair values, to eliminate the investment in subsidiary
and the subsidiary’s pre-combination equity and to recognize goodwill and non-controlling interest in the
consolidated financial statements
ABC Group
Consolidation Worksheet
January 1 20x4
ABC Co XYZ Inc CJE Consolidation CJE
ref# adjustments ref#
ASSETS DEBIT CREDIT
Cash 10,000 5,000
Accounts Receivable 30,000 12,000
Inventory 40,000 23,000 1 8,000
Investment in Subsidiary 75,000 - 75,000 1
Equipment, net 180,000 40,000 1 8,000
Goodwill - - 1 3,000
TOTAL ASSETS 335,000 80,000

LIABILITIES AND EQUITY

Accounts Payable 50,000 6,000
Total Liabilities 50,000 6,000

Share capital 170,000 50,000 1 50,000

Share premium 65,000 -
Retained earnings 50,000 24,000 1 24,000
Non-controlling interests - - 18,000 1
Total equity 285,000 74,000
TOTAL LIABILITIES AND
EQUITY 335,000 80,000
Consolidated journal entries are not recorded in either of the parent’s or the subsidiary’s
books of accounts. These are prepared only for the purpose of preparing the consolidated
financial statements. Consolidation worksheets are also prepared for the same purpose, rather
than as formal reports

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 🖉 PRACTICE

On January 1, 20x4, Health Co. acquired 70% interest in Wealth Co. The financial statements of
the combining entities right after the business combination are as follows:

Health Co Wealth Co
Cash P100,000 P20,000
Accounts Receivable 120,000 40,000
Inventory 400,000 100,000
Investment in Subsidiary 560,000 -
Prepaid Assets 30,000 10,000
Building, net 1,200,000 400,000
Total Assets 2,410,000 570,000
Accounts Payable 70,000 90,000
Share Capital 1,000,000 200,000
Share Premium 350,000 50,000
Retained Earnings 990,000 230,000
Total Liabilities and Equity 2,410,000 570,000

The carrying amounts of Wealth’s assets and liabilities approximate the acquisition-date fair
values, except as follows:

Carrying amount Fair Value

Accounts receivable 40,000 20,000
Building, net 400,000 540,000

Health measured the NCI at proportionate share.

Requirement: Prepare the consolidated financial position statement.

--- Endi ---

i Reference: Millan, ZV. B. (2024). Accounting for Business Combinations (Advanced Accounting
2). Bandolin Enterprise.

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