Chapter 7

Consolidated Financial Statements (Part 4)

Learning Objectives

1. Prepare the consolidated financial statements wherein the investment in subsidiary is

measured at other than cost.
2. Prepare the consolidated financial statements of a complex group structure.

Investment in subsidiary measured at other than cost

The investment in subsidiary is initially measured equal to the value assigned to the
consideration transferred at the acquisition date and subsequently measured either:

a. at cost;

b. in accordance with PFRS 9 Financial Instruments; or

c. using the equity method.

In all of the previous illustrations, the investment in subsidiary is measured at cost. In this
section, we will illustrate the consolidation procedures when the investment in subsidiary is
measured at fair value (PFRS 9) and using the equity method.

Illustration 1: Investment in subsidiary measured at fair value

On January 1, 20x1, ABC acquired 80% interest in XYZ, Inc. for P175,000.

Information on acquisition date (Jan. 1, 20x1):

 XYZ's net identifiable assets have a carrying amount of P74,000 and fair value of
P90,000. The difference is due to the following:
____________________________________________________________________________
Carrying Fair Fair value
________________________ amount value adjustment (FVA)________

Inventory 20,000 24,000 4,000

Equipment, net 40,000 52,000 12,000___________

Totals 60,000 76,000 16,000

 The remaining useful life of the equipment is 6 years.

 ABC measured the NCI at proportionate share'.

Information on subsequent reporting date (Dec. 31, 20x1);

ASSETS ABC Co. XYZ, Inc.

Investment in subsidiary (at fair value) 100,000

Other assets 343,000 124,000

TOTAL ASSETS 443,000 124,000

LIABILITIES AND EQUITY

Liabilities 73,000 30,000

Share capital 235,000 50,000

Retained earnings 135,000 44,000

Total equity 370,000 94,000______

TOTAL LIABILITIES AND EQUITY 443,000 124,000

PROFIT FOR THE YEAR 85,000 20,000

Requirement: Prepare a summary of the December 31, 20x1 consolidated financial statements.

Solutions:

Step 1: Analysis of the effects of fair value measurement

Initial cost of investment (consideration transferred) 75,000

Carrying amount of investment - Dec. 31 (fair value) 100,000

Unrealized gain recognized in profit or loss 25,000

We will eliminate the unrealized gain from the following:

a. carrying amount of investment in subsidiary;

b. consolidated retained earnings; and

c. consolidated profit or loss

Step 2: Analysis of subsidiary's net assets

XYZ, Inc. Jan. 1, 20x1 Dec. 31, 20x1 Net change

Net assets at carrying amount 74,000 94,000

Fair value adjustments (FVA) 16,000 (a) 10,000(b)

Net assets at fair value 90,000 104,000 14,000

______________________________________________________________________________

FVA, 1/1/x1(a) Useful life Depreciation FVA, 12/31/x1(b)___

Inventory 4,000 N/A 4,000 -

Equipment 12,000 6 yrs. 2,000 10,000____________

Totals 16,000 6,000 10,000___________

Step 3: Goodwill computation

Consideration transferred 75,000

Non-controlling interest in the acquiree (90K x 20%) - Step 2 18,000

Previously held equity interest in the acquiree ______

Total 93,000

Fair value of net identifiable assets acquired (see Step 2) (90,000)

Goodwill - Jan. 1, 20x1 3,000

Less: Accumulated impairment losses _______

Goodwill - Dec. 31, 20x1 3,000

Step 4: Non-controlling interest in net assets

Subsidiary's net assets at fair value - Dec 31, 20x1 (see Step 2) 104,000

Multiply by: NCI percentage 20%

Non-controlling interest in net assets - Dec 31, 20x1 20,800

Step 5: Consolidated retained earnings

Parent's retained earnings - Dec. 31, 20x1 135,000

Parent's share in the net change in subsidiary's net assets (4) 11,200

Unrealized gain on change in fair value (Step 1) (25,000)

Consolidated retained earnings - Dec. 31, 20x1 121,200

(d) Net change in XYZ's net assets (Step 2) 14,000 x 80% = 11,200

Step 6: Consolidated profit or loss

Profits of ABC &XYZ (85K + 20k) 105,000

Depreciation of FVA (see Step 2) (6,000)

Unrealized gain on change in fair value (Step 1) (25,000)

Consolidated profit 74,000

_ Owners of parent NCI Consolidated

Parent’s profit before FVA 85,000 N/A 85,000

Share in XYZ’s profit before FVA (e) 16,000 4,000 20,000

Depreciation of FVA (f) (4,800) (1,200) (6,000)

Unrealized gain on change in FV (25,000) N/A (25,000)

Totals 71,200 2,800 74,000

(20,000 x 80% = 16,000); (20,000 x 20% = 4,000)

(6,000 x 80% = 4,800); (6,000 x 20% = 1,200)

ASSETS

Investment in subsidiary (Eliminated)

Other assets (343,000 + 124,000 + 10,000 FVA net, Step 2) 477,000

Goodwill (Step 3) 3,000

TOTAL ASSETS 480,000

LIABILITIES AND EQUITY

Liabilities (73,000 + 30,000). 103,000

Share capital (Parent only) 235,000

Retained earnings (Parent only - Step 5) 121,200

Owners of parent 356,200

Non-controlling interest (Step 4) 20,800

Total equity 377,000

TOTAL LIABILITIES AND EQUITY 480,000

Illustration 2: Investment in subsidiary - Equity method

On January 1, 20x1, ABC acquired 80% interest in XYZ, Inc. for P75,000

Information on acquisition date (Jan. 1, 20x1):

 XYZ's net identifiable assets have a carrying amount of P74,000 and fair value of
P90,000. The difference is due to the following:

Carrying Fair Fair value

amounts values
adjustments________

Inventory 20,000 24,000 4,000

Equipment, net 40,000 52,000 12,000

Totals 6,000 76,000 16,000 ____________

 The remaining useful life of the equipment is 6 years.

 ABC measured the NCI at 'proportionate share'.

Information on subsequent reporting date (Dec. 31, 20x1):

ASSETS ABC Co. XYZ, Inc.

Investment in subsidiary (equity method) 86,200

Other assets 343,000 124,000

TOTAL ASSETS 429,200 124,000

LIABILITIES AND EQUITY

Liabilities 73,000 30,000

Share capital 235,000 50,000

Retained earnings 121,200 44,000

Total equity 356,200 94,000______

TOTAL LIABILITIES AND EQUITY 429,200 124,000

ABC Co. XYZ, Inc.

Revenues 180,000 100,000

Net share in profit of XYZ, Inc. 11,200 -

Expenses (120,000) (80,000)

Profit 71,200 20,000

Requirement: Prepare a summary of the December 31, 20x1 consolidated financial statements.

Solutions:

Step 1: Analysis of the effects of the equity method

Under the equity method, the investment is initially recognized at cost and subsequently adjusted
for changes in the equity of the investee and depreciation of any undervaluation or overvaluation
in the identifiable assets and liabilities of the investee. Dividends received from the investee are
not recognized as income but as deduction to the carrying amount of the investment.

The relevant accounts are analyzed as follows:

Investment subsidiary
Initial cost 75,000
Sh. in profit of XYZ, Inc. 16,000 -Dividends received share in the
amortization of undervaluation of
4,800 assets

__86,200_ Dec. 31, 20x1

(20,000 x 80%) = 16,000

 The fair value adjustments are determined as follows:

______________________________________________________________________________

FVA, 1/1/x1 Useful life Depreciation FVA, 12/31/x1_____

Inventory 4,000 N/A 4,000 -

Equipment 12,000 6 yrs. 2,000 10,000____________

Totals 16,000 6,000 10,000___________

(6,000 x 80%) = 4,800

Net share in the profit of XYZ, Inc.

16,000 Sh. In profit of XYZ, Inc.

