U U N IT

1
CONSOLIDATED FINANCIAL
STATEMENTS

Unit Overview

This Unit commences by reviewing the conceptual framework for business

combinations. You may recall that a business combination is the acquisition of all of a
company’s assets at a single price. One type of business combination is a merger, that
is, an existing company acquires another and the operations of both are combined.
Another type of business combination is a consolidation, which refers to two or more
firms merging into one new company. In discussing business combinations, we will
look specifically at issues such as acquisition of control, methods of accounting for
business combinations, techniques of consolidation and the disclosure requirements
in accordance with IFRS 10.

We will apply the conceptual framework, together with IFRS and IAS’s in the preparation
of Consolidated Financial Statements for simple and complex groups. Issues such as
the date of acquisition, fair value accounting for investment in a subsidiary, treatment
of pre and post-acquisition profits, and the treatment of goodwill in a consolidation,
including pre-existing goodwill, will be explored.

The Unit ends by examining Consolidated Financial Statements subsequent to

acquisition, and briefly looks at the impairment of goodwill. Impairment of goodwill
is covered in greater detail in Unit 3. Please note that you must review the required
readings listed in order to fully grasp the topics being discussed.

Unit 1 Learning Objectives

At the end of this Unit, the student will be able to:

1. Apply the relevant IFRS’s and IAS’s in accounting for business combination.

2. Calculate goodwill on acquisition and impairment of goodwill

© 2016 University of the West Indies Open Campus  1

 This Unit is divided into two sessions as follows:

Session 1.1: The Conceptual Framework for Business Combinations

Session 1.2: Consolidation Process

READING
Required Readings and Resources

Hoyle, J., Schaefer, T., & Doupnik T. (2011). Chapter 1 in Advanced

Accounting (10th Edition). New York McGraw-Hill Irwin.
Available at https://thatsharefile.files.wordpress.com/2013/11/
advanced-accounting-10th-ed-j-hoyle-et-al-mcgraw-hill-2011.pdf

Suggested Reading or Other Resources

Beams, F. A., Anthony, J. H., Bettinghaus, B., Smith, K. A. (2012).

Advanced Accounting, (11th Edition), United States of America,
Pearson Prentice Hall. Available at: http://www.boostem.org/
pdf/BUSINESS/Advanced_Accounting.pdf
International Accounting Standards Board (IASB). (2010).
International Financial Standards Reporting Standards (IFRS):

a. IFRS 3 —Business Combinations. Available at http://www.

iasplus.com/en/standards/ifrs/ifrs3 and http://www.frascanada.
ca/international-financial-reporting-standards/resources/
unaccompanied-ifrss/item45582.pdf

b. IFRS 3 —Business Combinations. Available at http://www.

iasplus.com/en/standards/ifrs/ifrs3

c. IAS 36 — Impairment of Assets. Available at http://www.ifrs.org/

IFRSs/Documents/Technical-summaries-2014/IAS%2036.pdf

d. IAS 27 —Separate Financial Statements. Available at http://

www.iasplus.com/en/projects/completed/consol/ias-27-equity-
method-in-separate-financial-statements

e. IFRS 10 ---Consolidated Financial Statements. Available at

http://www.iasplus.com/en/standards/ifrs/ifrs10

f. IAS 1 – Presentation of Financial Statements. Available at

http://www.iasplus.com/en/standards/ias/ias1
You are also advised to locate and read: Additional papers
relevant to the topics covered.

2  ACCT3041 Advanced Financial Accounting – UNIT 1

 SSession 1.1

Conceptual Framework for Business

Combination

Introduction
In this session we will explore the main principles and stages involved in applying
acquisition accounting in a business combination. We begin the session with a summary
of the major changes to IFRS 3 and their importance to applying the acquisition method.
We then review the definition of a business combination, the fundamental principles
involved in the acquisition method of accounting for a business combination and then
proceed with the steps involved in applying acquisition accounting. Each step will be
looked at in detail to provide a comprehensive understanding of the key issues within
the framework of IFRS 3 (Revised) and IAS 27 (Revised) and IFRS 10 which provide
the rules for applying acquisition accounting.

It is important to note that, in January 2008, the International Accounting Standards

Board (the IASB) issued a revised IFRS 3 Business Combinations and a revised IAS 27
Consolidated and Separate Financial Statements. In doing so, the Board completed
phase II of its business combinations project, and achieved substantial convergence
between International Financial Reporting Standards (IFRSs) and US Generally
Accepted Accounting Principles (US GAAP) on these topics.

As shown below IAS 27 was further revised in May 2011 and now specifically deals
with Separate Financial Statements.

