Chapter 15
Consolidated Financial
Statements- Subsequent
to Date of Acquisition
IFRS 10
UNIFORM ACCOUNTING POLICIES
 IFRS 10 requires that "a parent shall prepare
consolidated financial statements using
uniform
accounting
policies
for
like
transactions and other events in similar
circumstances" Thus, all entities in the group
shall ideally use the same accounting policies
for like transactions and other events.
 For example, on the measurement of property,
plant and equipment, if the group uses the
revaluation model, then all entities in the
group shall use the same valuation model to
measure their property, plant and equipment.
 Sometimes a subsidiary may have to adopt an
accounting policy that is different from those used
by the parent. In such cases and for the purpose
of consolidation, appropriate adjustments shall be
made to the financial statements of the subsidiary
to align its policy to those used in the consolidated
financial statements.
 For example, a subsidiary may have used the cost
model to measure the biological assets because
they did not adopt LAS 41. Agriculture If the
parent and its other subsidiaries all use the fair
value model for biological assets in accordance
with IAS 41, the financial statements of that
subsidiary shall be adjusted from the cost model to
the fair value model for biological assets, before
they can be included in the consolidated
financial statements.
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.
Consolidated FS 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 invertory and fixed assets
Intercompany losses may indicate an impairment that
requires recognition in the consolidated FS
CONSOLIDATED COMPREHENSIVE
INCOME
 Consolidated comprehensive income may be
computed using two approaches:
 A. Parent company approach
 B. Entity approach
 In the consolidated statement of comprehensive
income and retained earnings, consolidated
comprehensive income is allocated to noncontrolling interests (NCT) 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 wholly owned
subsidiary, all income of the parent and its
subsidiaries accrue to the parent company. For
partially owned subsidiary, a portion of its income
accrues to its no 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 computes and any
income assigned to NCL.
Illustration
 Assume that P Company owns 80 percent of the stock of S Company
which was purchased at book value. In 2017, S Company reported
comprehensive income of P50,000, while P Company reported
comprehensive income of P120,000 including dividend income from
Company of P20,000. Consolidated comprehensive income for 2017 is
computed as follows:
P Company Comprehensive Income
P120,000
Dividend Income
(20,000)
Comprehensive Income From own operations
100,000
S Company Comprehensive Income
50,000
Total
P150,000
Less: NCI Comprehensive Income (P50,000x20%)
Consolidated Comprehensive Income
10,000
P140,000
Entity Approach
 When a subsidiary is wholly owned by the parent, the
consolidated CI computed similarly as that of 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 comprehensive income.
 Stated differenly. 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.
Using the data in the illustration for P Corporation and S
Company, consolidated comprehensive income (CI) is
computed and allocated as follows:
P Company Comprehensive Income
P120,000
Dividend Income
(20,000)
Comprehensive Income
from own operations
100,000
S Company CI from own operations
50,000
Consolidated CI
P150,000
Attribute to NCI (P50,000x20%)
10,000
Attribute to Parent
P140,000
 Consolidated Cl 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 (IFRS 10) does not
prescribe the approach to be used in computing
consolidated CL However, since IFRS 3 provides that
non-controlling interest (NCD) is to be presented in the
consolidated statement of financial position as part of
equity, then the entity concept will be used throughout
the chapter (unless stated).
ACCOUNTING FOR INVESTMENT IN
SUBSIDIARY
 IAS 27 provides that in the separate financial
statements of an entity who have investment in
subsidiaries, joint ventures and associates it may
elect to account for its investments either
 a.) at cost, or
 b.) at fair value in accordance with IFRS 9. financial
instruments; or
 c.) using the equity method as described in PAS 28
Cost Method
 The cost method is used when the acquirer
(Parent) owns directly or indirectly more than half
of the voting power of the acquire (Subsidiary),
thereby exercising control (AS 271).
 Under this method, the Investment in Subsidiary
account is retained at its original cost-of acquisition
balance Income on the investment is limited to
dividends received from the subsidiary. This method
is usually used in practice, therefore detailed
explanation will be presented in this chapter
involving
the
preparation
of
consolidated
statements subsecquent to acquisition.