Share in amortization of
undervaluation of assets 4,800

_11,200_

Step 2: Analysis of net assets

XYZ, Inc. Jan. 1, 20x1 Dec. 31, 20x1 Net change

Net assets at carrying amount 74,000 94,000

Fair value adjustments (FVA) 16,000 (a) 10,000(b)

Net assets at fair value 90,000 104,000 14,000

Step 3: Goodwill computation

Consideration transferred 75,000

Non-controlling interest in the acquiree (90K ~ 20%) – Step 2 18,000

Previously held equity interest in the acquiree -______

Total 93,000

Fair value of net identifiable assets acquired (see Step 2) (90,000)

Goodwill - Jan. 1, 20x1 3,000

Less: Accumulated impairment losses _______

Goodwill - Dec. 31, 20x1 3,000___

Step 4: NCI in net assets

XYZ's net assets at fair value - Dec. 31, 20x1 (Step 2) 104,000

Multiply by: NCI percentage 20%

Non-controlling interest in net assets - Dec. 31, 20x1 20,800

Step 5: Consolidated retained earnings

Parent's retained earnings - Dec. 31, 20x1 121,200

Parent's share in the net change in subsidiary's net assets (d) 11,200

Less: Net share in profit of subsidiary (Step 1) (11,200)

Add: Dividend received from subsidiary -

Consolidated retained earning - Dec. 31, 20x1 121,200

(d) 14,000 (see Step 2)x 80% -11,200

Any dividends received from the subsidiary are added back because under the equity method,
dividends are not recognized as income (i.e., not recognized in retained earnings) but rather as
deduction to the carrying amount of the investment. The consolidation journal entry is as
follows:

Note: If the investment in subsidiary is measured under the equity method, the consolidated
retained earnings is equal to the parent's retained earnings. This is because, under the equity
method, the investor recognizes its share in the subsequent changes in the investee's net assets
and any fair value adjustments directly in its financial statements.
Step 6: Consolidated profit or loss

Profits of ABC & XYZ (71.2K + 20K) 91,200

Depreciation of FVA (see Step 2) (6,000)

Net share in profit of XYZ (11,200)

Consolidated profit 74,000__

_ Owners of parent NCI Consolidated

Parent’s profit before FVA 71,200 N/A 71,200

Share in XYZ’s profit before FVA (e) 16,000 4,000 20,000

Depreciation of FVA (f) (4,800) (1,200) (6,000)

Net share in profit of XYZ (11,200) - -

Totals 71,200 2,800 74,000

(20,000 x 80% = 16,000); (20,000 x 20%= 4,000)

(6,000 x 80% = 4,800); (6,000 x 20% = 1,200)

ASSETS

Investment in subsidiary (Eliminated)

Other assets (343,000 + 124,000 + 10,000 FVA net) 477,000

Goodwill (Step 2) 3,000___

TOTAL ASSETS 480,000

LIABILITIES AND EQUITY

Liabilities (73,000 + 30,000) 103,000

Share capital (Parent only) 235,000

Retained earnings (Parent only - Step 5) 121,200

Owners of parent 365,200

Non-controlling interest (Step 3) 20,800

Total equity 377,000

TOTAL LIABILITIES AND EQUITY 480,000

Regardless of the measurement basis used for the investment in subsidiary, the consolidated
accounts result to same amounts. This is because the investment in subsidiary and the effects of
its measurement basis are eliminated. Compare Illustration 1 (measurement at fair value) with
Illustration 2 (measurement using equity method) and Illustration 1: Consolidation - Subsequent
to date of acquisition' in Chapter 4 (measurement at cost).

Complex group structures

In a simple group (horizontal group) structure, a parent has one or more subsidiaries through
direct holdings only. However, in practice, this is not always the case. Related entities may have
overlapping interests in each other, such as in the case of a complex group structure

A complex group structure arises when the parent obtains control over another entity indirectly
through its direct holdings over another entity. A complex group structure may be described as
either (a) vertical group or (b) D-shaped (mixed) group.

a. Vertical group - the parent's subsidiary has its own subsidiary (sometimes referred to as 'sub-
subsidiary').

Vertical group

P
80%

S1
60%

S2
If control is based solely on shareholdings, P's control does not extend only to S1 but also to S2
(the 'sub-subsidiary). Since P controls S1, S1 cannot exercise control over S2 without the
intervention of P. Therefore, the vertical group's consolidated financial statements shall include
all of the three entities.

Note: You might think that S2 is not a subsidiary of P because P only indirectly holds 48% (80%
x 60%) of S2. This view, however, is incorrect. P controls S1, S1 controls S2; therefore, P
controls S2

b. D-shaped (Mixed) group - the parent has a direct controlling interest in at least one subsidiary,
and in addition, both the parent and the subsidiary together hold a controlling interest in another
entity.

D-shaped (Mixed) group

P
80%

25%
S1
30%

S2

If control is based solely on shareholdings, P controls 51 through its direct holdings of 80%. This
makes S1 a subsidiary of P. In addition, both P and S1 own a controlling interest in S2, i.e., 25%
+ 30% = 55%. This makes S2 a subsidiary of P Group.

P controls S1. Therefore, P controls S1's 30% interest in S2. This 30% indirect holdings
plus P's 25% direct holdings are presumed to result to control of P over S2. Therefore, the mixed
group's consolidated financial statements shall include all of the three entities.

Identifying the acquisition date

The acquisition date is the date the acquirer obtains control of the acquiree. For a "sub-
subsidiary," it is the date the sub-subsidiary becomes a member of the parent group. This may
precede, coincide with or follow the acquisition of the parent's or subsidiary's direct holdings
over the sub-subsidiary.
Goodwill from each subsidiary and sub-subsidiary are computed separately on their respective
acquisition dates. Their pre-acquisition and post-acquisition reserves are also calculated from
these dates.

Illustration 1: Acquisition date - Vertical group

Scenario #1:

On January 1, 20x1, Si acquires 60% interest in S2. On January 1, 20x3, P acquires 80%
interest in S1.

Since S1 already holds controlling interest in S2 when P acquired S1, the acquisition date for
both S1 and S2 is on January 1, 20x3.

Goodwill from each of S1 and 52 are computed on this date. Also, the pre-acquisition and
post-acquisition reserves of each of S1 and S2 are computed from this date.

Scenario #2:

On January 1, 20x1, P acquires 80% interest in Si. On January 1, 20x3, S1 acquires 60%
interest in S2.

Since S1 acquires S2 only after P acquired $1, the acquisition dates are: (a) January 1, 20x1 for
S1 and (b) January 1, 20x3 for S2.

Goodwill from S1 is computed on January 1, 20x1 while goodwill from S2 is computed

on January 1, 20x3. S1's pre- acquisition and post-acquisition reserves are computed from
January 1, 20x1 while S2's pre-acquisition and post-acquisition reserves are computed from
January 1, 20x3.

Illustration 2: Acquisition date-D-shaped group

Scenario #1:

P acquires 80% interest in S1 on January 1, 20x1. P acquires 25% interest in S2 on January 1,

20x2. S1 acquires 30% interest in S2 on January 1, 20x3.
The acquisition date of S1 is on January 1, 20x1 while the acquisition date of S2 is on January 1,
20x3, the date when both P and S1 together hold a controlling interest in S2 (25% + 30% = 55%)
S2 is an associate of P in 20x2.

Scenario #2:

S1 acquires 30% interest in S2 on January 1, 20x1. P acquires 25% interest in S2 on January

1, 20x2. P acquires 80% interest in S1 on January 1, 20x4.

The acquisition date for both S1 and 52 is on January 1, 20x4, the date when P holds controlling
interest in S1 and also the date when P and S1 together hold a controlling interest in S2. S2 is an
associate of P in 20x2 and 20x3.

Consolidation of a vertical group

A parent entity is required to consolidate all entities it controls, whether through direct or indirect
holdings. Therefore, the parent shall consolidate both the subsidiary and the 'sub-subsidiary. The
consolidation procedures for a vertical group differ from those of a simple group only on the
computations of goodwill and NCI.

In the previous example where P owns 80% of S1 and S1 owns 60% of S2, there are two
separate groups:

1. The S1 Group - whereby S1 shall prepare consolidated financial statements to include S2, its
own subsidiary; and

2. The P Group - whereby P shall prepare consolidated financial statements to include both S1
and S2.

Therefore, two sets of consolidated financial statements are prepared, one by S1 for the
S1 Group and one by P for the P Group, unless the limited exemptions under PFRS 10 apply.

In the succeeding illustrations, we will only be preparing the consolidated financial

statements for the P Group (complex group structure) because the S1 Group is a simple structure
and its consolidation is the same as those we have discussed in the previous chapters.

Illustration 1: Vertical group -Same acquisition date

On January 1, 20x1:

 P acquired 80% interest in S1 for P100,000. Sl's net identifiable assets were P110,000.
The NCI in Si has a fair value of P25,000.
 S1 acquired 60% interest in S2 for P50,000. S2's net identifiable assets were P60,000.
The NCI in S2 (direct and indirect) has a fair value of P40,000.
 The carrying amounts of Si's and S2's net identifiable assets approximate fair values.

Information on December 31, 20x1:

_ P S1 S2

Investment in subsidiary 100,000 50,000

Other assets 200,000 120,000 80,000

Total assets 300,000 170,000 80,000

Liabilities 30,000 38,000 2,000

Share capital 120,000 80,000 50,000

Retained earnings 150,000 52,000 28,000

Total equity 270,000 132,000 78,000

Total liabilities and equity 300,000 170,000 80,000

Revenues 180,000 102,000 48,000

Expenses (100,000) (80,000) (30,000)

Profit 80,000 22,000 18,000

 Goodwill has been impaired by 20%.

 There were no changes in Si's and S2's share capital accounts.
Requirement: Prepare the December 31, 20x1 consolidated financial information

Solutions:

Step 1: Analysis of group structure

The group structure is analyzed as follows:

P's ownership interest in S1 80%

Si's ownership interest in S2 60%

 P, S1 and S2 all belong to a vertical group.