This session deals predominantly with accounting for business combinations under
IFRS 3(2008) (Revised). Where appropriate, related requirements of IAS 27 Separate
Financial Statements (as amended in 2011) outlines the accounting and disclosure
requirements for ‘separate financial statements’, which are financial statements
prepared by a parent, or an investor in a joint venture or associate, where those
investments are accounted for either at cost or in accordance with IAS 39 Financial
Instruments: Recognition and Measurement or – particularly as regards the definition
of control, accounting for non-controlling interests, and changes in ownership interests
are referred to for completeness.

IFRS 10 (May 2011) Consolidation requirements previously forming part of IAS 27

(2008) have been revised and are now contained in IFRS 10 Consolidated Financial
Statements.

ACCT3041 Advanced Financial Accounting – UNIT 1  3

 IFRS 3 (Revised January 2008) requires companies to ascertain whether a business
transaction or other event is a business combination by applying the definition in the
IFRS.

IFRS 3 (Revised) may also be stated as IFRS 3 (2008) and may be referenced as such
throughout this Unit.

Please go to the link provided above under International Accounting Standards IFRS
10 and 3 (Revised)

Session Objectives
1. Apply the key concept underpinning the revised IFRS 3 including the application
of the acquisition method of accounting for business combination.
2. Prepare a set of consolidated financial statement in accordance with IFRS 3.

Summary of Major Changes to IFRS 3 and their Importance

in Applying the Acquisition Method
We commence this section by summarizing the key changes contained in the Revised
IFRS3, which underpins this Unit. These five key changes arising out of the revisions
to IFRS 3 in 2008 are summarized in Table 1.
Table 1: Summary of Changes to IFRS 3

No. Area of Change Accounting Treatment

Expense through the Statement of Comprehensive
1 Acquisition Cost
income in the period incurred
Contingent Adjustment to the liability account is recognized
2
Consideration through the Statement of Comprehensive income
Two options (choices) are available for measuring
non- controlling interest; either,

Partial (i) the non-controlling interest’s proportionate share

3 acquisition of of the net identifiable assets of the entity acquired
acquisition (old method); or

(ii) fair value, The new ‘approach’ only applies at

the date of acquisition.
Transactions with
Goodwill is not recognized, neither a profit nor loss
4 non-controlling
on the transaction.
interests
Previous residual holdings re-measured to fair
5 Step Acquisition
value.

4  ACCT3041 Advanced Financial Accounting – UNIT 1

 VIDEOS
Please review the following videos for information on IFRS 3, IFRS
10, IAS 1 and IAS 27 for further clarity on the treatment of the
IFRS’s.
Watch the video by M. Silvia and compare it with the information
provided by the ACCA video. The videos are to compliment the Unit
readings. Please ensure that you visit the related links provided
under the Suggested Readings.

Silvia, M. (2016, January 16). IFRS 3 Business Combinations

Summary [YouTube]. IFRSbox. Available at https://www.youtube.
com/watch?v=4k9awiViuFg

Chilli Chickenz. (2014, December 25th). ACCA P2 Lecture 1

IAS 27D. [YouTube]. Available at https://www.youtube.com/
watch?v=awfyzQOPCz8
The last video (below) is for information purposes.

Association of Chartered Certified Accountants. (2016). IFRS

Revised Business Combinations. Available at http://www.
accaglobal.com/za/en/discover/cpd-articles/corporate-reporting/
ifrs3-combinations.html

Applying the Acquisition Method

IFRS 3 (Revised) requires that all business combinations in which the acquirer obtains
control must be accounted for by applying the acquisition method. [IFRS 3 (Revised)
4] In addition to determining whether a transaction or other event is a business
combination [IFRS 3 (Revised) 3] four stages in the application of the acquisition
method are listed:

i. identifying the acquirer;

ii. determining the acquisition date;
iii. recognizing and measuring the identifiable assets acquired, the liabilities
assumed and any non-controlling interest in the acquire: and
iv. recognizing and measuring goodwill or a gain from a bargain purchase.

ACCT3041 Advanced Financial Accounting – UNIT 1  5

 VIDEOS
View the following videos explaining the Acquisition Method in a
Business Combination. Please pay attention to the different steps
followed in the videos.
This first video will provide an understanding of the acquisition
method outlined above in Table 1.

