Consolidated Financial Statements – Subsequent to Date of Acquisition

Overview

Consolidated financial statements are prepared when an entity controls one or more other entities.

Control

An investor, regardless of the nature of its involvement with an entity (the investee), determines 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 of the following:

a) Power over the investee;

b) Exposure, or rights, to variable returns from its investment with the investee; and
c) The ability to use its power over the investee to affect the amount of the investor's returns.

THE CONSOLIDATION PROCESS

The approach followed to prepare a complete set of consolidated financial statements subsequent to acquisition is quite similar to that used
to prepare a consolidated statement of financial position as of the date of acquisition, However, in addition to the Statement of Financial
Position, the Statement of Comprehensive Income and Retained Earnings Statement of the consolidating companies must be combined

ACCOUNTING PROCEDURES

When preparing consolidated financial statements, an entity must use uniform accounting policies for reporting like transactions and other
events in similar circumstances. If a member of the group uses accounting policies other than those adopted in the consolidated financial
statements for like transactions and events in similar circumstances, appropriate adjustments are made to that group member's financial
statements in preparing the consolidated financial statements to. ensure conformity with the group's accounting policies.

Consolidation of an investee shall begin from the date the investor obtains control of the investee and cease when the investor loses control
of the investee.

Consolidated financial statements are prepared using the following basic accounting procedures:
a) Combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent with those of its subsidiaries.
b) Eliminate the carrying amount of the parent's investment in each subsidiary and the parent's portion of equity of each subsidiary
(IFRS 3 explains how to account for the difference).
c) Eliminate in full intercompany assets and liabilities, equity, income, expenses and cash flows relating to transactions between
entities of the group (profits or losses resulting from intercompany transactions that are recognized in assets, such as inventory
and fixed assets, are eliminated in full). Intercompany losses may indicate an impairment that requires recognition in the
consolidated financial statements.

Consolidated Comprehensive Income (CI)

Because consolidation subsequent to a subsidiary’s acquisition involves changes that take place over time, the resulting financial statements
rest heavily on the concepts of consolidated comprehensive income.

Consolidated comprehensive income may be computed using two approaches, the parent company approach and the entity approach. In
the consolidated statement of comprehensive income and retained earnings, consolidated comprehensive income is allocated to non-
controlling interests and the controlling interest (equity holders of the parent company).

Parent Company Approach

Under the parent company approach, consolidated comprehensive income is that part of the total enterprise's income that is assigned to the
parent company’s stockholders. For a wholly owned subsidiary, all income of the parent and its subsidiaries accrues to the parent company.
For a partially owned subsidiary, a portion of its income accrues to its non-controlling shareholders and is excluded from consolidated net
income.

In simple cases, consolidated comprehensive income equals the total earnings for all companies consolidated, less any income recorded by
the parent from the consolidating companies and any income assigned to NCI.

Entity Approach

When a subsidiary is wholly owned by the parent, the consolidated CI is computed similarly to the parent company approach. On the other
hand, when a subsidiary is partially owned by the parent, the portion of its income accruing to NCI is included in the consolidated CI.
Stated differently, consolidated comprehensive income under the entity approach equals total earnings of all companies consolidated, less
any income recorded by the parent from the consolidating companies.
Consolidated CI under parent company approach is the same as the income allocated to parent company stockholders under entity
approach. Therefore, the difference between parent company and entity approaches lie solely in the manner of consolidating parent and
subsidiary financial statements, and in reporting the financial position and results of operations in the consolidated financial statements.

International Accounting Standard (IAS 27) does not prescribe the approach to be used in computing consolidated CI. However, since IAS27
provides that non-controlling interest (NCI) is to be presented in the consolidated statements of financial position as part of equity, then the
entity concept will be used throughout the chapter (unless stated)

ACCOUNTING FOR INVESTMENT IN A SUBSIDIARY

When stocks are acquired, the acquirer/investor maintains the Investment account on a continuous basis. The acquirer may choose two
methods when accounting for its investment in stock: the cost method or the equity method.

Cost Method

The cost method is used when the acquirer (Parent) owns directly or indirectly more than half of the voting power of an entity (Subsidiary),
thereby exercising control (IAS 27).
Under this method, the Investment in Subsidiary account is retained at its original cost — of-acquisition (consideration given) balance.
Income on the investment is limited to dividends received from the subsidiary.

