CONSOLIDATION

Objectives:

PAS 27 objective of setting the standard to be applied:

 In accounting for investments in subsidiaries, jointly controlled entities, and associates when
an entity elects, or is required by local regulations, to present separate (non-consolidated)
financial statements.

PFRS 10 objective of setting the standard to be applied:

 In the preparation and presentation of consolidated financial statements for a group of entities
under the control of a parent; and

The Concept of Control

Consolidation is the process of combining the assets, liabilities, earnings and cash flows of a
parent and its subsidiaries as if they were one economic entity. Since an economic and not legal
perspective is adopted, transactions between companies within this economic entity and their
resultant balances must be eliminated. A parent is an entity that controls one or more
subsidiaries. A group is a parent and all its subsidiaries.

Control as the Criterion for Consolidation

A subsidiary is defined as an entity that is controlled by another entity, the parent. The criterion
for identifying a parent-subsidiary relationship, and hence, the basis for consolidation is control.
The determination of whether one entity controls another is then crucial to the determination of
which entities should prepare consolidated financial statements.

PFRS 10 Guidance on Control

PFRS 10 uses control as the single basis for consolidation. An investor considers controls an investee if
and only if the investor has all of the following three elements of control:

 Power over the investee. Power is the ability to direct those activities which significantly affect
the investee’s returns. It arises from rights, which may be straightforward (e.g. through voting
rights) or complex (e.g. though one or more contractual arrangements).
 Exposure, rights, to variable returns from involvement with the investee returns must have the
potential to vary as a result of the investee’s performance and can be positive, negative or both.
 The ability to use power over the investee to affect the amount of the investor’s returns.

Separate Financial Statements of the Parent of Investor in an Associate or Jointly

Controlled Entity

In the parent’s/investor’s individual financial statements, investments in subsidiaries, associates,

and jointly controlled entities should be accounted for either:
 At cost
 In accordance with PAS 39/PFRS 9 (effective January 1, 2018)
 Using equity method as described in PAS 28.

Such investments may not be accounted for by the equity method in the parent/ investor’s
separate statements.

Presentation of Consolidated Financial Statements

A parent is required to present consolidated financial statements in which it consolidates its

investments in subsidiaries – except in one circumstance: A parent need not present consolidated
financial statements if and only if all of the following four conditions are met:

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1. The parent is itself a wholly-owned subsidiary, or is a partially-owned subsidiary of another
entity and 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.

2. The parent’s debt or equity investments are not traded in a public market.

3. The parent 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.

4. The ultimate or any intermediate parent of the parent produces consolidated financial
statements available for public use that comply with IFRS.

Once an investment cease to fall within the definition of a subsidiary, it should be accounted for
as an associate under PAS 28, as a joint venture under PFRS 11 or as an investment under PAS
39, as appropriate.

Consolidation Procedures

Worksheet entries at the acquisition date

Pre-acquisition entries:

As noted in paragraph 15 of PAS 27, the pre-acquisition are required to eliminate the carrying
amount of the parent’s investment in the subsidiary and the parent’s portion of pre-acquisition
equity. The pre-acquisition entries then involve three areas:
 The investment account, shares in subsidiary, as shown in the financial statements of the parent.
 The equity of the subsidiary at the acquisition date (the pre-acquisition equity). The pre-
acquisition equity is not just the equity recorded by the subsidiary but includes the business
combination valuation reserve recognized on consolidation via valuation entries.
 Recognition of goodwill.

Calculating the NCI share of equity:

Non-controlling interest in the net assets consists of:

 The amount of those non-controlling interests at the date of the original combination
calculated in accordance with PFRS 3 Revised and;
 The non-controlling’s share of changes in equity since the date of the combination.

Under PFRS 3, all identifiable (i.e., excluding goodwill) assets and liabilities are recognized at
their respective fair values, including those corresponding to the non-controlling ownership
interest. This means that there is a step-up in value to equal the valuation being placed on the
enterprise indirectly by the new majority owner.

