CHAPTER FIVE

CONSOLIDATED FINANCIAL
STATEMENT
Based on IFRS 10
Introduction
 When the investor acquires a controlling
interest in the investee, a parent - subsidiary
relationship establishes.
 The investee becomes a subsidiary of the
acquiring parent company (investor) but
remains a separate legal entity.
 On the date of acquisition, the parent prepare
the Consolidated Financial Statement (CFS).
 CONSOLIDATED FINANCIAL
STATEMENT (CFS)
 Consolidated financial statements are the 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.

 An entity that is a parent shall present consolidated financial statements (IFRS

10.4).

◦ A parent is an entity that controls one or more entities

◦ A subsidiary is an entity that is controlled by another entity (i.e. the parent)

◦ A group is a parent and its subsidiaries

 INTERACTION OF:
IFRSs 3, 7, 9, 10, 11, 12 and IAS 28
Control
alone?
YES NO

Consolidation in
accordance with IFRS 3 Joint control?
and IFRS 10
Disclosures in YES NO
accordance with IFRS
12
Define type of joint
Significant
arrangement in influence?
accordance with IFRS 11
Joint Operation Joint Venture YES NO

Account for assets, liabilities, Account for an investment in

accordance with IAS 28 IFRS 9
revenues and expenses
Disclosures in
Disclosures in accordance with Disclosures in accordance with accordance
IFRS 12 IFRS 12 with IFRSs 7
4
 ADVANTAGES OF CFS

1. Provide good information about the parent company,

including the parent`s shareholders, creditors and other
resource providers.
2. The only way to conveniently summarize the vast amount
of information about the individual companies.
3. The parent`s long term creditors also find the CFS of
subsidiary operation on the overall health and future of the
parent.
 DISADVANTAGES OF CFS
1. The masking of poor performance.
2. Lack of detailed disclosures.
3. Non-Controlling Stockholders get little value from
CFS.
 CRITERIA FOR CFS
An investor, regardless of the nature of its involvement with an
entity (the investee) shall determine whether it is a parent by
assessing whether it controls the investee. An investor controls an
investee when it is exposed, or has rights, to variable returns from
its involvement with the investee and has the ability to affect
those returns through its power over the investee. Thus, an
investor controls an investee if and only if the investor has all the
following:
1. Power over the investee
2. Exposure, or rights, to variable returns from its involvement with
the investee; and
 THE CONTROL MODEL—AN
OVERVIEW
An investor controls an investee when it is exposed, or has rights,
to variable returns from its involvement with the investee and has
the ability to affect those returns through its power over the
investee.
Exposure Power
to
variable
returns
Link
power-
returns

control
ASSESSING CONTROL OF AN
INVESTEE

POWER EXPOSUR
E LINK

Exposure Ability to
Rights (or rights) use power
to over the
variable investee
returns of to affect
Relevant the its own
activities investee returns

9
 1. POWER OVER AN INVESTEE
• Power = existing rights that give it the current ability to

POWER direct the relevant activities.

• Power arises from rights (e.g. voting rights, rights to
appoint key personnel, among others)
• Relevant activities: The investor has been directing
Rights
relevant activities can help to determine whether the
investor has power.

-Assessing and Purchasing of Goods.

Relevant
activities -Purpose, Design and profit margin of the Investee

-Making Capital Expenditure or obtaining Finance

An investor need not have absolute power to control

 Example
 An investor acquires 48 per cent of the voting rights of an investee. The

remaining voting rights are held by thousands of shareholders, none individually

holding more than 1 per cent of the voting rights. None of the shareholders has

any arrangements to consult any of the others or make collective decisions. When

assessing the proportion of voting rights to acquire, on the basis of the relative

size of the other shareholdings, the investor determined that a 48 per cent interest

would be sufficient to give it control. In this case, on the basis of the absolute size

of its holding and the relative size of the other shareholdings, the investor

concludes that it has a sufficiently dominant voting interest to meet the power

criterion without the need to consider any other evidence of power.