The controlling interest and NCI percentages are calculated as follows:

Ownership over S1

Direct holdings of Pin S1 80%

NCI in S1 (squeeze) 20%

Total 100%

Ownership over S2

Direct holdings of Pin S2 0%

Indirect holdings of P in S2 (80% x 60%)* 48%

Total holdings of P in S2 48%

NCI in S2 (squeeze) 52%

Total 100%

(80% interest of Pin S1 x 60% interest of S1 in S2)

 Although the computed total holdings of P is only 48%, i.e, less than 50%, it is still
presumed that there is control because P controls S1, who in turn controls S2. In substance, it is
actually P who has control over S2. This is not unusual in practice. The computation is made
only for purposes of mathematical computations during consolidation procedures.

The NCI in S2 is reconciled as follows:

Interest in S2 held by outside shareholders in S1 (20% x 60%) 12%

Interest in S2 held by outside shareholders in S2

(100% -60% held by S1) 40%

NCI in S2 52%

The controlling interests and NCI's are summarized below:

______________________________________________________

_ S1 S2

Owners of P 80% 48%

NCI 20% 52%

Total 100% 100%

Step 2: Analysis of subsidiary's net assets

____________S1 S2

Acqn. Cons Net Acqn Cons Net

_ Date __Date change Date _Date
change

Net assets at carrying amt. 110,000 132,000 60,000 78,000

FVA

Net assets at fair value ___110,000 132,000___22,000__60,000 _78,000___18,000

Step 3: Goodwill computation

The impairment loss on goodwill is determined as follows:

_________________________________________S1 S2 Total

Consideration transferred (given) 100,000 50,000

Indirect holding adjustment (10,000)

NCI at fair values (given) 25,000 40,000

Prev. held equity interest

Total 125,000 80,000

Fair value of net assets acquired (Step 2) (110,000) (60,000)

Goodwill at acquisition date 15,000 20,000

Multiply by: Impairment (given) 20% 20%

Impairment loss on goodwill - 20x1 3,000 4,000 7,000

An indirect holding adjustment is made because the consideration transferred to S2 is not wholly
made by P but rather partly by P (80%) and partly by S1 (20%). Only the portion effectively
transferred by P (P50,000 x 80% = P40,000) enters into the computation of goodwill. The
indirect holding adjustment is computed as follows:

Total consideration transferred to S2 50,000

Multiply by: NCI in S1 20%

Indirect holding adjustment 10,000

The indirect holding adjustment affects both the computations of goodwill and NCI.

Since the NCI's are measured at fair value, there must be goodwill attributable to the
NCI's. These are computed as follows:

_ S1 S2

Consideration transferred (given) 100,000 50,000

Indirect holding adjustment (10,000)

Less: Prev. held equity interest in the acquiree

Total 100,000 40,000

Less: P's proportionate sh. in net assets of S1 & S2

_______(P110,000 x 80%) & (P60,000 x 48%) (88,000) (28,800).

Goodwill attributable to owners of P - Jan. 1, 20x1 12,000 11,200

Less: P's share in goodwill impairment

_______(13,000 x 80%) & (P4,000 x 48%) (2,400) (1,920)

Goodwill attributable to owners of P - Dec. 31, 20x1 9,600 9,280

Fair value of NCI (given) 25,000 40,000

Less: NCI's proportionate sh. in the net assets of

______S1 & S2 (P110,000 x 20%) & (P60,000 x 52%) (22,000) (31,200)

Goodwill attributable to NCI - Jan. 1, 20x1 3,000 8,800

Less: NCI's share in goodwill impairment (2,080)

(P3,000 x 20%) & (P4,000 x 52%) (600)

Goodwill attributable to NCI - Dec. 31, 20x1 2,400 6,720

Goodwill, net - Dec. 31, 20x1 12,000 16,000

Step 4: Non-controlling interest in net assets

_ S1 S2 Total

Net assets at fair value - 12/31x1 (Step 2) 132,000 78,000

Multiply by: NCI percentage 20% 52%

Total 26,400 40,560

Add: Goodwill to NCI - 12/31x1 (Step 3) 2,400 6,720

Indirect holding adjustment (Step 3) (10,000)

NCI - Dec. 31, 20x1 28,800 37,280 66,080

A Notice that the only difference in the goodwill and NCI computations between a simple
group structure and a complex group structure is the indirect holding adjustment

Step 5: Consolidated retained earnings

Parent's retained earnings - Dec. 31, 20x1 150,000

Parent's share in the net change in Si's net assets (a) 17,600

Parent's share in the net change in S2's net assets (b) 8,640

Parent's share in goodwill impairment (P2,400 + P1,920) (Step 3) (4,320)

Consolidated retained earnings - Dec. 31, 20x1 171,920

(a) 22,000 (Step 2) x 80%-17,600

(b) 18,000 (Step 2) x 48% = 8,640

Step 6: Consolidated profit or loss

Profits of P, S1 & S2 (80K + 22K +18K) 120,000

Depreciation of FVA -

Impairment of goodwill (Step 3) (7,000)

Consolidated profit 113,000

 Owners NCI NCI Consoli-
of P in S1 in S2 dated

P's profit before FVA 80,000 N/A N/A 80,000

Share in Si's profit before FVA (C) 17,600 4,400 22,000

Share in S2's profit before FVA (d) 8,640 9,360 18,000

Depreciation of FVA - - - -

Impairment of goodwill (Step 3) (4,320) (600) (2,080) (7,000)

Totals 101,920 3,800 __7,280 113,000

(c) (22,000 x 80% = 17,600): (22,000 x 20% - 4,400)

(d) (18,000 x 48% -8,640); (18,000 x 52% = 9,360)

Consolidated statement of financial information - Dec. 31, 20x1

Other assets (200,000 + 120,000+80,000) 400,000

Goodwill (12,000 + 16,000) - (Step 3) 28,000

Total assets 428,000

Liabilities (30,000 + 38,000 +2,000) 70,000

Share capital (P only) 120,000

Retained earnings (Step 5) 171,920

Equity attributable to owners of parent 291,920

Non-controlling interests (Step 4) 66,080

Total equity 358,000

Total liabilities and equity 428,000

Revenues (180,000 + 102,000 + 48,000) 330,000

Expenses (100,000+80,000 + 30,000) (210,000)

Impairment loss on goodwill - (Step 3) (7,000)

Consolidated profit 113,000

Profit attributable to:

Owners of the parent (Step 6) 101,920

Non-controlling interests (3,800 + 7,280) - (Step 6) 11,080

_ 113,000

Illustration 2: Vertical group - Different acquisition dates

The following transactions occurred during 20x1:

 On January 1, 20x1, P acquired 80% interest in S1 for P100,000.

 On December 31, 20x1, S1 acquired 60% interest in S2 for P50,000.

The following information has been determined:

Retained earnings S1 S2

January 1, 20x1 30,000 10,000

December 31, 20x1 52,000 28,000

Fair value of NCI S1 S2

January 1, 20x1 25,000 48,000

December 31, 20x1 28,000 42,000

 The carrying amounts of the net identifiable assets of S1 and S2 approximate their fair
values at acquisition dates.

Individual financial information on December 31, 20x1:

_ P S1 S2

Investment in Subsidiary 100,000 50,000 -

Other assets 200,000 120,000 80,000

Total assets 300,000 170,000 80,000

Liabilities 30,000 38,000 2,000

Share capital 120,000 80,000 50,000

Retained earnings 150,000 52,000 28,000

Total liabilities and equity 300,000 170,000 80,000

Revenues 180,000 102,000 48,000

Expenses (100,000) (80,000) (30,000)

Profit 80,000 22,000 18,000

 There have been no changes in the share capital accounts of S1 and S2 during the year.
 The goodwill from S1 has been impaired by P10,000.

Requirement: Prepare the December 31, 20x1 consolidated financial information.

Solutions:

Step 1: Analysis of group structure

P's ownership interest in S1 80%

Si's ownership interest in S2 60%

 P, 51 and S2 all belong to a vertical group.

The controlling interest and NCI percentages are calculated as follows:

Ownership over S1

Direct holdings of P in S1 80%

NCI in S1 (squeeze) 20%

Total 100%

Ownership over S2

Direct holdings of P in S2 0%

Indirect holdings of Pin S2 (80% x 60%) 48%

Total holdings of P in S2 48%

NCI in S2 (squeeze) 52%

Total 100%

The acquisition dates of the subsidiaries are January 1, 20x1 for S1 and December 31, 20x1 for
S2. Goodwill and NCI on each of S1 and S2 are computed separately on their respective
acquisition dates. Their pre-acquisition and post-acquisition reserves are also calculated from
these dates.