Fair Value Method
 IRS 10, IFRS 12 and IAS 27 require a parent that is an
investment entity to measure its investments in particular
subsidiaries at fair value through profit or loss in
accordance with IFRS 9 (or IAS 39) instead of
consolidating those subsidiaries in its consolidated and
separate financial statements. An investment entity is
defined as an entity that:
 a) Obtains funds from one or more investors for the
purpose of providing those investors with investment
management services;
 b) Commits to its investors that its business purpose is to
invest funds solely for returns from capital appreciation,
investment income or both and
 c) Measures and evaluates the performance
substantially all of its investments on a fair value basis
of
A parent of an investment entity has to
consolidate all entities that it controls.
Example
 Entity X a vehicle manufacturer is the parent
company of investment entity B. B has holdings in
various companies that are not active in the
automobile sector. While X is not an investment entity
pursuant to IRS 10, B is classed as an investment
entity pursuant to IFRS 10. For purposes of this
example, it should be assumed that both X and B
must prepare consolidated financial statements,
 Analysis Since B is an investment entity, it must report
companies in which it holds a controlling interest at
fair value through profit or loss. Conversely, X must
fully consolidate all its subsidiaries, including B.
Equity Method
The equity method is used when the
investor/acquirer owns 20% or more
(less than 50%) of the voting power of
the
investee/acquiree,
thereby
exercising significant influence over
the operations of the investee. This
method is applied to investments in
associates and joint ventures.
CONSOLIDATION: WHOLLY OWNED SUBSIDIARYAcquisition at Book Value
FIRST YEAR AFTER ACQUISITION
 Assume that on January 2, 2017, Pete Corporation acquires all
the common stock of Sake Company for P300,000. At that time,
Sake Company has P200,000 of common stock outstanding and
retained earnings of P100,000. Analysis of the acquisition is as
follows:
Price Paid
P300,000
Less: Book Value of interest acquired (100%)
Common Stock
P200,000
Retained Earnings
P100,000
Excess
P300,000
P
0
On December 31,2017, Sake Company reported the following results of its
operations:
Net Income
P50,000
Dividends Paid
P30,000
Parent Company entries
 Using the cost Method, Pete Corporation would make the
following entries:
Jan. 2 Investment in Sake Company
300,000
Cash
300,000
To record the purchase of Sake Company stock
Dec. 31
Cash
Dividend Income
30,000
30,000
To record 100% of dividend from Sake Company
After posting the above journal entries, Pete Corporation’s
investment in Sake Company and Dividend Income accounts will
have a balance of;
Investment in Sake Company
P300,000
Dividend Income
P 30,000
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 stockholders'
equity at date of acquisition
Using the above procedures, the working paper elimination
entries for Pete Corporation and subsidiary on December 31,
2017, one year after acquisition, are as follows:
E(1) Dividend Income
P30,000
Dividends Declared- Sake Company
To eliminate inter-company dividends
E(2) Common Stock- Sake Company
Retained Earnings- Sake Company
P30,000
Using the above procedures, the working paper
elimination entries for Pete Corporation and subsidiary
on December 31, 2017, one year after acquisition, are
as follows:
E(1) Dividend Income
`P30,000
Dividends Declared- Sake Company
P30,000
To eliminate inter-company dividends
E(2) Common Stock- Sake Company
Retained Earnings- Sake Company
P200,000
100,000
Investment in Sake Company
To eliminate investment and equity accounts
at date of acquisition
P300,000
Consolidation Working Paper-First Year
 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 Retained
Earnings, and the Statement of Financial Position
(FP).
 Other format such as the trial balance approach
format may also be used This fomat has the following
columns: Trial Balances of the parent and the
subsidiary, eliminations and adjustments. Statement
of CI, NCI (if any), Controlling Retained Earnings, and
the Consolidated Statement of Financial Position.
