ADVANCED FINANCIAL ACCOUNTING AND REPORTING
Consolidated Financial Statements (PFRS 10)
Consolidated Financial Statements
These are financial statements of an entity
with multiple divisions or subsidiaries.
Requirement
to
Prepare
Consolidated
Financial Statements
A parent is required to present
consolidated financial statements, except if:
1. It meets all the following conditions:
• It is a 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
• Its debt or equity instruments are not
traded in a public market
• It did not, nor is in the process of filing,
financial statements for the purpose of
issuing instruments to the public
• Its ultimate or any intermediate parent
produces IFRS compliant consolidated
financial statements available for
• public use.
2. It is a post or long term-employment benefit
plan to which IAS 19 Employee Benefits
applies
3. It meets the criteria of an investment entity
Control Model
An investor determines whether it is a
parent by assessing whether it controls the
investee. An investor is required continuously to
reassess whether it controls an investee. An
investor controls an investee if it has all of the
following:
1. Power over the investee
2. Exposure, or rights, to variable returns from
its involvement with the investee
3. The ability to use its power, to affect the
amount of the investor’s returns
not recorded on the books of either the parent or
the subsidiary company.
Overview of Eliminating Entries
1. Eliminating entry #1 - To eliminate the
investment account from the parent
company’s statement of financial position
against the stockholders’ equity accounts
in the statement of financial position of the
subsidiary.
2. Eliminating entry #2 - To allocate excess by
adjusting the net assets to their fair values.
3. Eliminating entry #3 - To eliminate the
Dividend Income account and minority
share of dividends against the dividend
declared by the subsidiary.
4. Eliminating entry #4 - To assign to the noncontrolling stockholders their share of the
increase in the subsidiary’s adjusted
undistributed earnings that occurred
between the acquisition date and the
beginning of the current period.
5. Eliminating entry #5 - To amortize the
allocated excess to identifiable assets.
6. Eliminating entry #6 - To eliminate the
intercompany sale of inventory.
7. Eliminating entry #7 - To eliminate the
unrealized inventory profit.
8. Eliminating entry #8 - To eliminate the
realized inventory profit.
9. Eliminating entry #9 - To eliminate the
unrealized gain on intercompany sale of
fixed asset
10. Eliminating entry #10 - To eliminate excess
depreciation
11. Eliminating entry #11 - To recognize the
NCI in the subsidiary’s net income for the
year.
Note:
1. Eliminating entry nos. 1 and 2 only for consolidated statement of financial position
at acquisition date
2. Eliminating entry no. 4 exists only for consolidated financial statements two
reporting dates after the date of acquisition
and beyond
Note: Generally, statements are to be
consolidated when a parent company owns over
50% of the voting ordinary shares of another
company thereby having controlling interest.
Eliminating Entries
These are journal entries made on the
consolidation
working
papers
to
effect
intercompany adjustments and eliminations on the
consolidated financial statements. These appear
only on the consolidation working papers and are
Consolidated Statement of Financial Position
at Acquisition Date
This financial statement is unique because
it is the first consolidated financial statement that
can be prepared. At the acquisition date, no other
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ADVANCED FINANCIAL ACCOUNTING AND REPORTING
Consolidated Financial Statements (PFRS 10)
transactions have occurred besides the business
combination.
Measurement of Non-Controlling Interest
The following are the options provided by
the Standard in measuring the non-controlling
interest, in the order of priority:
1. At fair value (usually given); or
2. At
the
non-controlling
interest’s
proportionate share of the acquiree’s
identifiable net assets, which is computed
as follows:
=
(Consideration
given
/
Percentage ownership of parent over
subsidiary) * (1 - Percentage ownership of
parent over subsidiary
General Formula for Constructing Eliminating
Entry Nos. 1 and 2
Fair
Value
Parent
>50%
NCI
<50%
Fair value of
subsidiary
A
B
C
- Book value of
interest acquired
D
E
F
= Excess
G
H
I
- Adjustment of
identifiable
accounts
(e.g., Inventory,
Land, Building,
etc.)