The controlling interests and NCI's are summarized below:

_ S1 S2

Owners of P 80% 48%

NCI 20% 52%

Total 100% 100%

Step 2: Analysis of subsidiary's net assets

____________S1 S2

Acqn. Cons Net Acqn Cons Net

_ Date __Date change Date _Date
change

Share capital . 80,000 80,000 50,000 50,000

Ret. earnings 30,000 52,000 28,000 28,000

Totals at carrying amts 110,000 132,000 78,000 78,000

FVA

Net assets at fair value ___110,000 132,000___22,000__60,000 _78,000___18,000

Step 3: Goodwill computation

_ S1 S2

Consideration transferred (given) 100,000 50,000

Indirect holding adjustment (P50,000 x 20%) (10,000)

Less: Prev. held equity interest in the acquiree

Total 100,000 40,000

Less: P's proportionate sh. in net assets of S1 & S2

_______(P110,000 x 80%) & (P78,000 x 48%) (88,000) (37,440)

Goodwill attributable to owners of P (acq'n. dates) 12,000 2,560

Less: P's sh. in goodwill impairment (P10,000 x 80%) (8,000)

Goodwill attributable to owners of P-Dec. 31, 20x1 4,000 2,560

\

Fair value of NCI (given) 25,000 42,000

Less: NCI's proportionate sh. in the net assets of

____S1 & S2 (P110,000 x 20%) & (P78,000 x 52%) (22,000) (40,560)

Goodwill attributable to NCI (acquisition dates) 3,000 1,440

Less: NCI's sh. in goodwill impairment (P10,000 x 20%) (2,000)

Goodwill attributable to NCI - Dec. 31, 20x1 1,000 1,440

Goodwill, net - Dec. 31, 20x1 5,000 4,000

The fair values of the NCI’s are determined on the subsidiaries' respective acquisition
dates (i.e., Jan. 1, 20x1 for S1 and Dec. 31, 20x1 for S2).

Step 4: Non-controlling interest in net assets

_ S1 S2 Total

Net assets at fair value - 12/31x1 (Step 2) 132,000 78,000

Multiply by: NCI percentage 20% 52%

Total 26,400 40,560

Add: Goodwill to NCI - 12/31x1 (Step 3) 1,000 1,440

Indirect holding adjustment (Step 3) (10,000)

NCI - Dec. 31, 20x1 27,400 32,000 59,400

Step 5: Consolidated retained earnings

Parent's retained earnings - Dec. 31, 20x1 150,000

Parent's share in the net change in S1's net assets (a) 17,600

Parent's share in the net change in S2's net assets (b)

Parent's share in goodwill impairment (Step 3) (8,000)

Consolidated retained earnings - Dec. 31, 20x1 159,600)

(a) 22,000 (Step 2) x 80% = 17,600

(b) (Step 2) x 48%=0

Step 6: Consolidated profit or loss

Profits of P, S1 & S2 (80K + 22K + 0K) 102,000

Depreciation of FVA -

Impairment of goodwill (Step 3) (10,000)

Consolidated profit 92,000_

None of S2's profit is included in the 20x1 consolidated financial statements because S2
was acquired only on December 31, 20x1.

Owners NCI NCI Consoli-

_ of P in S1 _in S2 dated

P's profit before FVA 80,000 N/A N/A 80,000

Share in Si's profit before FVA (c) 17,600 4,400 22,000

Share in S2's profit before FVA (d)

Depreciation of FVA

Impairment of goodwill (Step 3) (8,000) (2,000) (10,000)

Totals 89,600 2,400 92,000

(c) (22,000 x 80% = 17,600); (22,000 x 20% = 4,400)

(d) (0 x 48% =0); (0 x 52% = 0)

Consolidated statement of financial information - Dec 31, 20x1

Other assets (200,000 + 120,000+80,000) 400,000

Goodwill (5,000+ 4,000) (Step 3) 9,000

Total assets 409,000

Liabilities (30,000+ 38,000 + 2,000) 70,000

Share capital (P only) 120,000

Retained earnings (Step 5) 159,600

Owners of parent 279,600

Non-controlling interests (Step 4) 59,400

Total equity 339,000

Total liabilities and equity 409,000

Revenues (180,000 + 102,000) 282,000

Expenses (100,000 + 80,000) (180,000)

Impairment loss on goodwill (Step 3) (10,000)

Consolidated profit 92,000

Profit attributable to:

Owners of the parent (Step 6) 89,600

Non-controlling interests (Step 6) 2,400

Consolidated profit 92,000

Consolidation of a D-shaped (mixed) group

The consolidation procedures for a D-shaped group are similar to a vertical group. However, in a
D-shaped group, the parent holds both a direct and an indirect interest in a 'sub-subsidiary'.

Illustration: Consolidation of a D-shaped (mixed) group

On January 1, 20x1

 P acquired 64,000 shares in S1 for P100,000 and 12,500 shares in S2 for P40,000.
 S1 acquired 15,000 shares in S2 for P50,000.
 Si's and S2's net identifiable assets have carrying amounts of P110,000 and P60,000,
respectively. The carrying amounts approximate fair values.
 The NCIS are measured at fair values of P25,000 for S1 and P40,000 for S2.

Information on December 31, 20x1:

P S1 S2

Investment in Subsidiary 140,000 50,000 -

Other assets 200,000 120,000 80,000

Total assets 340,000 170,000 80,000

Liabilities 70,000 38,000 2,000

Share capital 120,000 80,000 50,000

Retained earnings 150,000 52,000 28,000

Total liabilities and equity 340,000 170,000 80,000

Revenues 180,000 102,000 48,000

Expenses (100,000) (80,000) (30,000)

Profit 80,000 22,000 18,000

 There were no changes in Si's and S2's share capital in 20x1.

Requirement: Prepare the December 31, 20x1 consolidated financial information.

Solutions:
Step 1: Analysis of group structure

P's ownership interest in S2 (64,000 sh. +80,000 sh.") 80%

P's ownership interest in S2 (12,500 sh. +50,000 sh.") 25%

SI's ownership interest in S2 (15,000 sh. + 50,000 sh.") 30%

*Share capital divided by P1.00 par value per share.

 P, S1 and S2 all belong to a D-shaped (mixed) group.

The controlling interest and NCI percentages are calculated as follows:

Ownership over S1

Direct holdings of P in S1 80%

NCI in S1 (squeeze) 20%

Total 100%

Ownership over S2

Direct holdings of Pin S2 25%

Indirect holdings of P through S1 (80% x 30%) 24%

Total holdings of P in S2 49%

NCI in S2 (squeeze) 51%

Total 100%

The NCI in S2 is reconciled as follows:

Interest in S2 held by outside shareholders in S1

 (20% NCI in S1 x 30% interest of S1 in S2) 6%

Interest in S2 held by outside shareholders in S2

(100% - 25% held by P-30% held by S1) 45%

NCI in S2 51%

The controlling interests and NCI's are summarized below:

_ S1 S2

Owners of P 80% 49%

NCI 20% 51%

Total 100% 100%

Step 2: Analysis of subsidiary's net assets

____________S1 S2

Acqn. Cons Net Acqn Cons Net

_ Date __Date change Date _Date
change

Net assets at carrying amt.. 110,000 132,000 60,000 78,000

FVA

Net assets at fair value ___110,000 132,000___22,000__60,000 _78,000___18,000

Step 3: Goodwill computation

_ S1 S2

Consideration transferred (given) & (P40,000 + P50,000) 100,000 90,000

Indirect holding adjustment (P50,000 x 20%) (10,000)

Less: Prev. held equity interest in the acquiree

Total 100,000 80,000

Less: P's proportionate sh. in net assets of S1 & S2

_______(P110,000 x 80%) & (P60,000 x 49%) (88,000) (29,400)

Goodwill attributable to owners of P (acq'n. dates) 12,000 50,600

Less: P's sh. in goodwill impairment (P10,000 x 80%)

Goodwill attributable to owners of P-Dec. 31, 20x1 12,000 50,600

Fair value of NCI (given) 25,000 40,000

Less: NCI's proportionate sh. in the net assets of

____S1 & S2 (P110,000 x 20%) & (P60,000 x 51%) (22,000) (30,600)

Goodwill attributable to NCI – Jan. 1, 20x1 3,000 9,400

Less: NCI's sh. in goodwill impairment

Goodwill attributable to NCI - Dec. 31, 20x1 3,000 9,400

Goodwill, net - Dec. 31, 20x1 15,000 60,000

Step 4: Non-controlling interest in net assets

_ S1 S2 Total

Net assets at fair value - 12/31x1 (Step 2) 132,000 78,000

Multiply by: NCI percentage 20% 51%

Total 26,400 39,780

Add: Goodwill to NCI - 12/31x1 (Step 3) 3,000 9,400

Indirect holding adjustment (Step 3) (10,000)