Under this approach, the non-controlling interest shown in a consolidated balance sheet will be
the non-controlling percentage times the net assets of the subsidiary as reported in the parent’s
consolidated balance sheet. Goodwill will be reported, as under partial goodwill or full-goodwill
method depending on the option use by the acquiring company.

Non-controlling interests should be presented in the consolidated balance sheet within equity, but
separate from the parent’s shareholders’ equity. Non-controlling interests in the profit or loss of
the group should be also presented separately.

PAS 27 states that income attributable to non-controlling interest be separately presented in the
statement of earnings or operations. Generally, this is accomplished by presenting net income

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before non-controlling interest, followed by the allocation to the non-controlling, and then
followed by net income.

Consolidated Financial Statements

Date of Acquisition

I- No Fair Value of NCI given

Company Z acquired 80% of Company Y for P10,000,000, carrying value of Company Y net assets
at time of acquisition being P6,000,000 and fair value of these net identifiable assets being
P8,000,000.

Determine the following:

1. Goodwill arising on consolidation is to be valued on the proportionate basis or “Partial Goodwill:

a. P1,600,000 c. P3,600,000
b. P2,000,000 d. P4,500,000

2. Non-controlling interest arising on consolidation is to be valued on the proportionate basis or

“Partial” Goodwill:
a. P1,200,000 c. P2,500,000
b. P1,600,000 d. P3,000,000

3. Goodwill arising on consolidation is to be valued on the full (fair value) basis or “Full/Gross-up”
Goodwill:
a. P1,600,000 c. P3,600,000
b. P2,000,000 d. P4,500,000

4. Non-controlling interest arising on consolidation is to be valued on the full (fair value) basis or
“Full/Gross-up” Goodwill:
a. P1,200,000 c. P2,500,000
b. P1,600,000 d. P3,000,000

Control Premium/Control Discount

A control premium is an amount that a buyer is usually willing to pay over the current
market price of a publicly traded company. If the consideration transferred is proportionally
more than the fair value of non-controlling interest, there is a control premium. On the other
hand, control discount will arise when there is a fire sale or lack of control (sometimes
called a non-controlling interest discount).

II- With Fair Value of NCI given and Control Premium

Entity Subsidiary has 40% of its share publicly traded on an exchange. Entity Parent Purchases the
60% non-publicly traded share in one transaction, paying P6,300,000. Based on the trading price of
the shares of Entity Subsidiary at the date of gaining control a value of P4,000,000 assigned to the
40% non-controlling interest (or fair value of non-controlling interest), indicating that Entity
Subsidiary has paid a control premium of P300,000. The fair value of Entity Subsidiary’s identifiable
net assets is P7,000,000 and a carrying value of P5,000,000.

Determine the following:

1. Goodwill arising on consolidation is to be valued on the proportionate basis or “Partial” Goodwill:

a. P1, 800,000 c. P3,300,000
b. P2,100,000 d. P4,120,000

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 2. Non-controlling interest arising on consolidation is to be valued on the proportionate basis or
“partial” Goodwill:
a. P2,000,000 c. P4,000,000
b. P2,800,000 d. P4,120,000

3. Goodwill arising on consolidation is to be valued on the full (fair value) basis or “Full/Gross-up”
Goodwill:
a. P1,200,000 c. P3,300,000
b. P2,100,000 d. P4,120,000

4. Non-controlling interest arising on consolidation is to be valued on the full (fair value) basis or
“Full/Gross-up” Goodwill:
a. P2,000,000 c. P4,000,000
b. P2,800,000 d. P4,120,000

5. Assuming the price paid amounted to P 6, 294, 000, which includes control premium of P 294, 000with
no fair value of non-controlling interest given. Goodwill arising on consolidation is to be valued on
the full (fair value) basis or “Full/Gross-up” Goodwill:
a. P2,100,000 c. P3,294,000
b. P3,300,000 d. P4,120,000

6. In relation to no. 5, non-controlling interest arising on consolidation amounted to:

a. P2,800,000 c. P4,000,000
b. P3,294,000 d. P4,120,000

III- Step- Acquisition: With FV of NCI & FV previously held equity interest in the
Acquiree/Subsidiary

Pares Company acquires 15 percent of Serap Company’s common stock for P500,000 cash and
carries the investment using the cost method. A few months later, pares purchases another 60 percent
of Serap Company’s stock for P2,160,000. At that date, Serap Company reports identifiable assets
with a book value of P3,900,000 and a fair value of P5,100,000 and it has liabilities with a book value
and fair value of P1,900,000. The fair value of the 25% non-controlling interest in Serap Company is
P900,000.