J
= Goodwill (Gain
from bargain
purchase)
K
6. F = E - D
7. G = A - D
8. H = B - E
9. I = C - F
10. J or Allocation of excess to adjust the net
assets to their fair value = Fair value of
identifiable account to be adjusted - Book
value of identifiable account
11. K = G - J
Eliminating Entry No. 1
The purpose of this eliminating entry is to
eliminate the reciprocal accounts found in the
books of the acquirer (Investment in Subsidiary)
and acquiree (equity accounts). Also, it allows for
the establishment of the initial balance of the NonControlling Interest account. Of course, if the
acquiree is a wholly-owned subsidiary, there will
be no NCI.
Entry: Dr. Share capital - acquiree, Share
premium - acquiree, Retained earnings - acquiree;
Cr. Investment in subsidiary (E), Non-controlling
interest (F)
Eliminating Entry No. 2
The purpose of this eliminating entry is to
allocate the excess of the fair value of the
subsidiary over the book value of interest acquired
to identifiable accounts whose fair values exceed
the corresponding book values. Also, it allows for
the establishment of the Goodwill or Gain from
Bargain Purchase account.
Entry: Dr. Identifiable accounts (J),
Goodwill (balancing figure or K); Cr. Investment in
subsidiary (H), Non-controlling interest (I), Gain
from bargain purchase (balancing figure or K)
1. A = Consideration given / Percentage
ownership of parent over subsidiary
2. B = Consideration given
3. C = Fair value of NCI or NCI’s proportionate
share of the acquiree’s identifiable net
assets
4. D = Acquiree’s: Share capital + Share
premium + Retained earnings + Other
equity accounts
5. E = D * Percentage ownership of parent
over subsidiary
Consolidated
Financial
Statements
Subsequent to Date of Acquisition
These statements may be affected by the
other eliminating entries aside from nos. 1 and 2
since transactions have already been entered into
between the date of acquisition and such date after
the acquisition.
Note: Whenever a parent consolidates
statements, it has to use a different consolidation
working paper and not just continue the previous
one. Therefore, some entries will have to be
repeated in order to effect proper consolidation.
Eliminating Entry No. 3
The purpose of this eliminating entry is to
eliminate the effect of distribution of dividend by
the acquiree since under the consolidated financial
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ADVANCED FINANCIAL ACCOUNTING AND REPORTING
Consolidated Financial Statements (PFRS 10)
statements, the parent and subsidiary are
considered as one entity.
Entry: Dr. Dividend income (acquirer), Noncontrolling interest (balancing figure); Cr.
Dividends declared - acquiree
Eliminating Entry No. 4
This entry is only made if after the
acquisition date, at least one reporting period has
already passed before the current reporting period.
Its purpose is quite similar to eliminating entry no.
11. The only difference is that in this entry, the
earnings being referred to are those from prior
periods.
Formula:
Retained earnings - acquiree, beginning of
current period
Retained earnings - acquiree, date of
acquisition
=
Increase in earnings - prior year
Amortization of allocated excess in prior
years
=
Adjusted undistributed earnings
*
Percentage ownership of NCI over
subsidiary
=
Prior earnings assignable to NCI
Entry: Dr. Retained earnings - acquiree
(prior earnings assignable to NCI); Cr. NCI
Upstream Intercompany Sales
These are those sales made
subsidiaries to the parent company.
from
Unrealized Gross Profit
It exists in the ending inventory of the
consolidated entity whenever there is an
intercompany sale of inventory during the current
period but the inventory was left unsold in the
ending inventory of the buyer. This gross profit will
only be realized once the involved inventory is
sold.