Working Paper Relationships
 The following aspects of the working paper for
consolidated
financial
statements
of
Pete
Corporation and Subsidiary 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
earnings 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 carried 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 Cl and consolidated retained earnings
in the working paper may be verified as follows, to assure
their accuracy:
Consolidated CI:
Pete Corporation CI
P170,000
Sake Company CI
50,000
Dividend Income
Consolidated CI
(30,000)
P190,000
Consolidated Retained Earnings:
Retained of Pete Corporation, December 31
P410,000
Add: Pete’s share of net increase in Sake’s
Retained earnings [(P50,000-P30,000)x100%]
20,000
Consolidated Retained Earnings
P430,000
CONSOLIDATED FINANCIAL
STATEMENTS
The
consolidated
statement
of
comprehensive
income
and
retained
earnings, and statement of financial position
of Pete Corporation and Subsidiary for the
year ended December 31, 2017, are
presented on the next page. The amounts of
the consolidated financial statements are
taken from the consolidated column of the
consolidation working paper (Illustration 151).
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 year's consolidation procedures
begin as if there had never been a previous
consolidation.
Consolidation two years after combination is illustrated
by continuing the example of Pete Corporation and
Sake Company. On December 31, 2018, Sake
Company reported net income of P75,000 and paid
dividends of P40,000.
Parent company entries
 Pete Corporation will only record the dividends
received from Sake Company by the following entry
on December 31, 2018:
Cash
Dividend Income
P40,000
P40,000
To record dividends received from Sake (100%)
On December 31, 2018, the balance of investment in
Sake Company account and dividend income
account are:
Investment in Sake Company (at original Cost)
Dividend Income
40,000
P300,000
Working paper elimination entries
Two elimination entries to be presented in the
working paper are as follows:
E(1) Dividend Income
40,000
Dividend Declared-Sake Company
40,000
To eliminate inter-company dividends
E(2) Common Stock- Sake Company
200,000
Retained Earnings- Sake Company 100,000
Investment in Sake company
To eliminate investment and subsidiary’s
equity accounts at date of acquisition
300,000
Take note that after posting the above elimination
entries in the working paper, the Retained Earnings
account of Sake Company is not fully eliminated. The
difference of P20,000 represents Pete Corporation's
share in the undistributed earnings of Sake Company in
prior years [(P50,000-P30,000) x 100%). This is because the
earnings of the subsidiary under the cost method are
not recorded by the parent company.
Consolidation Working Paper-Second year. After
posting the elimination entries E(1) and E(2) in the
consolidation working paper, the working paper as
completed is shown below. All the working paper
relationships discussed in relation with Illustration 15-1
continue in the second year as well
CONSOLIDATION: PARTIALLY OWNED
SUBSIDIARY - Acquisition at Book Value
When a subsidiary is 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).
FIRST YEAR AFTER ACQUISITION
 Assume that on January 2, 2017, Pete Corporation purchases
80% of the common stock of Sake Company for P240,000. All
other data are the same as those used in the previous
example. The following D & A schedule was prepared on the
date of acquisition:
Consolidation Working Paper - First Year
 The working paper for consolidated statements for
Pete Corporation and partially owned subsidiary for
the year ended December 31, 2017 is shown on the
next page (Illustration 15-3). The following should be
noted in the working paper.
1. Although only 80% of Sake Company stock is owned
by Pete Corporation, 100% of sales, cost of goods sold
and operating expenses are carried to the
consolidated column. This is because the financial
statements are considered to be those of a
consolidated entity. This approach requires that the
NCI in Call of subsidiary of P10,000 be subtracted to
arrive at the consolidated net income attributable to
parent of P190,000.
2. Elimination entry (2) eliminates the investment
account balance at its acquisition cost (P240,000). This
results to the elimination of the equity accounts of
Sake Company and the recognition of the NCI of
P60,000.
3. Elimination entry (1) eliminate the inter-company
dividends and NCI share of dividends paid by Sake
Company.
4. Elimination entry (3) recognizes the NCI in CI of
subsidiary for year 2017.
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 the interest
acquired from 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.
 The following elimination procedures may be used to
eliminate inter-company transactions when the
investment cost is not equal to the book value of the
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 Chapter 15.
(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.