NCI - Dec. 31, 20x1 29,400 39,180 68,580

Step 5: Consolidated retained earnings

Parent's retained earnings - Dec 31, 20x1 150,000

Parent's share in the net change in Sl's net assets 17,600

Parent's share in the net change in S2's net assets 8,820

Consolidated retained earnings - Dec. 31, 20x1 176,420

22,000 (Step 2) x 80% = 17,600

18,000 (Step 2) × 49% -8,820

Step 6: Consolidated profit or loss

Profits of P, S1 & S2 (80K + 22K +18K) 120,000

Depreciation of FVA _______

Consolidated profit 120,000

Owners NCI NCI Consoli-

_ of P in S1 _in S2 dated

P's profit before FVA 80,000 N/A N/A 80,000

Share in Si's profit before FVA (c) 17,600 4,400 22,000

Share in S2's profit before FVA (d) 8,820 9,180 18,000

Depreciation of FVA

Totals 106,420 4,400 9,180 120,000

(22,000 x 80% = 17,600); (22,000 x 20%= 4,400)

(18,000 x 49% = 8,820); (18,000 x 51% = 9,180)

Consolidated statement of financial information - Dec 31, 20x1

Other assets (200,000 + 120,000 + 80,000) 400,000

Goodwill (15,000 + 60,000) (Step 3) 75,000

Total assets 475,000

Liabilities (70,000 + 38,000 + 2,000) 110,000

Share capital (P only) 120,000

Retained earnings (Step 5) 176,420

Owners of parent 296,420

Non-controlling interests (Step 4) 68,580

Total equity 365,000

Total liabilities and equity 475,000

Revenues (180,000 + 102,000 + 48,000) 330,000

Expenses (100,000 + 80,000 + 30,000) (210,000)

Consolidated profit 120,000

Profit attributable to:

Owners of the parent (Step 6) 106,420

Non-controlling interests (4,400 + 9,180) (Step 6) 13,580

_ 120,000

Complex group structure with Associate

Investments in associates are accounted for under the equity method which is often times
referred to as one-line consolidation. The next illustration illustrates the consolidation procedures
when the group has investments in associates.

Illustration:

The following transactions occurred on January 1, 20x1:

 A acquired 80% interest in B for P100,000.

 A acquired 25% interest in C for P40,000.
 B acquired 30% interest in C for P50,000.
 B acquired 20% interest in E for P60,000.
 C acquired 40% interest in D for P80,000.
Additional information:

_ B C D E

Retained earnings - Jan. 1, 20x1 30,000 10,000 2,000 8,000

Fair value of NCI - Jan. 1,20x1 25,000 40,000 18,000 48,000

The carrying amounts of the net identifiable assets of each of the investees approximate their fair
values on January 1, 20x1. There have been no changes in the share capital accounts of the
entities during the year.

A summary of the individual financial statements of the entities on December 31, 20x1 is shown
below:

Statements of financial position

As at December 31, 20x1

_ A B C D E

Investments 140,000 110,000 80,000

Other assets 200,000 120,000 80,000 60,000 70,000

Total assets 340,000 230,000 160,000 60,000 70,000

Liabilities 70,000 98,000 82,000 30,000 10,000

Share capital 120,000 80,000 50,000 20,000 40,000

Retained earnings 150,000 52,000 28,000 10,000 20,000

Total liab. & egty. 340,000 230,000 160,000 60,000 70,000

The investment accounts pertain solely to the investment transactions described earlier and are
not adjusted for any investment income from investees.
Statements of profit or loss

For the year ended December 31, 20x1

_ A B C D E

Revenues 180,000 102,000 48,000 64,000 32,000

Expenses (100,000) (80,000) (30,000) (56,000) (20,000)

Profit 80,000 22,000 18,000 8,000 12,000

Profits do not include income from investments.

Requirements:

a. Assuming the existence of control is based solely on shareholdings, which of the entities
above are considered subsidiaries of A Co.?

b. Prepare the consolidated financial statements.

Solutions:

Step 1: Analysis of group structure

20%
25% B E
C 30%

40%
D
Requirement (a):

A, B and C belong to a D-shaped (mixed) group structure. Therefore, B and C are subsidiaries of
A.

C and E are associates of B while D is an associate of C.

Although A controls B, A does not control E because B only has a significant influence
over E. The same is true in the case of D.

Therefore, only B and C are accounted for under the 'acquisition method.' D and E are
accounted for under the equity method!'

The controlling and NCI are analyzed as follows:

Ownership over B

Direct holdings of A in B 80%

NCI (squeeze) 20%

Total 100%

Ownership over C

Direct holdings of A in C 25%

Indirect holdings of A through B (80% x 30%) 24%

Total holdings of A 49%

NCI (squeeze) 51%

Total 100%

The NCI in C is reconciled as follows:

Interest in C held by outside shareholders in B

(20% NCI in B x 30% interest of B in C) 6%

Interest in C held by outside shareholders in C

(100% - 25% held by A - 30% held by B) 45%

The controlling interests and NCI's are summarized below:

_ B C

Owners of A 80% 49%

NCI 20% 51%

Total 100% 100%

Notice that no NCI's are computed for the investments in associates.

Step 1A: Adjustments for the equity method

Band C's accounts are adjusted using the equity method.

_ B C

Profits before share in associate's profit 22,000 18,000

Share in D's profit (P8,000 x 40%) N/A 3,200

Share in E's profit (P12,000 x 20%) 24,400 21,200

Adjusted profits 24,400 21,200

Although C is an associate of B, B's share in C's profit is not included in the

computations above because C is a member of the group, and is therefore accounted for under
the 'acquisition method.' Only D and E are accounted for under the 'equity method.

_ B C Total

Investment in associate D (purchase cost) 80,000

Investment in associate E (purchase cost) 60,000

Share in associate's profits 2,400 3,200

Investments in associates (adjusted) 62,400 83,200 145,600

_ B C

Retained earnings - 12/31/x1 (unadjusted) 52,000 28,000

Share in associate's profits 2,400 3,200

Retained earnings - 12/31/x1 (adjusted) 54,400 31,200

The "usual" consolidation procedures are then performed as follows:

Step 2: Analysis of net assets

B C

Acqn. Cons Net Acqn Cons Net

_ Date __Date change Date _Date

change

Share capital . 80,000 80,000 50,000 50,000

Ret. earnings (Step 1A) 30,000 54,400 10,000 31,200

Totals at carrying amts 110,000 134,400 60,000 81,200

FVA

Net assets at fair value ___110,000 134,400___24,400__60,000 _81,200___21,200

Step 3: Goodwill computation

_ B C
Consideration transferred (given) & (40,000 + 50,000) 100,000 90,000

Indirect holding adjustment (P50,000 x 20%) (10,000)

Less: Prev. held equity interest in the acquiree

Total 100,000 80,000

Less: P's proportionate sh. in net assets of A & B

_______(P110,000 x 80%) & (P60,000 x 49%) (88,000) (29,400)

Goodwill attributable to owners of A – Jan 1 20x1 12,000 50,600

Less: P's sh. in goodwill impairment

Goodwill attributable to owners of -Dec. 31, 20x1 12,000 50,600

Fair value of NCI (given) 25,000 40,000

Less: NCI's proportionate sh. in the net assets of

____B & C (P110,000 x 20%) & (P60,000 x 51%) (22,000) (30,600)

Goodwill attributable to NCI (acquisition dates) 3,000 9,400

Less: NCI's sh. in goodwill impairment (P10,000 x 20%)

Goodwill attributable to NCI - Dec. 31, 20x1 3,000 9,400

Goodwill, net - Dec. 31, 20x1 15,000 60,000

Step 4: Non-controlling interest in net assets

_ A B Total

Net assets at fair value - 12/31x1 (Step 2) 134,000 81,200

Multiply by: NCI percentage 20% 51%

Total 26,880 41,412

Add: Goodwill to NCI - 12/31x1 (Step 3) 3,000 9,400

Indirect holding adjustment (Step 3) (10,000)

NCI - Dec. 31, 20x1 29,880 40,812 70,692

Step 5: Consolidated retained earnings

Parent's retained earnings - Dec 31, 20x1 150,000

Parent's share in the net change in B's net assets (a) 19,512

Parent's share in the net change in C's net assets (b) 10,388

Consolidated retained earnings - Dec. 31, 20x1 179,908

24,400 (Step 2) x 80% = 19,520

21,200 (Step 2) x 49% = 10,388

Step 6: Consolidated profit or loss

Profits of A, B & C (80K + 24,400 + 21,200) - Step 1A 125,600

Depreciation of FVA ________

Consolidated profit 125,600__

Owners NCI NCI Consoli-

_ of P in S1 _in S2 dated

P's profit before FVA 80,000 N/A N/A 80,000

Share in B's profit before FVA (c) 19,520 4,880 24,400

Share in C's profit before FVA (d) 10,388 10,812 21,200

Depreciation of FVA

Totals 109,908 4,880 10,812 125,600

(24,400 x 80% = 19,520), (24,400 x 20% = 4,880)

(21,200 x 49% = 10,388); (21,200 x 51% = 10,812)

Requirement (b): Consolidated financial statements

Investments in associates (Step 1A) 145,600

Other assets (200,000+ 120,000+80,000) 400,000

Goodwill (15,000 + 60,000) (Step 3) 75,000

Total assets 620,600

Liabilities (70,000+ 98,000 + 82,000) 250,000

Share capital (A only) 120,000

Retained earnings (Step 5) 179,908

Owners of parent 299,908

Non-controlling interests (Step 4) 70,692

Total equity 370,600

Total liabilities and equity 620,600

Revenues (180,000 + 102,000 + 48,000) 330,000

Expenses (100,000 + 80,000 + 30,000) (210,000)

Share in profits of associates (3,200 + 2,400) (Step 1A) 5,600

Consolidated profit 125,600

Profit attributable to:

Owners of the parent (Step 6) 109,908

_ Non-controlling interests (4,880 + 10,812) (Step 6) 15,692

_ 125,600

Push-down accounting

In the previous illustrations, we assigned the fair value adjustments (FVA) to the subsidiary's net
identifiable assets through consolidation computations (or consolidation journal entries) which
are not recorded in the separate books of either the subsidiary or the parent.