1. Mursau, A. (2012, August 19). Accounting for Acquisition Method

in a Business Combination. [YouTube] Available at https://www.
youtube.com/watch?v=KRofnruubjk
The following two videos are on Step Acquisition. Review them to
point out the areas that you can identify under IFRS 3 (Revised)

2. Accounting ED. (2011, November 18). Advanced Accounting

20A: Piecemeal Acquisition of a Subsidiary. [YouTube]. Available
at https://www.youtube.com/watch?v=Y1NVuMrVZ-w

3. Maguire, K. (2013, May 31). Bravado Step Acquisition BPP

Rev Kit P2. [YouTube]. Available at https://www.youtube.com/
watch?v=JddFOCgTKDE

What is the role of the financial accountant?

When you consider what is required in financial reporting, you will appreciate that
the role of the financial accountant has several dimensions, including;

• the collation of financial information

• the rigorous interrogation of financial information to ensure its accuracy

• the clear presentation of financial reports that are of optimum use to a company
and its clients

• the commitment to identify and adopt current standards of reporting as soon as

these are developed

• advocacy of the highest ethical standards in the practices and approaches used in
financial reporting

6  ACCT3041 Advanced Financial Accounting – UNIT 1

 READING
The below reading will provide additional information on ‘Business
Combinations’.

Review Chapter 1, page 1 -4, Business Combinations in Beam, F. A.,

Anthony, J. H., Bettinghaus, B., Smith K. A. (2012), Advanced
Accounting, USA, Pearson Prentice Hall. Available at http://www.
boostem.org/pdf/BUSINESS/Advanced_Accounting.pdf

LEARNING ACTIVITY 1.1

Activity Topic: Case: Assignment of Acquisition Cost
These are practice exercises that you should attempt. It will give
you a better understanding of the topics covered in session 1.1.
Contact your tutor for assistance if necessary.

1. Post your discussion in the Unit discussion forum and comment on

at least 2 of your peer’s postings.

a. What is a business combination and the types of legal

arrangements that can take place to create it in accordance
with IFRS 3?

b. What does the term consolidated financial statements mean?

2. Attempt problem P1-3, chapter 1, page 22, Beam, F. A., Anthony,

J. H., Bettinghaus, B., Smith K. A. (2012), Advanced Accounting,
USA, Pearson Prentice Hall. Available at http://www.boostem.org/
pdf/BUSINESS/Advanced_Accounting.pdf
Post solutions at the Learning Exchange discussion forum for your
tutor’s comments.

3. Compare and contrast the requirements of IFRS 3 (Revised) and

IFRS 10. Hint (the readings and the videos will be helpful)

Session 1.1 Summary

In this session our focus was on the conceptual framework for business combinations.
We reviewed the major changes to the IFRS and discussed their importance to
acquisition accounting. We also described the steps in acquisition accounting.

ACCT3041 Advanced Financial Accounting – UNIT 1  7

 SSession 1.2

The Consolidation Process

Introduction
In session 1.2 we continue to look at business combinations, focusing on the procedures
for the consolidation process and the understanding and preparation of consolidated
financial information.

Session Objectives
After completing this session, you will be able to:
1. Explain the requirements of IFRS 10 Consolidated Financial Statements
2. Summarize why subsidiary is included in consolidated financial statements
3. Prepare a consolidated balance sheet
4. Describe the procedures for the consolidation of business information

Objectives of IAS 1
The objective of IAS 1 (2007) is to prescribe the basis for presentation of general
purpose financial statements, to ensure comparability both with the entity’s financial
statements of previous periods and with the financial statements of other entities.
IAS 1 sets out the overall requirements for the presentation of financial statements,
guidelines for their structure and minimum requirements for their content. [IAS
1.1]. Standards for recognizing, measuring, and disclosing specific transactions are
addressed in other Standards and Interpretations. [IAS 1.3].

Scope
1. IAS 1 applies to all general purpose financial statements that are prepared and
presented in accordance with International Financial Reporting Standards (IFRSs).
[IAS 1.2]
2. General purpose financial statements are those intended to serve users who are
not in a position to require financial reports tailored to their particular information
needs. [IAS 1.7].

8  ACCT3041 Advanced Financial Accounting – UNIT 1

 Definition of and Preparation of Consolidated Financial
Statements

Objectives of IFRS 10
The objective of IFRS 10 is to establish principles for the presentation and preparation
of consolidated financial statements when an entity controls one or more other entities.
[IFRS 10:1]

The Standard: [IFRS 10:1]

• requires a parent entity (an entity that controls one or more other entities) to present
consolidated financial statements.
• defines the principle of control, and establishes control as the basis for consolidation.
• set out how to apply the principle of control to identify whether an investor
controls an investee and therefore must consolidate the investee.
• sets out the accounting requirements for the preparation of consolidated financial
statements.
• defines an investment entity and sets out an exception to consolidating particular
subsidiaries of an investment entity*.