Equity Method

The equity method is used when the acquirer/investor owns 20% or more (less than 50%) of the voting power of the investee/acquiree,
thereby exercising significant influence over the operations of the investees (IFRS 12).

Under this method, the investment account is initially recorded at cost and is increased or decreased to recognize the investor’s share of the
income or loss of the investee after the date of acquisition. Dividends received from an investee reduce the investment account balance.
Adjustments to the investment account may also be necessary for changes arising from revaluation of assets and liabilities of the investee.

Cost Method and Equity Method Compared

Consolidated statements are the same under both methods. However, the working paper elimination entries used in the two methods
are different.
IAS 27 "Consolidated Financial Statements" prescribes the use of the cost method, and for this reason, the cost method is used and
emphasized in the following chapter involving the preparation of consolidated statements subsequent to acquisition. The equity method is
illustrated in the appendix of this chapter.

CONSOLIDATION: WHOLLY OWNED SUBSIDIARY- Acquisition Book Value

FIRST YEAR AFTER ACQUISITION

Working Paper Elimination Entries

When the acquisition of a subsidiary is at book value, the following working paper elimination procedures are used before the consolidation
of the financial statements:
(1) Eliminate Dividend Income account against the Dividend Declared by the Subsidiary
(2) Eliminate the parent's equity in the subsidiary’s stockholder’s equity at date of acquisition.

Consolidation Working Paper – First Year after Acquisition

A number of different working paper formats for preparing consolidated financial statements are used in practice. One of the most widely
used format is the three-section working paper, consisting of one section for each three basic financial statements : the Income Statement,
the Statement of the Retained Earnings, and the Statement of Financial Position. Other format such as the trial balance approach format
may also be used. This format the following columns: Trial Balances of the parent and the subsidiary, eliminations and adjustments,
Statement of CI, NCI (if any), Controlling Retained Earnings, Consolidated Statement of Financial Position

The three-section consolidation working paper will be used throughout the chapter (unless stated).

Working Paper Relationships

The following aspects of the working paper for consolidated financial statements should be emphasized:

1. The two elimination entries have been entered in the working paper and the amounts totaled across and down to complete the
working paper.
2. Each of the first two sections of the working paper "telescopes" into the section below in a logical progression. As part of the
normal accounting cycle, net income is closed to retained earnings and reflected in the statement of financial position. Similarly, in
the consolidation working paper the retained is carried forward to the statement of financial position,
3. Using the double-entry bookkeeping, total debits must equal total credits for any single elimination entry and for the working paper
as a whole. The totals of all debits and credits at the very bottom of the statement of financial position section are equal because
the cumulative balances from the two upper sections are forward to the statement of financial position section.
4. Elimination (2) deals with the intercompany investment and subsidiary equity accounts on the date of acquisition, this accounting
technique is necessary because the parent's Investment in Sake Company account is maintained at the cost of the original
investment under the cost method,
5. The consolidated CI and consolidated retained earnings in the working paper may be verified, to assure their accuracy:
SECOND AND SUBSEQUENT YEARS AFTER ACQUISITION

The consolidation procedures to be used at the end of the second year, and in periods, thereafter, are basically the same as those used at
the end of the first year, in essence, each yd consolidation procedures begin as if there had never been a previous consolidation.

CONSOLIDATION: PARTIALLY OWNED SUBSIDIARY – Acquisition at Book Value

When a subsidiary partially owned by the parent company, the consolidation procedures must be slightly modified from those discussed
earlier to include recognition of non-controlling interest (NCI).

Consolidation: Partially Owned Subsidiary-Acquisition at Other Than Book Value

In some cases, the consideration given of the parent is not equal to the book value of interest acquired from the subsidiary. as discussed in
Consolidated Statement of Financial Position-Date of Acquisition, the excess between the consideration given and the book value of the
interest acquired must be allocated to the specific assets and liabilities of the subsidiary. This allocation must be made in the consolidation
paper each time consolidated statements are prepared. In addition, if the allocation related to assets subject to depreciation or amortization,
appropriate entries must be made in the working paper for the depreciation for the depreciation or amortization to reduce consolidated net
income accordingly.

The following elimination procedures may be used to eliminate inter-company transactions when the investment cost is not equal to the
book value of interest acquired.

1) Eliminate intercompany dividends and recognize NCI share of subsidiary’s dividends declared.
2) Eliminate equity accounts of subsidiary at date of acquisition against investment account and NCI.
3) Allocate excess to the specific assets and liabilities of the subsidiary The allocation should be in accordance with the principles
discussed in Consolidated Statement of Financial Position-Date of Acquisition.
4) Amortize the allocated excess except goodwill in accordance with accounting for the asset to which it is assigned
5) Assign income of subsidiary to NCI.