Another approach to assigning FVA to a subsidiary's net identifiable assets is push-down

accounting. Under push-down accounting, FVA are directly recorded in the subsidiary's books.
Therefore, FVA are reflected in the subsidiary's individual financial statements. In other words,
FVA are "pushed down" to the subsidiary's statements. This procedure simplifies the
consolidation process.

Authoritative status of push-down accounting

The SEC in the US

a. Requires push-down accounting if a subsidiary is "substantially wholly-owned," i.e.,

parent's ownership interest is at least 95%;
b. Encourages push-down accounting if a parent's ownership interest is 80% to less than
95%; and
c. Prohibits push-down accounting if a parent's ownership interest is less than 80%.

However, if the subsidiary has outstanding public debt or preference shares, the U.S. SEC
encourages, but does not require, The use of push down accounting. (U.S. sec Staff Accounting
Bulletin No. 54)

It should be noted though that the PFRSs do not address push-down accounting. Neither
does the Philippine SEC require the use of the push-down accounting. This section only attempts
to illustrate how push-down accounting works.

Arguments on the use push-down accounting

Proponents' view

Proponents of push-down accounting argue that a substantial change in ownership creates a new
basis of accounting for the subsidiary's assets and liabilities.
 Since the subsidiary's financial statements are viewed as extension of the parent's
statements (parent company theory), the basis of accounting for the subsidiary's net identifiable
assets should parallel the parent's accounting basis for newly purchased assets and liabilities, i.e.,
at fair values. Therefore, the acquisition- date fair values of the subsidiary's net identifiable assets
should be "pushed-down" to the subsidiary's separate financial statements.

Oppositions' view

Those who oppose push-down accounting argue that a new basis of accounting should not arise
irrespective of the ownership change in a subsidiary

Since the subsidiary's financial statements are viewed as a distinct part of a group (entity theory),
the subsidiary should still retain its previous accounting basis for its net identifiable assets (e.g.,
amortized cost for receivables, lower of cost or NRV for inventories, cost model or revaluation
model for PPE, etc.) in its separate financial statements.

Moreover, many believe that since the subsidiary did not actually sell anything (i.e., the
parent purchases its controlling interest from the subsidiary's former owners and not from the
subsidiary itself), a new basis of accounting should not arise.

Thus, the acquisition-date fair value adjustments should be reflected only in the
consolidated financial statements but not in the subsidiary's separate financial statements in order
to give readers information on the effect of the business combination.

Illustration 1: Push-down accounting - Acquisition date

On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc, by issuing 5,000 shares with
fair value of P15 per share and par value of P10 per share. The individual financial statements
immediately before the acquisition are shown below:

_ ABC Co. XYZ, Inc.

Cash 40,000 17,000

Inventory 40,000 23,000

Equipment, net 180,000 40,000

Total assets 260,000 80,000

Accounts payable 50,000 6,000

Share capital 120,000 50,000

Share premium 40,000 -

Retained earnings 50,000 24,000

Total liabilities and equity 260,000 80,000

The carrying amounts of XYZ's net identifiable assets approximate their fair values except for
the following:

XYZ, Inc. Carrying Fair Fair value

amounts values adjustments_(FVA_______

Inventory 23,000 31,000 8000

Equipment, net (54 yrs. remaining life) 40,000 4,000 8,000

Totals 63,000 79,000 16,000___________

NCI is measured at proportionate share.

Requirement: Prepare the consolidated statement of financial position using "push-down

accounting."

Solutions:

ABC Co. records the acquisition in its separate books as follows:

Jan. Investment in subsidiary (5,000 x 15) 75,000

1, Share capital (5,000 x 10) 50,000

20x1 Share premium 25,000

XYZ also records the transaction in its separate books.

Goodwill is computed as follows:

Consideration transferred 75,000

NCI in the acquiree (P90,000 see below x 20%) 18,000

Previously held equity interest in the acquire ______

Tota 93,000

Fair value of net assets acquired (P50K + P24K + P16K FVA) (90,000)

Goodwill 3,000

The entry in XYZ's separate books is as follows:

Jan. Goodwill 3,000

1, Inventory 8,000

20x1 Equipment 8,000

Retained earnings 24,000

Push-down capital (squeeze) 43,000

to push-down' FVAs in XYZ's books

The entry above is not a CJE but rather a regular entry that is recorded in the separate books of
XYZ.
Under push-down accounting, the subsidiary is viewed as a new entity. Accordingly, the pre-
acquisition retained earnings are eliminated and the accounts are remeasured at acquisition-date
fair values.

The resulting "push-down capital" is presented as an equity account in the subsidiary's

separate financial statements, but this will be eliminated in the consolidated financial statements.

The individual financial statements after recording the entries above are shown below:

Before acquisition After acquisition

ABC Co. XYZ, Inc ABC Co. XYZ, Inc.

Cash 40,000 17,000 40,000 17,000

Inventory 40,000 23,000 40,000 31,000

Investment in subsidiary 75,000

Equipment 180,000 40,000 180,000 48,000

Goodwill 3,000

Total assets 260,000 80,000 335,000 99,000

Accounts payable 50,000 6,000 50,000 6,000

Share capital 120,000 50,000 170,000 50,000

Share premium 40,000 65,000

Push-down capital 43,000

Retained earnings 50,000 24,000 50,000

Total liabilities and equity 260,000 80,000 335,000 99,000

When push-down accounting is used, the subsidiary:

a. Records the goodwill arising from the business combination;.

b. Records the acquisition-date fair value adjustments to its identifiable assets and liabilities;

c. Eliminates the pre-acquisition retained earnings; and

d. The balancing figure after performing (a) to (c) is recorded in the "push-down capital"
account.

As mentioned earlier, push-down accounting simplifies the consolidation process because the
consolidation journal entries mainly involve only the elimination of the investment in subsidiary
and effects of intercompany transactions, if any. No depreciation of FVA is made because the
subsidiary's net identifiable assets are already restated to acquisition-date fair values.

The consolidation journal entry is as follows:

CJE #1: To eliminate the investment in subsidiary

Share capital - XYZ, Inc.

Jan. Share capital – XYZ, Inc. 50,000

1, Push-down capital 43,000

20x1 Investment in subsidiary 75,000

Non-controlling interest (see above) 18,000

Just like in normal consolidation procedures, the CJE above is also not recorded in the
separate books but rather used only for consolidation purposes.

The consolidated statement of financial position is shown below:

ASSETS

Cash (40,000 + 17,000) - see after acquisition balances 57,000

Inventory (40,000 + 31,000) 71,000

Investment in subsidiary (eliminated) - (CJE #1)

Equipment 228,000
Goodwill 3,000

Total assets 359,000

LIABILITIES AND EQUITY

Accounts payable 56,000

Share capital (ABC Co. only) 170,000

Share premium (ABC Co. only) 65,000

Push-down capital (eliminated) - (CJE #1)

Retained earnings (ABC Co. only) 50,000

Equity attributable to owners of parent 285,000

Non-controlling interest - (CJE #1) 18,000

Total equity 303,000

Total liabilities and equity 359,000

Whether or not the push-down accounting is used, the consolidated accounts should
result to the same amounts,

Illustration 2: Push-down accounting - Subsequent date

Use the same facts in "Illustration 1" above:

No intercompany transactions occurred during 20x1. Goodwill is not impaired. The December
31, 20x1 individual financial statements show the following information:

Statements of financial position

As at December 31, 20x1

ASSETS ABC Co. XYZ, Inc.

Cash 98,000 79,000

Inventory 105,000 15,000

Investment in subsidiary 75,000 -

Equipment, net 140,000 36,000

Goodwill 3,000

TOTAL ASSETS 418,000 133,000

LIABILITIES AND EQUITY

Accounts payable 73,000 30,000

Share capital 170,000 50,000

Share premium 65,000

Push-down capital - 43,000

Retained earnings 110,000 10,000

Total equity 345,000 103,000

TOTAL LIABILITIES AND EQUITY 418,000 133,000

Statements of profit or loss

For the year ended December 31, 20x1

ABC Co. XYZ, Inc.