1. Goodwill arising on consolidation is to be valued on the proportionate basis or “Partial” Goodwill:

a. P84,000 c. P300,000
b. P100,000 d. P400,000

2. Non-controlling interest arising on consolidation is to be valued on the proportionate basis or

“Partial” Goodwill:
a. P300,000 c. P800,000
b. P500,000 d. P900,000

3. Goodwill arising on consolidation is to be valued on the full (fair value) basis or “Full/Gross-up”
Goodwill:
a. P84,000 c. P300,000
b. P100,000 d. P400,000

4. Non-controlling interest arising on consolidation is to be valued on the full (fair value) basis or
“Full/Gross-up” Goodwill:
a. P300,000 c. P800,000
b. P500,000 d. P900,000

5. The remeasurement gain or loss should be recognized to profit or loss account if 15% ownership
is a FVTPL (fair value through profit or loss) when the additional shares are acquired:
a. Zero c. P40,000 loss
b. P40,000 gain d. P68,000 loss

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 6. The reumeasurement gain or loss should be recognized to profit or loss account if 15% ownership
is a FVTOCI (fair value through other comprehensive income) when the additional shares are
acquired:
a. Zero c. P40,000 loss
b. P40,000 gain d. P68,000 loss

IV- Bargain Purchase Computation- Attributable entirely to the Acquirer (or Parent)

Parlor Company acquires 75% of Saloon Company’s common stock for P 225, 000 cash. At that
date, the NCI in Saloon has a book value of P 52, 500 and a fair value of P 82, 000. Also on that
date, Saloon reports identifiable assets with a book value of P 400, 000 and a fair value of P 510,
000, and it has liabilities with a book value and fair value of P 190, 000.

1. Gain on bargain purchase arising on consolidation if the fair value of net identifiable
assets is to be valued on the proportionate basis.
a. Zero c. P 15, 000
b. P 13, 000 d. P 17, 333

2. Gain on bargain purchase arising on consolidation if the fair value of net identifiable
assets is to be valued on the full (fair value) basis.
a. Zero c. P 15, 000
b. P 13, 000 d. P 17, 333

Sale of Subsidiary- Loss of Control of a Subsidiary or “Deconsolidation”

Control of a subsidiary may be lost as a result of a parent’s decision to sell its controlling interest
in the subsidiary issuing its shares to others. Control may be lost, with or without a change in
absolute or relative ownership levels, as a result of contractual arrangement or if the subsidiary
becomes subject to the control of the government, court, administrator, or regulator (e.g. through
legal reorganization or bankruptcy). Consistent with the approach taken for step acquisitions
(refer to Problem III) when control of a subsidiary is lost, and an interest is retained, that interest
is measured at fair value, and this is factored into the calculation of the gain or loss on disposal.
It should be noted that this change applies also to situations in which an entity loses joint control
of, significant influence over, another entity.

V-Deconsolidation

Pedro Company owns 80, 000 shares of Santa Corporation’s 100, 000 outstanding common
shares, acquired at book value. The December 31, 2008, consolidated balance sheet presented by
Pedro and Santa in the amount of P 600, 000. On January 1, 2009, Pedro sells 70, 000 shares of
Santa for P 490, 000. The fair value of Pedro’s remaining 10% interest in Santa is P 70, 000.
What amount of gain or loss, if any, should be recognized on the sale of Pedro’s shares resulting
in deconsolidation, and how much of that should be attributed to Pedro? Determine the gain or
loss on disposal (or deconsolidation) should be:
a. P 40, 000 loss b. P 80, 000 loss c. P 10, 000 gain d. P 80, 000 gain