Key Definitions [IFRS 10]

Consolidated financial statements: Financial statements of a group in which the assets,
liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries
are presented as those of a single economic entity.

Subsidiary: An entity that is controlled by another entity.

Parent: An entity that controls one or more subsidiaries.

Control: An investor controls an investee when the investor is exposed, or has rights,
to variable returns from its involvement with the investee and has the ability to affect
those returns through power over the investee.

Power: Existing rights that give the current ability to direct the relevant activities of
the investee.

Group: A parent and all its subsidiaries

Associate: An entity over which an investor has significant influence and which is
neither a subsidiary nor an interest in a joint venture.

Significant influence: The power to participate in the financial and operating policy of
an investee but is not control or joint control over those policies. (IAS)

ACCT3041 Advanced Financial Accounting – UNIT 1  9

 Investments in Subsidiaries
Control is the important point here. In most cases this will involve the holding
company or parent owning a majority of the ordinary shares (with the normal voting
rights attached). There are circumstances when the parent may own only a minority of
the voting power in the subsidiary, but still has control.

IFRS 10 provides a definition of control and identifies separate elements of control:

An investor controls an investee if and only if it has all of the following:

1) Power over the investee
2) Exposure to, or rights to, variable returns from its involvement with the investee.
3) The ability to use its power over the investee to affect the amount of the investor
’s returns.

If there are changes to one or more of these elements of control, an investor should
reassess whether it controls an investee.

Power can be obtained directly from ownership of the majority of voting rights or can
be derived from other rights, such as:
• rights to appoint, reassign or remove key management personnel who can
direct the relevant activities
• rights to appoint or remove another entity that directs the relevant activities
• rights to direct the investee to enter into, or veto changes to, transactions for
the benefit of the investor
• other rights, such as those specified in a management contract

Consolidation Procedures
Consolidated financial statements: [IFRS 10:B86]:
• combine like items of assets, liabilities, equity, income, expenses and cash flows
of the parent with those of its subsidiaries
• offset (eliminate) the carrying amount of the parent’s investment in each
subsidiary and the parent’s portion of equity of each subsidiary (IFRS 3
Business Combinations explains how to account for any related goodwill)
• eliminate in full, intragroup assets and liabilities, equity, income, expenses
and cash flows relating to transactions between entities of the group (profits
or losses resulting from intragroup transactions that are recognized in assets,
such as inventory and fixed assets, are eliminated in full).

A reporting entity includes the income and expenses of a subsidiary in the consolidated
financial statements from the date it gains control until the date when the reporting
entity ceases to control the subsidiary. Income and expenses of the subsidiary are based
on the amounts of the assets and liabilities recognized in the consolidated financial
statements at the acquisition date. [IFRS 10:B88].

10  ACCT3041 Advanced Financial Accounting – UNIT 1

 The parent and subsidiaries are required to have the same reporting dates, or
consolidation based on additional financial information prepared by subsidiary,
unless impracticable. Where impracticable, the most recent financial statements of the
subsidiary are used, and adjusted for the effects of significant transactions or events
between the reporting dates of the subsidiary and consolidated financial statements.
The difference between the date of the subsidiary’s financial statements and that of
the consolidated financial statements shall be no more than three months [IFRS 10:B92,
IFRS 10:B93].

READING ACTIVITY
Read about IFRS 10 Consolidated Financial Statements (see
below) to know the position of the standard on consolidated
financial statements and the requirements that should be followed.
This will be important as accountants ae expected to abide by the
standards.

Read Chapter 1 page 5-10 Business Combination, Beam, F. A.,

Anthony, J. H., Bettinghaus, B., Smith K. A. (2012), Advanced
Accounting, USA, Pearson Prentice Hall. Available at http://
www.boostem.org/pdf/BUSINESS/Advanced_Accounting.pdf

Additional reading is on IFRS 10, review the standard’s position

on consolidated financial statements IFRS 10 – Consolidated
Financial Statements. Available at: http://www.iasplus.com/en/
standards/ifrs/ifrs10
The following videos provide additional information on the
consolidated process including procedures and the financial
statements.