Revenues 300,000 120,000

Expenses (240,000) (110,000)

Profit for the year 60,000 10,000

The consolidation journal entries are as follows:

CJE #1: To eliminate the investment in subsidiary

Dec. Share capital – XYZ, Inc. 50,000

31, Push-down capital 43,000

20x1 Investment in subsidiary 75,000

Non-controlling interest (acquisition 18,000

date)

CJE #2: To eliminate XYZ's post-combination change in net assets

Dec. Retained earnings - XYZ, Inc. 10,000

31, Retained earnings - ABC Co. 8,000

20x1 Non-controlling interest (post - 2,000

acquisition)

ABC's share in the net change in XYZ's net assets (110,000 x 80%).

NCI's share in the net change in XYZ's net assets (P10,000 x 20%).

The consolidated financial statements are shown below:

ASSETS

Cash (98,000 + 79,000) 177,000

Inventory (105,000 + 15,000) 120,000

Investment in subsidiary (eliminated) - (CJE #1)

Equipment, net (140,000 + 36,000) 176,000

Goodwill 3,000

TOTAL ASSETS 476,000

LIABILITIES AND EQUITY

Accounts payable (73,000 + 30,000) 103,000

Share capital (ABC Co. only) 170,000

Share premium (ABC Co. only) 65,000

Push-down capital (eliminated) - (CJE #1)

Retained earnings (ABC Co.'s 110,000 + 8,000 CJE #2) 118,000

Equity attributable to owners of parent 353,000

Non-controlling interest (18,000 + 2,000) (CJE #1 and #2) 20,000

Total equity 373,000

TOTAL LIABILITIES AND EQUITY 476,000

Revenues (300,000 + 120,000) 420,000

Expenses (240,000 + 110,000) (350,000)

Profit for the year 70,000

Profit attributable to owners of parent (60,000 + (10,000 x 80%)] 68,000

Profit attributable to NCI (10,000 x 20%) 2,000

Profit for the year 70,000

Chapter 7: Summary

 The consolidation procedures for a complex group structure are similar to those of a
simple structure except for the computations of goodwill and NCI. These
computations are affected by the indirect holding adjustment
 An indirect holding adjustment is made because the consideration transferred to the
"sub-subsidiary" is partly made by the parent and partly by the direct subsidiary. Only
the portion made by the parent enters into the computation of goodwill.

PROBLEMS:

PROBLEM 1: MULTIPLE CHOICE

1. On January 1, 1993, Owen Corp. acquired all of Sharp Corp.'s common stock for P1,200,000.
On that date, the fair values of Sharp's assets and liabilities equaled their carrying amounts of
P1,320,000 and P320,000, respectively. During 1993, Sharp paid cash dividends of $20,000.
Selected information from the separate balance sheets and income statements of Owen and Sharp
as of December 31, 1993, and for the year then ended follows:

Owen Sharp

Balance sheet accounts:

Investment in subsidiary (equity method) 1,300,000

Retained earnings 1,240,000 540,000

Total equity 2,620,000 1,100,000

Income statement accounts:

Operating income 420,000 200,000

Equity in earnings of Sharp 120,000

Net income 400,000 120,000

In Owen's December 31, 1993, consolidated balance sheet, what amount should be reported as
total retained earnings?

a. 1,240,000 c. 1,380,000

b. 1,360,000 d. 1,800,000

(Adapted)

Use the following information for the next seven questions:

On January 1, 1991, Dallas, Inc. acquired 80% of Style, Inc.'s outstanding common stock. On
that date, the carrying amounts of Style’s assets and liabilities approximated their fair values.
Non- controlling interest was measured using the proportionate share method.

During 1991, Style paid P5,000 cash dividends to its stockholders. Summarized balance sheet
information for the two companies follows:

Dallas Style

12/31/1991 12/31/1991 1/1/1991

Investment in Style (equity method) 132,000

Other assets 138,000 115,000 100,000

Totals 270,000 115,000 100,000

Common stock 50,000 20,000 20,000

Additional paid-in capital 80,250 44,000 44,000

Retained earnings ___139,750 51,000 ___36,000

Totals ___270,000 115,000__100,000

2. What amount should Dallas report as earnings from subsidiary, in its 1991 income statement?

a. 12,000 c. 16,000

b. 15,000 d. 20,000

(Adapted)

3. How much is the acquisition cost of the investment on January 1, 1991?

a. 120,000 c. 150,000

b. 132,000 d. 160,000

4. How much is the goodwill on the business combination?

a. 20,000 c. 32,000

b. 22,000 d. 40,000

5. How much is the non-controlling interest in the net assets of Style on December 31, 1991?

a. 20,000 c. 26,000

b. 23,000 d. None of these

6. How much is the consolidated retained earnings on December 31, 1991?

a. 190,750 c. 51,000

b. 139,750 d. 36,000

7. How much is the total assets in the consolidated statement of financial position as of
December 31, 1991?
a. 293,000 c. 270,000

b. 280,000 d. 253,000

8. What amount of equity attributable to the owners of the parent should be reported in Dallas'
December 31, 1991, consolidated balance sheet?

a. 270,000 c. 293,000

b. 286,000 d. 385,000

PROBLEM 2: MULTIPLE CHOICE

1. Penn, Inc., a manufacturing company, owns 75% of the common stock of Sell, Inc., an
investment company. Sell owns 60% of the common stock of Vane, Inc., an insurance company.
In Penn's consolidated financial statements, should consolidation accounting or equity method
accounting be used for Sell and Vane?

a. Consolidation used for Sell and equity method used for Vane.

b. Consolidation used for both Sell and Vane.

c Equity method used for Sell and consolidation used for Vane.

d. Equity method used for both Sell and Vane.

(Adapted)

Acquisition date - Vertical group

Scenario #1:

2. On January 1, 20x1, S1 acquires 60% interest in S2. On January 1, 20x3, P acquires 80%
interest in S1. What is the acquisition date?

a. January 1, 20x1 for S1 only

b. January 1, 20x3 for S2 only

c. January 1, 20x1 for both S1 and S2

d. January 1, 20x3 for both S1 and S2

3. When is goodwill computed?

a. January 1, 20x1 for S1 only

b. January 1, 20x3 for S2 only

c. January 1, 20x1 for both S1 and S2

d. January 1, 20x3 for both S1 and S2

e. a and b

Scenario #2:

4. On January 1, 20x1, P acquires 80% interest is S1. On January 1, 20x3, S1 acquires 60%
interest in S2. What is the acquisition date?

a. January 1, 20x1 for S1 only

b. January 1, 20x3 for S2 only

c. January 1, 20x1 for both S1 and S2

d. January 1, 20x3 for both St and S2

e. a and b

Acquisition date - D-shaped group

Scenario #1:

5. P acquires 80% interest in S1 on 25% interest in S2 on January 1, 20x2. S1 acquires 30%

interest in S2 on January 1, 20x3. What is the acquisition date?

a. January 1, 20x1 for S1 only

b. January 1, 20x3 for S2 only

c. January 1, 20x2 for S2

d. a and c

e. a and b
Scenario #2:

6. Si acquires 30% interest in S2 on January 1, 20x1. P acquires 25% interest in S2 on January 1,

20x2. P acquires 80% interest in S1 on January 1, 20x4.

a. January 1, 20x4 for S1 only

b. January 1, 20x2 for S2 only

c. January 1, 20x4 for both S1 and S2

d. a and c

e. a and b

Consolidation of a vertical group - Same acquisition date

Use the following information for the next seven questions:

The following transactions occurred on January 1, 20x1:

 P acquired 80% interest in S1 for P400,000 when the retained earnings of S1 were
P120,000. NCI in S1 has a fair value of P100,000
 Si acquired 60% interest in S2 for P200,000 when the retained earnings of S2 were
P40,000. NCI in S2 (direct and indirect) has a fair value of P160,000.

The carrying amounts of the net identifiable assets of S1 and S2 approximate their fair values on
January 1, 20x1. The group determined on December 31, 20x1 that goodwill has been impaired
by 20%. There have been no changes in the share capitals of S1 and S2 during the year.