VI- Sale of Subsidiary: Not Resulting in Loss of Control, No Additional Shares Issued

Padyak Company owns 80,000 shares of Sirkulo Corporation’s 100,000 outstanding common shares,
acquired at book value. The December 31, 2014, consolidated balance sheet presented by Padyak and
Sirkulo included net assets of Sirkulo in the amount of P600,000. On January 1, 2015, Padyak sells
10,000 share (10%) of its Sirkulo stock to unrelated parties for P70,000. Determine the gain or loss on
disposal of shares to be recognized in the profits or loss statement:
a. Zero b. P10,000 gain c. P10,000 loss d. P5,000 loss

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 VII- Sale of Subsidiary: Not Resulting in Loss of Control, with Additional Shares Issued

Padyak Company owns 80,000 shares of Sirkulo Corporation’s 100,000 outstanding common shares,
acquired at book value. The December 31, 2014, consolidated balance sheet presented by Padyak and
Sirkulo included net assets of Sirkulo in the amount of P600,000. On January 1, 2015, Sirkulo issues
25,000 additional shares of common stock to unrelated parties for P175,000. The amount to be credited to
“additional paid-in capital/share premium” account:
a. Zero b. P16,000 gain c. P10,000 loss d. P5,000 loss

VIII – Wholly-Owned

The financial statement for Goodwin, Inc. and Corr Company for the year ended December 31, 2014,
prior to Goodwin’s business combination transaction regarding Corr, follow (in thousands):

Goodwin Corr
Revenues P2,700 P600
Expenses 1,980 400
Net Income P 720 P200

Retained earnings, 1/1 P2,400 P400

Net income 720 200
Dividends (270) (0)
Retained earnings, 12/31 P2,850 P600

Cash P 240 P 220

Receivables and inventory 1,200 340
Buildings(net) 2,700 600
Equipment(net) 2,100 1,200
Total assets P 6,240 P 2,360

Liabilities P 1,500 P 820

Common stock 1,080 400
Additional paid-in capital 810 540
Retained earnings 2,850 600
Total Liabilities and stockholders’ equity P6,240 P2,360

On December 31, 2014, Goodwin issued P600 in debt and 30 shares of its P10 par value common stock to
the owners of Corr to purchase all of the outstanding shares of that company. Goodwin shares had a fair
value of P40 per share. Goodwin paid P25 to a broker for arranging the transaction. Goodwin paid P35 in
stock issuance costs. Corr’s equipment was actually worth P1,400 but its buildings were only valued at
P560.

1. If the combination is accounted for as an acquisition, what amount is the investment recorded on
Goodwin’s books?
a. P1,540
b. P1,800
c. P1,825
d. P1,860

2. Compute the consolidation revenues for 2014.

a. P3,300
b. P2,700
c. P1,540
d. P 720
3. Compute the consolidated expenses for 2014.

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 a. P1,980
b. P2,005
c. P2,015
d. P2,040

4. Compute the consolidated cash account at December 31, 2014.

a. P460
b. P435
c. P425
d. P400

5. Compute the consolidated building (net) account at December 31, 2014.

a. P2,700
b. P3,370
c. P3,260
d. P3,300

6. Compute the consolidated goodwill account at December 31, 2014.

a. P 0
b. P100
c. P125
d. P160

7. Compute the consolidated common stock account at December 31, 2014.

a. P1,080
b. P1, 380
c. P1,480
d. P2,280

8. Compute the consolidated additional paid-in capital at December 31, 2014.

a. P 810
b. P1,350
c. P1,675
d. P1,910

9. Compute the consolidated retained earnings at December 31, 2014.

a. P2,800
b. P2,825
c. P2,850
d. P3,425

IX- Push-down Accounting-Business Combination: Statutory Merger and Consolidation Approach

versus No push-down Accounting (Stock Acquisition Approach)

Prince Company acquires Duchess, Inc. on January 1, 2011. The consideration transferred exceeds the
fair value of Duchess’ net assets. On that date, Prince has a building with a book value of P 1, 2000, 000
and a fair value of P 1, 500, 000. Duchess has a building with a book value of P 400, 000 and a fair value
of P 500, 000.