Consolidation: Partially Owned Subsidiary Acquisition at Other Than Book Value

In some cases, the consideration given of the parent is not equal to the book value of interest acquired from the subsidiary. As discussed in
Chapter 15, the excess between the consideration given and the book value of the interest acquired must be allocated to the specific assets
and liabilities of the subsidiary. This allocation must be made in the consolidation paper each time consolidated statements are prepared. In
addition, if the allocation relates to assets subject to depreciation or amortization, appropriate entries must be made in the working paper for
the depreciation or amortization to reduce consolidated net income accordingly.

ACCOUNTING FOR LOSS OF CONTROL

Whenever a parent ceases to have a controlling interest in a subsidiary, that subsidiary should be deconsolidated (eliminated from the
consolidated financial statements). Usually, this would result from a sale of an interest in the subsidiary, which reduces the parent company's
share to less than 50%.

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 at its fair value when control is lost and subsequently accounts for it
and for any amounts owned by or to the former subsidiary in accordance with relevant IFR.S.
c) Recognizes the gain or loss associated with the loss of control attributable to the former controlling interest.

The gain or loss is included in net income attributable to the parent company. The gain or loss is the difference between:
a. The aggregate of:
1. The fair value of any consideration
2. The fair value of any retained non-controlling investment in the former subsidiary at the date the subsidiary is deconsolidated
3. The carrying amount of the non-controlling interest in the former subsidiary (including any accumulated other comprehensive
income attributable to the non-controlling interest) at the date the subsidiary is deconsolidated
b. The carrying amount of the former subsidiary's assets and liabilities.

Sale or Interest Not Resulting in Loss of Control:

A parent company may sell a portion of its investment in a subsidiary but still have an interest that provides control even after the sale. T here
can be no income statement gains or losses resulting from any stock issuances by the consolidated entity. Gain on sale of
investment in a subsidiary is recorded as an addition to additional paid-in capital (APIC). Loss on sale of the investment in subsidiary is
treated as a reductional from additional paid-in capital. If there is not an adequate amount of additional paid-in capital, Retained Earnings is
debited.

Exemption from Preparing Consolidated Financial Statements by an Intermediate parent

A parent that prepares financial statements in accordance with [FRS is exempt from presenting consolidated financial statements if it meets
al I of the following conditions:

a) it is a wholly owned subsidiary or is a partially owned subsidiary of another entity and all its other owners, including those not
otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial
statements.
 b) its debt or equity instruments are not traded in a public market.
c) it did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organization
for the purpose of issuing any class of instruments in a public market; and
d) its ultimate or any intermediate parent produces consolidated financial statements that are available for public use and comply
with IFRS

Where an entity uses this exemption, it may, but is not required to prepare separate financial statements as its only financial statements;
however, if separate financial statements are prepared, they must comply with IAS 27.

Consolidated Financial Statement- Subsequent to Date of Acquisition

Problem 1

Father Company acquires an 80% interest in Mother Company for P250,000 in cash on January 1, 2025, when Mother Company has the
following statement of financial position:

Assets Liabilities & Equity

Current Assets 100,000 Current Liabilities 50,000

Non-Current Assets 200,000 Common Stock, P10 par 100,000
Retained Earnings 150,000
Total Assets 300,000 Total Liabilities & Equity 300,000

Any excess of the price paid over book value is attributable to fixed assets, which have a 10-year remaining life. Father uses the cost method to record its
investment in Mother Company.

The following trial balance of the two companies is prepared on December 31, 2025:

Father Co. Mother Co.

Current Assets 60,000 130,000
Non-current Assets 294,000 180,000
Investment in Mother Company 250,000
Current Liabilities (60,000) (40,000)
Common Stock, P10 par (300,000) (100,000)
Retained Earnings (200,000) (150,000)
Sales (150,000) (100,000)
Expenses 110,000 75,000
Dividend Income (4,000)
Dividends declared 5,000

Required:
1. Prepare determination and allocation of excess schedule for the investment
2. Prepare eliminations and adjustments that would be made on the 2025 consolidation paper
3. Prepare the 2025 consolidated statement of income with income distribution
4. Prepare the 2025 statement of retained earnings
5. Prepare the 2025 consolidated statement of financial position