A summary of the individual financial statements of the entities is shown below:

Statements of financial position

As at December 31, 20x1

_ P S1 S2

Investment in Subsidiary 400,000 200,000

Other assets 800,000 480,000 320,000

Total assets 1,200,000 680,000 320,000

Liabilities 120,000 152,000 8,000

Share capital 480,000 320,000 200,000

Retained earnings 600,000 208,000 112,000

Total liabilities and equity 1,200,000 680,000 320,000

Statements of profit or loss

For the year ended December 31, 20x1

Revenues 720,000 480,000 192,000

Expenses (400,000) (320,000) (120,000)

Profit 320,000 88,000 72,000

7. How much is the goodwill as of December 31, 20x1?

a. 144,000 b. 132,600 c. 112,000 d. 128,000

8. How much is the total NCI in net assets as of December 31, 20x1?

a. 305,620 b. 264,320 c. 265,220 d. 236,220

9. How much is the consolidated retained earnings as of December 31, 20x1?

a. 687,680 b. 667,280 c. 698,020 d. 688,420

10. How much is the consolidated profit or loss in 20x1?

a. 460,320 b. 446,000 c. 484,000 d. 452,000

11. How much is the profit attributable to owners of parent and to NCI, respectively?

Owners of parent NCI in S1 NCI in S2

a. 406,730 15,480 38,110

b. 407,680 15,200 29,120

c. 407,930 15,380 22,690

d. 408,840 15,120 60,040

12. How much is the consolidated total assets as of December 31, 20x1?

a. 1,712,000 b. 1,680,000 c. 1,340,000 d. 1,722,000

13. How much is the consolidated total equity as of December 31, 20x1?

a. 1,060,000 b. 1,432,000 c. 1,442,000 d. 1,400,000

Consolidation of a vertical group-Different acquisition dates

Use the following information for the next seven questions:

The following transactions occurred during 20x1:

 On January 1, 20x1, P acquired 80% interest in S1 for P400,000.

 On December 31, 20x1, S1 acquired 60% interest in S2 for P200,000

The following information has been determined:

Retained earnings S1 S2

January 1, 20x1 120,000 40,000

December 31, 20x1 208,000 112,000

Fair value of NCI S1 S2

January 1, 20x1 100,000 192,000

December 31, 20x1 112,000 168,000

A summary of the individual statement of financial position of the entities as at December 31,
20x1 is shown below:

_ P S1 S2

Investment in Subsidiary 400,000 200,000

Other assets 800,000 480,000 320,000

Total assets 1,200,000 680,000 320,000

Liabilities 120,000 152,000 8,000

Share capital 480,000 320,000 200,000

Retained earnings 600,000 208,000 112,000

Total liabilities and equity 1,200,000 680,000 320,000

Statements of profit or loss

for the year ended December 31, 20x1

Revenues 720,000 408,000 192,000

Expenses (400,000) (320,000) (120,000)

Profit 320,000 88,000 72,000

The carrying amounts of the net identifiable assets of S1 and S2 approximate their fair values at
their acquisition dates. The group determined that the goodwill to Si has been impaired by
P40,000 as at December 31, 20x1. There have been no changes in the share capitals of S1 and S2
during the year.

14. How much is the total goodwill as of December 31, 20x1?

a. 28,000 b. 18,240 c. 34,000 d. 36,000

15. How much is the total NCI in net assets as of December 31, 20x1?

a. 229,600 b. 237,600 c. 237,088 d. 232,680

16. How much is the consolidated retained earnings as of December 31, 20x1?

a. 638,400 b. 640,000 c. 637,780 d.639,888

17. How much is the consolidated profit or loss in 20x1?

a. 368,000 b. 356,600 c. 446,000 d. 452,000

18. How much are the profit attributable to owners of parent and to the NCIS?
a. 348,200 b. 358,400 c. 407,680 d. 407,930

19. How much is the consolidated total assets as of December 31. 20x1?

a. 1,680,000 b. 1,712,000 c. 1,636,000. d. 1,722,000

20. How much is the consolidated total equity as of December 31, 20x1?

a. 1,356,000 b. 1,432,000 c. 1,400,000 d. 1,442,000

Consolidation of a D-shaped (mixed) group

Use the following information for the next seven questions:

The following transactions occurred on January 1, 20x1:

 P acquired 64,000 shares in S1 for P400,000 and 12,500 shares in S2 for P160,000
 S1 acquired 15,000 shares in S2 for P200,000.

Additional information:

_ S1 S2

Retained earnings - January 1, 20x1 120,000 40,000

Fair value of NCI - January 1, 20x1 100,000 160,000

The carrying amounts of the net identifiable assets of S1 and S2 approximate their fair values on
January 1, 20x1. The group determined on December 31, 20x1 that there is no impairment of
goodwill. There have been no changes in the share capitals of S1 and S2 during the year.

A summary of the individual financial statements of the entities on December 31, 20x1 is shown
below:

Statements of financial position

As at December 31, 20x1

_ P S1 S2

Investment in Subsidiary 560,000 200,000

Other assets 800,000 480,000 320,000

Total assets 1,360,000 680,000 320,000

Liabilities 280,000 152,000 8,000

Share capital (P4.00 par value) 480,000 320,000 200,000

Retained earnings 600,000 208,000 112,000

Total liabilities and equity 1,360,000 680,000 320,000

Statements of profit or loss

For the year ended December 31, 20x1

Revenues 720,000 408,000 192,000

Expenses (400,000) (320,000) (120,000)

Profit 320,000 88,000 72,000

The profits above do not include inter-company investment income.

21. How much is the total goodwill as of December 31, 20x1?

a. 280,000 b. 300,000 c. 320,000 d. 360,000

22. How much is the total NCI in net assets as of December 31, 20x1?

a. 232,680 b. 237,600 c. 274,320 d. 229,600

23. How much is the consolidated retained earnings as of December 31, 20x1?

a. 638,400 b. 705,680 c. 637,780 d. 698,480

24. How much is the consolidated profit or loss in 20x1?

a. 368,000 b. 356,600 c. 637,780 d. 698,480

25. How much are the profit attributable to owners of parent and to the NCIS?

Parent NCI in S1 NCI in S2

a. 324,800 15,600 27,600

b. 358,400 9,600 0

c. 425,680 17,600 36,720

d. 366,480 17,680 67,840

26. How much is the consolidated total assets as of December 31, 20x1?

a. 1,900,000 b. 1,712,000 c. 1,636,000 d. 1,722,000

27. How much is the consolidated total equity as of December 31, 20x1?

a. 1,356,000 b. 1,282,000 c. 1,460,000 d. 1,272,000

Complex group structure with Associate

Use the following information for the next eight questions:

The following transactions occurred on January 1, 20x1:

 A acquired 80% interest in B for P400,000.

 A acquired 25% interest in C for P160,000.
 B acquired 30% interest in C for P200,000.
 B acquired 20% interest in E for P240,000.
 C acquired 40% interest in D for P320,000.

Additional information:

_ B C D E

Retained earnings - Jan. 1, 20x1 120,000 40,000 8,000 32,000

Fair value of NCI - Jan. 1,20x1 100,000 160,000 72,000 192,000

The carrying amounts of the net identifiable assets of each of the investees approximate their fair
values on January 1, 20x1. The group determined on December 31, 20x1 that there is no
impairment in goodwill. There have been no changes in the share capitals of S1 and S2 during
the year.

A summary of the individual financial statements of the entities on December 31, 20x1 is shown
below:

Statements of financial position

As at December 31, 20x1

_ A B C D E

Investments 500,000 440,000 320,000

Other assets 800,000 480,000 320,000 240,000 280,000

Total assets 1,360,000 920,000 640,000 240,000 280,000

Liabilities 280,000 392,000 328,000 120,000 40,000

Share capital 480,000 320,000 200,000 80,000 160,000

Retained

earnings 600,000 208,000 112,000 40,000 80,000

Total

liabilities 1,360,000 920,000 640,000 240,000 280,000

and equity

The investment accounts pertain solely to the investment transactions described earlier and are
not adjusted for any investment income from investees.

Statements of profit or loss

For the year ended December 31, 20x1

_ A B C D E

Revenues 720,000 408,000 192,000 256,000 128,000

Expenses (400,000) (320,000) (120,000) (224,000) (80,000)

Profit 320,000 88,000 72,000 32,000 48,000

Profits do not include income from investments.

28. Assuming the existence of control is based solely shareholdings, which of the entities above
are considered subsidiaries of A Co.?

a. B and C b. B, C and D c. B only d. A, B, C, D and E

29. How much is the total goodwill as of December 31, 20x1?

a. 280,000 b. 300,000 c. 320,000 d. 360,000

30. How much is the total NCI in net assets as of December 31, 20x1?

a. 282,678 b. 237,600 c. 274,320 d. 229,600

31. How much is the consolidated retained earnings as of December 31, 20x1?

a. 638,400 b. 705,680 c. 719,632 d. 698,480

32. How much is the consolidated profit or loss in 20x1?

a. 500,560 b. 502,400 c. 489,420 d. 399,272

33. How much are the profit attributable to owners of parent and to the NCIS?

Parent NCI in B NCI in C NCI in D NCI in E

a. 439,632 19,520 43,248 0 0

b. 358,400 9,600 0 31,272 0

c. 425,680 17,600 36,720 6,890 2,530

d. 443,932 18,768 37,860 0 0

34. How much is the consolidated total assets as of December 31, 20x1?

a. 1,900,000 b. 2,482,400 c. 1,636,000 d. 1,317,600

35. How much is the consolidated total equity as of December 31, 20x1?

a. 1,356,000 b. 1,482,400 c. 1,460,000 d. 1,282,000