11
2. ASSESSING EXPOSURE (OR RIGHTS) TO VARIABLE
RETURNS

• An investor is exposed, or has rights, to variable

EXPOSU returns from its involvement with the investee
RE
when the investor’s returns from its involvement
have the potential to vary as a result of the
Exposure
(or rights) investee’s performance.
to • Broad definition of returns:
variable
returns of dividends; remuneration from services, fees and
the
investee exposure to losses; residual interests on liquidation;
tax benefits; access to future liquidity; returns not
available to other investors (eg synergies) 12
 3. LINK BETWEEN POWER AND RETURNS
 An investor controls an investee if the investor not only has power over the
investee and exposure or rights to variable returns from its involvement with the
investee, but also has the ability to use its power to affect the investor’s returns
from its involvement with the investee.
 A case of power without control is the agency relationship.
 An agent is a party contracted by a principal to perform some service on behalf of
the principal that involves delegating some authority to the agent.
 Agent
◦ acts in the best interests of the principal (fiduciary responsibility)

◦ principal and agent seek to maximise their own benefits

◦ additional measures to ensure the agent does not act against the interests of the principal

 Delegated power does not mean control.

13
 ACCOUNTING REQUIREMENT
1. Accounting Policy: A parent shall prepare consolidated financial statements using uniform

accounting policies for like transactions and other events in similar circumstances.

2. Non Controlling Interest: A parent shall present non-controlling interests in the consolidated

statement of financial position within equity, separately from the equity of the owners of the

parent.

3. Loss of control : If a parent loses control of a subsidiary, the parent:

(a) Derecognizes the assets and liabilities of the former subsidiary from the consolidated statement of

financial position.

(b) Recognizes any investment retained in the former subsidiary.

(c) Recognizes the gain or loss associated with the loss of control

4. Parent and Subsidiary with different Fiscal period: When the fiscal periods of parents and its

subsidiaries differ, We prepare CFS for and as of the end of the parent`s fiscal period. If the

difference in fiscal period is not in excess of three months, it usually is accepted to use the

subsidiary`s statement for its fiscal year for consolidation.

 STEPS OF CFS
1. Combine like items of assets, liabilities, income, expenses and cash flows of the parent at Book Value
with those of its subsidiaries at Fair values;

2. Offset (eliminate): the carrying amount of the parent’s investment in subsidiary; and the subsidiary`s
equity account (i.e. Common Stock, Additional Paid in capital and Retained Earning.);

3. Eliminate in full intra-group assets and liabilities, equity, income, expenses and cash flows relating to
transactions between entities of the group (Inter company Receivable and Payables).

4. The elimination is not entered in either the parent company’s or the subsidiary’s accounting records;
it is only a part of the working paper for preparation of the consolidated balance sheet.

5. The elimination And Adjustment is used to reflect differences between current fair values and
carrying amounts of the subsidiary’s identifiable net assets because the subsidiary did not write up
its assets to current fair values on the date of the business combination.

6. The Elimination and Adjustment column in the working paper for consolidated balance sheet
reflects debits and credits.

7. CFS of Equity includes Parent`s Equity balance and Non Controlling Interest.
 Cont…
Intercompany Accounts to Be Eliminated
Parent’s Accounts Subsidiary’s Accounts
Investment in subsidiary Against Equity accounts
Intercompany receivable Intercompany payable
Against
(payable) (receivable)
Advances to subsidiary (from
Against Advances from parent (to parent)
subsidiary)
Interest expense (interest
Interest revenue (interest expense) Against
revenue)
Dividend revenue (dividends Dividends declared (dividend
Against
declared) revenue)
Management fee received from
Against Management fee paid to parent
subsidiary
Sales to subsidiary (purchases of Purchases of inventory from
Against
inventory from subsidiary) parent (sales to parent)
 Cont…