FIRST YEAR AFTER COMBINATION-2017
 Using the data in our previous example, assume that Pete
Corporation purchases 80% of the common stock of Sake
Company on January 2, 2017, for P300,000. Assume
further that on the date of the combination, all assets and
liabilities of Sake Company have fair market values
equal to their book values, except for the following:
 For the first year immediately after the acquisition,
Sake Company reported the following:
Comprehensive Income
P50,000
Dividend Income
30,000
Parent Company Entries
During 2017, under the cost method, Pete Corporations records
the following entries on its books:
Jan. 2 Investment in Sake Company
Cash
300,000
300,000
To record purchase of Sake Company Stock
Dec. 31 Cash
24,000
Dividend Income
24,000
To record dividend received from Sake Company
(P30,000x80%)
 The working paper elimination entries for Pete Corporation and
subsidiary on December 31, 2017, are as follows:
E(1) Dividend Income
NCI
24,000
6,000
Dividends Declared- Sake Company
30,000
To eliminate inter-company dividends and minority
Interest share of dividends (P30,000x20%)
E(2) Common Stock- Sake Company
200,000
Retained Earnings- Sake Company 100,000
Investment in Sake Company
NCI
240,000
60,000
Consolidation Working Paper-First Year
The working paper for consolidated
financial statements for Pete Corporation
and partially owned subsidiary, Sake
Company for the year ended December
31, 2017 showing the five elimination
entries.
The following are the features of the working paper for the second year
after acquisition:
1. Elimination entry (1) eliminates the total dividend
declared by Sake Company against the dividend
income recorded by the parent and the share of the
NČI.
2. Elimination entry (2) eliminates the total equity
accounts of Sake Company against the investment
account (parent's interest) and NCI.
3. Elimination entry (3) allocates excess by adjusting the
assets of Sake Company to fair values.
4. Elimination entry (4) amortizes the allocated excess.
5. Elimination entry (5) recognizes the NCI in the Cl of
Sake Company, adjusted for amortization and
depreciation.
Second year after combination-2018
Consolidation procedures in the second
year follow the same procedures in the first
year. From our previous example, assume
that on December 31,2018, Sake Company
showed the following results of operations:
Comprehensive Income
P75,000
Dividends Paid
P40,000
Parent company entries
 On December 31,2018, Pete Corporation under the
cost method of accounting would record only the
dividends received from Sake Company by the
following entry:
Cash
32,000
Dividend Income
32,000
To record dividends received from sake company
SUBSIDIARY THAT HAS A DIFFERENT
REPORTING DATE
 IFRS 10 generally requires that "the financial statements of the
parent and its subsidiaries used in the preparation of the
consolidated financial statements shall be prepared as of the
same reporting date. When the reporting date of the parent is
different from that of a subsidiary, the subsidiary prepares for
consolidation purposes, additional financial statements as of the
same date as the financial statements of the parent unless it is
impracticable to do so."
 However, IFRS 10 permits consolidation of a subsidiary's financial
statements with a different reporting date, provided that the
difference between the reporting dates of the parent and any of
its subsidiaries shall be no more than 3 months. For example, if
the financial year ended of a parent is 31 December 2016, it may
consolidate the accounts of a subsidiary with a financial year
ended 30 September 2016 or with a financial year ended 31
March 2017 or any financial year ended in between those dates
and the date of the parent's financial statements.
In practice, one way of consolidating the financial
statements of a subsidiary with a different reporting
date is to adjust the subsidiary's financial statements
(for the purpose of consolidation only) so that its
revised financial statements have a financial year that
coincides with the year end of the parent. For this
purpose, management accounts for the period of the
difference in dates may be required to make those
adjustments. The alternative way is to consolidate the
subsidiary's accounts as they stand and adjust only the
effects of significant events or transactions that
occurred in the period of the difference in dates.
Irrespective of which way the financial statements of
the subsidiary are to be consolidated, it is important
that the length of the reporting period and any
difference in reporting dates shall be the same from
period to period.
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 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 IFRS
 (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
 3 subsidiary at the date the subsidiary is
deconsolidated The carrying amount of the noncontrolling 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 of 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. There 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 reduction from additional paid-in capital. If the
additional paid-in capital is inadequate, the
Retained Earnings should be debited.