1. If push-down accounting is used, what amounts in the Building account appear on Duchess’ separate
balance sheet and on the consolidated balance sheet immediately after acquisition?
a. P 400, 000 and P 1, 600, 000 c. P 400, 000 and P 1, 700, 000
b. P 500, 000 and P 1, 700, 000 d. P 500, 000 and P 2, 000, 000

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2. If push-down accounting is not used, what amounts in the Building account appear on Duchess’
separate balance sheet and on the consolidated balance sheet immediately after acquisition?
a. P 400, 000 and P 1, 600, 000 c. P 400, 000 and P 1, 700, 000
b. P 500, 000 and P 1, 700, 000 d. P 500, 000 and P 2, 000, 000

X-Partially-owned

Power Corporation acquired 70% of Silk Corporation’s common stock on December 31, 2014. Balance
sheet data for the two companies immediately following acquisition follow:

Power Silk
Cash P 44, 000 P 30, 000
Accounts Receivable 110, 000 45, 000
Inventory 130, 000 70, 000
Land 80, 000 25, 000
Buildings and equipment 500, 000 400, 000
Less: Accumulated depreciation (223, 000) ( 165, 000)
Investment in Silk Corporation stock 150, 500 0
Total assets P 791, 500 P 405, 000

Accounts Payable P 61, 500 P 28, 000

Taxes Payable 95, 000 37, 000
Bonds Payable 280, 000 200, 000
Common stock 150, 000 50, 000
Retained earnings 205, 000 90, 000
Total Liabilities and stockholders’ equity P 791, 500 P 405, 000

After the date of the business combination, the book values of Silk’s net assets and liabilities
approximated their fair value except for inventory, which had a fair value of P 85, 000, and land, which
had a fair value of P 45, 000. The fair value of the non-controlling interest was P 64, 500 on December
31, 2014. For each of the question below, indicate the appropriate total that should appear in the
consolidated balance sheet immediately after the business combination on the basis of full-goodwill
approach:

1. What amount of inventory will be reported?

a. P 179, 000 c. P 210, 500
b. P 200, 000 d. P 215, 000

2. What amount of goodwill will be reported?

a. P 0 c. P 40, 000
b. P 28, 000 d. P 52, 000

3. What amount total assets will be reported?

a. P 1, 081, 000 c. P 1, 196, 000
b. P 1, 121, 000 d. P 1, 231, 500

4. What amount of Investment in Silk will be reported?

a. P 0 c. P 150, 500
b. P 140, 000 d. P 215, 000

5. What amount of liabilities will be reported?

a. P 265, 000 c. P 622, 000
b. P 436, 500 d. P 701, 500

6. What amount will be reported as non-controlling interest?

a. P 42, 000 c. P 60, 900

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 b. P 52, 500 d. P 64, 500
7. What amount of parent’s share or controlling interest in retained earnings be reported?
a. P 295, 000 c. P 232, 000
b. P 268, 000 d. P 205, 000
8. What amount of consolidated retained earnings will be reported?
a. P 295, 000 c. P 232, 000
b. P 268, 000 d. P 205, 000

9. What amount of stockholders’ equity will be reported?

a. P 355, 000 c. P 419, 500
b. P 397, 000 d, P 495, 000

Subsequent to Date of Acquisition

I- Cost Model/Method versus Equity Model/Method

Pedro purchased 100% of the common stock of the Sanburn Company on January 1, 20x4, for P 500, 000.
On that date, the stockholders’ equity of Sanburn was P 380, 000. On the date of purchase, inventory of
Sanburn Company, which was sold during 20x4, was understated by P 20, 000. Any remaining excess of
cost over book value is attributable to patent with a 20-year life. The reported net income and dividends
paid by Sanburn Company were as follows:

20x4 20x5
Net income P 80,000 P 90,000
Dividends paid P 10,000 P 10,000

1. Using the cost method, which of the following amounts are correct?
Investment Income Investment Account Balance
20x4 December 31, 20x4

a. P 10, 000 P 500, 000

b. P 70, 000 P 570, 000
c. P 70, 000 P 550, 000
d. P 10, 000 P 550, 000

2. Using the cost method, which of the following amounts are correct?
Investment Income Investment Account Balance
20x5 December 31, 20x5

a. P 10, 000 P 500, 000

b. P 70, 000 P 570, 000
c. P 70, 000 P 550, 000
d. P 10, 000 P 550, 000

3. Using sophisticated (full) equity method, which of the following amounts are correct?
Investment Income Investment Account Balance
20x4 December 31, 20x4

a. P 55, 000 P 555, 000

b. P 55, 000 P 545, 000
c. P 90, 000 P 565, 000
d. P 90, 000 P 570, 000

4. Using sophisticated (full) equity method, which of the following amounts are correct?
Investment Income Investment Account Balance
20x5 December 31, 20x5

a. P 55, 000 P 555, 000

b. P 55, 000 P 545, 000
c. P 90, 000 P 620, 000
d. P 90, 000 P 570, 000

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 II- CNI under Entity Concept

For 20x6, Pyna reported P 500, 000 of net income from its own separate operations. This amount
excludes income relating to Syna, its 80% owned created subsidiary, which reported P 100, 000 of net
income and declared P 55, 000 of dividends in 20x6. What is the consolidated net income under the
economic unit/ entity concept?
a. P 536, 000 c. P 580, 000
b. P 544, 000 d. P 600, 000

III- CNI under Parent Concept

For 20x6, Pyna reported P 500, 000 of net income from its own separate operations. This amount
excludes income relating to Syna, its 80% owned created subsidiary, which reported P 100, 000 of net
income and declared P 55, 000 of dividends in 20x6. What is the consolidated net income under the
parent company concept?
a. P 536, 000 c. P 580, 000
b. P 544, 000 d. P 600, 000

IV – Comprehensive Problem

On January 1, 2015, Guess Company acquired 90% of Marciano Company in exchange for 5,400 shares
of P10 par common stock having a market value of P120,600. Guess and Marciano condensed balance
sheets on January 1, 2015 were as follows:

Assets Guess Company Marciano

Company
Cash P 30,900 P 37,400
Accounts receivable, net 34,200 9,100
Inventories 22,900 16,100
Equipment, net 179,000 40,000
Patents ----0---- 10,000
Total Assets P267,000 P112,600
Liabilities and Equities
Accounts payable P 4,000 P 6,600
Bonds payable 100,000 ----0----
Common stock, P10 par 100,000 50,000
Additional paid-in capital 15,000 15,000
Retained earnings 48,000 41,000
Total Liabilities and Equities P267,000 P112,600

At the date of acquisition, all assets and liabilities of Marciano Company have book value
approximately equal to their respective market values except the following as determined by appraisal
as follows:

Inventories (FIFO method) P 17,100

Equipment (net remaining life of 4 years) 48,000
Patents (remaining life of 10 years) 13,000

The following information relates to income and dividends:

Dividends paid Net income

Guess Company P 15,000 P 30,200
Marciano Company 4,000 9,400

Using the proportionate basis or partial goodwill method, compute the following:

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1. The investment balance on December 31, 2015:
a. P 0 c. P 122,160
b. P 120,600 d. P 125,460

2. Dividend income for 2015:

a. P 0 c. P 4,000
b. P 3,600 d. P 8,400

3. The non-controlling interest in net income on December 31, 2015:

a. P 0 c. P 610
b. P 540 d. P 940

4. The non-controlling interest on December 31, 2015:

a. P 10,600 c. P 12,010
b. P11,140 d. P 12,300

5. The profit attributable to equity holders of parent (or the income attributable to the parent) on
December 31, 2015:
a. P 26,600 c. P 36,000
b. P 32,090 d. P 44,100

6. The consolidated net income on December 31, 2015:

a. P 26,600 c. P 32,700
b. P 32,090 d. P 44,100

7. The consolidated retained earnings on December 31, 2015:

a. P 64,760 c. P 69,400
b. P 65,090 d. P 69,800

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