Silvia, M. (2014, July 29). IFRS 10 Consolidated Financial

Statements Summary. [YouTube]. IFRS box. Available at
https://www.youtube.com/watch?v=JECTxFnAvr0

Hasan, N. (2015, October 5). 10 1 Consolidated Financial

Statements Introduction. [YouTube]. Available at https://www.
youtube.com/watch?v=x7qIancVtMk

ACCT3041 Advanced Financial Accounting – UNIT 1  11

 LEARNING ACTIVITY 1.2
Consolidated Financial Statements
You will be expected to participate in the Discussion Forum
for this session. It will clarify and test your knowledge of
consolidated financial statements and the requirements of IFRS
10.
Post your discussion in the Unit discussion forum and comment on at
least 2 of your peer’s postings.

a. Discuss the circumstances under which the accounts of a

subsidiary would not be included in the consolidated financial
statements.

b. Explain the term non-controlling interest and state how it is treated

in the consolidated financial information.

Session 1.2 Summary

In this session we focused on the preparation of consolidated financial statements and
understanding the procedures necessary for the consolidation process. It also focused
on IFRS 10 the consolidated financial statements, and its application when preparing
the financial statements for business combinations.

Unit 1 Summary

Unit 1 provides the framework for preparing and recording transactions for business
combinations. The Unit sets the stage for the course as a whole. It focused on one
accounting framework against which business combinations are measured and
recorded. Key issues including acquisition accounting, ascertaining control fair value
measurement, pre and post-acquisition profits and the revised accounting treatment
for acquisition related costs were dealt with.

In Unit 2 we will look at preparation of consolidated financial statements subsequent

to acquisition and accounting for investment in associates in accordance with IFRS
3 (Revised). We will also understand the cost and equity method of accounting for
investments. In general, we will build on what you learnt in Unit 1.

12  ACCT3041 Advanced Financial Accounting – UNIT 1

 References
Accounting ED. (2011, November 18). Advanced Accounting 20A: Piecemeal
Acquisition of a Subsidiary. [YouTube]. Retrieved from https://www.youtube.
com/watch?v=Y1NVuMrVZ-w

Association of Chartered Certified Accountants (2016). IFRS Revised Business

Combinations. Retrieved from http://www.accaglobal.com/za/en/discover/
cpd-articles/corporate-reporting/ifrs3-combinations.html

Beams, F. A., Anthony, J. H., Bettinghaus, B., Smith, K. A. (2012). Advanced

Accounting, (11th Edition), United States of America, Pearson Prentice Hall.
Retrieved from http://www.boostem.org/pdf/BUSINESS/Advanced_
Accounting.pdf

Chilli Chickenz. (2014, December 25). ACCA P2 Lecture 1 IAS 27D. [YouTube].
Retrieved from https://www.youtube.com/watch?v=awfyzQOPCz8

Hasan, N. (2015, October 5). 10 1 Consolidated Financial Statements Introduction.

[YouTube]. Retrieved from https://www.youtube.com/watch?v=x7qIancVtMk

Hoyle, J., Schaefer, T., & Doupnik T. (2011). Chapter 1 in Advanced Accounting (10th
Edition). New York McGraw-Hill Irwin. Retrieved from https://thatsharefile.
files.wordpress.com/2013/11/advanced-accounting-10th-ed-j-hoyle-et-al-
mcgraw-hill-2011.pdf

IAS 1 – Presentation of Financial Statements. Retrieved from http://www.iasplus.

com/en/standards/ias/ias1

IAS 27 —Separate Financial Statements. Retrieved from http://www.iasplus.com/

en/projects/completed/consol/ias-27-equity-method-in-separate-financial-
statements

IFRS 3 —Business Combinations. Retrieved from http://wwwiasplus.com/en/

standards/ifrs/ifrs3. http://www.bdointernational.com/Services/Audit/
IFRS/IFRS%20at%20a%20Glance/Documents/IFRS%203.pdf

IFRS 10 ---Consolidated Financial Statements. Retrieved from http://www.iasplus.

com/en/standards/ifrs/ifrs10

Maguire, K. (2013, May 31). Bravado Step Acquisition BPP Rev Kit P2. [YouTube].
Retrieved from https://www.youtube.com/watch?v=JddFOCgTKDE

Silvia, M. (2013, November 2). IFRS 3 Business Combinations Summary [YouTube].

IFRSbox Retrieved from https://www.youtube.com/watch?v=vJD9Pmdag8E

Silvia, M. (2014, July 29). IFRS 10 Consolidated Financial Statements Summary.

[YouTube]. IFRSbox. Retrieved from https://www.youtube.com/
watch?v=JECTxFnAvr0

Silvia, M. (2016, January 16). IFRS 3 Business Combinations Summary [YouTube].

IFRSbox. Retrieved from https://www.youtube.com/watch?v=4k9awiViuFg

ACCT3041 Advanced Financial Accounting – UNIT 1  13