 It is necessary to eliminate the investment account of

the parent company against the related stockholders’
equity of the subsidiary to avoid double counting of
these net assets.
 Cont…
Sample Elimination and Adjustment Entry
Subsidiary`s Common
Reciprocal ledger account
Stock…………………………………………………….xx
(Subsidiary`s Equity
Subsidiary`s Additional Paid in capital in excess of Par………..xx
Account)
Subsidiary`s Retained Earning…………………………………………………xx
Inter company transaction
Payable to Increase in Asset and
Parent………………………………………………………………………xx Decrease in Liability in
Increase in Fair Value of Assets………………………………………………..xx termsof
Excess ofAC
FV (IV)
of Sub.
Over
Decrease in Fair Value of Liabilities………………………………………….xx FVNIA
Goodwill…………………………………………………………………………
…………….xx
Investment in
Subsidiary…………………………………………xx
Non Controlling
Interest………………………………………….xx
Receivable from
Subsidiary……………………………………xx
 PRACTICAL EXAMPLE 1 (Wholly Owned
Subsidiary)
 There is no question of control of a wholly owned subsidiary. Thus, as an illustration

assume that on December 31, 2002, PALM Corporation issued 10,000 shares of its 10 par

common stock (current fair value Br 50 a share) to shareholder of STARR Company for all

the outstanding Br 5 par common stock of Starr. There was no contingent consideration.

Costs of issuing common stock of the business combination paid by Palm Corp on

December 31, 2002 consisted of the following;

Costs of issuing common stock………35,000

 Assume also that the combination qualified for Acquisition accounting. Starr Company was

to continue its corporate existence as a wholly owned subsidiary of Palm Corporation. Both

companies had a December 31 fiscal year and use the same accounting policies. Financial

statements of the two companies as of December 31, 2002 Prior to combination are

presented below follow:

Cont…

Palm Starr
 Cont…
 On Dec, 31, 2002 current fair values of Starr Company’s
identifiable assets and liabilities were the same as their
carrying amount, except for the following 3 assets:
Fair Values:
Inventories Br 135,000
Plant assets (net) Br 365,000
Patent (net) Br 25,000
 SOLUTION
Costs related to Acquisition of Subsidiary
 Investment in Starr Com…(10,000shares*Br. 50/share)……...500,000
Common Stock………(10,000shares*Br. 10/share)…..
………100,000
Additional paid in capital in Excess of
Par…………………………400,000

Costs related to Issuance of Shares

 Additional paid in capital in Excess of Par…………………………
35,000

Cash……………………………………………………………………
………35,000
 Cont…
Since the Financial Statements are Given Prior to combination, We
Should Adjust some items that are affected by Business
Combination. Common Stock
Investment in Starr
BB…300,000
EB……Br
500,000 100,000
EB….Br
Additional Paid in capital in 400,000
excess of Par Cash
BB…50,000 BB … 35,000
100,000
400,000
EB ….Br
35,000 65,000
EB… Br
415,000
 Cont…
Goodwill Calculation
 Goodwill = Acquisition Cost – Fair Value of Net Identifiable

Asset(FVNIA)

FVNIA= Fair Value of Assets – Fair Value of Liabilities

FVNIA =(40,000 + 135,000 + 70,000 + 365,000 + 25,000) -

(25,000 + 10, 000 + 115,000) = Br 635,000 – Br 150,000

= Br 485,000

 Goodwill = Br 500,000 – Br 485,000 = Br 15,000

 Cont…
Elimination and Adjustment Entry
Common Stock…………………………………………………………..200,000
Additional Paid in Capital in Excess of Par………………….58,000
Retained Earning………………………………………………………..132,000
Payable to Palm……..….………………………………………………..25,000
Inventory…………………………………………………………………….25,0
00
Plant
Asset………………………………………………………………….65,000
Patent……………………………………………………………………………
5,000
Goodwill……………………………………………………………………….15
,000
Investment in
Starr………………………………………………….500,000
Receivable from Starr.……..
Cont…
 PRACTICAL EXAMPLE 2 (Partially
Owned Subsidiary)
 To illustrate the consolidation techniques for an Acquisition type business
combination involving a partially owned subsidiary, assume the following
facts:
 On December 31,2003 Post Corporation issued 66,500 shares of its Br 1 par
common stock (Current fair value Br 20 a share ) to stockholders of Sage
Company in exchange for 38,000 of the 40,000 outstanding shares of Sage’s Br
10 par common stock. Thus Post acquired 95% of the interest in Sage (38/40).
There was no contingent consideration. Cost of issuing shares of the combination
paid in cash by Post on December 31, 2003 were as follows:
Cost of issuing shares 72,750
 The Fair value of Non Controlling Interest is Br 70,000.
 Financial statements of the two companies before the combination are as follows:
Cont…
 Cont…
On Dec, 31, 2003 current fair values of Sage company’s
identifiable assets and liabilities were the same as their
carrying amount, except for the following assets:
Fair Values
Inventories Br 526,000
Plant assets (net) Br 1,290,000
Leasehold Br 30,000
 SOLUTION
Costs related to Acquisition of Subsidiary
 Investment in Starr Com…(66,500shares*Br. 20/share)……...1,330,000

Common Stock………(66,500shares*Br. 1/share)….………….66,500

Additional paid in capital in Excess of Par…………………………1,263,500

Costs related to Issuance of Shares

 Additional paid in capital in Excess of Par…………………………72,750

Cash……………………………………………………………72,750
 Cont…
Since the Financial Statements are Given Prior to combination, We
Should Adjust some items that are affected by Business
Combination. Common Stock
Investment in Starr
BB….1,000,00
EB…Br
0
1,330,000
66,500
Additional Paid in capital in excess EB….Br
of Par 1,066,500
Cash
BB…550,000 BB … 72,750
200,000
1,263,500
EB …Br
72,750 127,250
EB… Br
1,740,750
 Cont…
Goodwill Calculation
 Goodwill = Implied Value – Fair Value of Net Identifiable Asset(FVNIA)
 Implied Value = Acquisition Cost + Fair Value of Non Controlling Interest

Implied Value = Br 1,330,000 + Br 70,000 = Br 1,400,000 Or

Implied Value = Acquisition Cost/ % of Controlling Interest

Br 1,330,000/0.95 = Br 1,400,000
 FVNIA= Fair Value of Assets – Fair Value of Liabilities

FVNIA =(Br 100,000 + 526,000 + 215,000 + 1,290,000 + 30,000) -

(Br 16,000 + 930, 000) = Br 2,161,000 – Br 946,000 = Br 1,215,000

 Goodwill = Br 1,400,000 – Br 1,215,000 = Br 185,000

 Cont…
Elimination and Adjustment
Common Stock…………………………………………………………..400,000
Additional Paid in Capital in Excess of Par………………..235,000
Retained Earning………………………………………………………..334,000
Inventory……………………………………………………………………..26,
000
Plant
Asset………………………………………………………………….190,000
Leasehold Land……………………………………………………………
30,000
Goodwill……………………………………………………………………...185
,000
Investment in
Starr………………………………………………….1,330,000
Non Controlling
Interest…………………………………………..…70,000
Cont…
 SUMMARY OF CFS
1. The investment account and related subsidiary’s stockholders’
equity have been eliminated and the subsidiary’s net assets
substituted for the investment account.
2. Consolidated assets and liabilities consist of the sum of the
parent and subsidiary assets and liabilities in each classification.
3. Consolidated stockholders’ equity is the same as the parent
company’s stockholders’ equity.
Consolidated Common Stock= Parent’s Common Stock
Consolidated Retained Earnings = Parent’s Retained Earnings
Consolidated Stockholders’ Equity = Parent’s Stockholders’ Equity
(if 100% Subsidiary)
Consolidated Stockholders’ Equity = Parent’s Stockholders’ Equity +
Non Controlling Interest
(if < 100% Subsidiary)
End of Ch5

Thank You for

Your Attention!