Intercompany Sale Transaction Analysis
Selling
Price
Cost
Gross
Profit
Beginning
inventory
A
B
C
+ Sales
D
E
F
- Ending
inventory
G
H
I
= Cost of goods
sold
J
K
L
Eliminating Entry No. 5
Since the identifiable net assets are
already adjusted to fair value, it is just right to
adjust their depreciation, amortization, effects on
cost of goods sold, etc. because in such
transactions, the acquiree is still using the book
values.
Entries:
1. Inventory: Excess is amortized as the
inventory items are sold - Dr. Cost of goods
sold; Cr. Inventory
2. Depreciable PPE: Excess is amortized as
the property is depreciated - Dr. Operating
expense; Cr. PPE (net)
3. Any PPE (depreciable or non-depreciable):
Excess is amortized when the asset is sold
or disposed - Dr. Gain on sale of PPE; Cr.
PPE
Downstream Intercompany Sales
These are those made from a parent
company to its subsidiaries.
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1. A = Intercompany selling price of beginning
inventory
2. B = Cost of beginning inventory before
intercompany sale
3. C = A - B = A * Intercompany gross profit
rate = Gross profit realized during the
current period considering FIFO method is
used
4. D = Intercompany sales during the current
period
5. E = Cost of inventory (subject of
intercompany sale) from outsiders
6. F = D - E = F * Intercompany gross profit
rate
7. G = Intercompany selling price of ending
inventory
8. H = Cost of ending inventory before
intercompany sale
9. I = G - H = G * Intercompany gross profit
rate = Unrealized gross profit at the end of
the reporting period
10. J = A + D - G
11. K = B + E - H
12. L = C + F - I
ADVANCED FINANCIAL ACCOUNTING AND REPORTING
Consolidated Financial Statements (PFRS 10)
Eliminating Entry No. 6
Since, the parent and the subsidiary are
treated as one under the consolidated financial
statements, the transactions of the consolidated
entity with itself will have to be eliminated. The
entry will be the same whether there has been a
downstream or an upstream intercompany sale.
Entry: Dr. Sales (D); Cr. Cost of goods sold
Eliminating Entry No. 7
For example, the parent acquired a certain
amount of inventory from the subsidiary. The
subsidiary recognizes gross profit in its books
arising from that sale; but the inventory is still in the
ownership of the consolidated entity at the end of
the reporting period. Therefore, such gross profit is
still unrealized and will have to be eliminated.
Entry: Dr. Cost of goods sold (I); Cr.
Inventory
Eliminating Entry No. 8
Continuing the example in eliminating entry
no. 7, the parent sold the involved inventory to
outsiders during the second year. It recognized
gross profit on such sale based on:
1. The selling price to the external parties;
and
2. The cost when the inventory was sold to it
by the subsidiary (intercompany sale).
The difference between the original cost of
the inventory and the intercompany selling price is
not yet recognized as gross profit. Therefore, an
eliminating entry has to be made for the realized
gross profit.
Entry:
1. Downstream sale - Dr. Retained earnings,
Jan. 1 - acquirer (C); Cr. Cost of goods sold
2. Upstream sale - Dr. Retained earnings,
Jan. 1 - acquirer (C * percentage ownership
of parent over subsidiary), Non-controlling
interest (balancing figure); Cr. Cost of
goods sold (C)
Eliminating Entry No. 9
This is with regard to the intercompany sale
of PPE. Since the parent and the subsidiary are
considered as one under the consolidated financial
statements, any gain or loss they earn or incur from
intercompany sale of PPE will have to be
eliminated. Such gain or loss is considered
unrealized until the said PPE is sold to an external
party or as the asset is being depreciated.
Entry: Dr. PPE (balancing figure), Gain on
sale of PPE (unrealized); Cr. Accumulated
depreciation (balance that would have been show
had the PPE not been sold)
Eliminating Entry No. 10
For example, the PPE was sold by the
Parent to its subsidiary at a gain. The subsidiary is
now depreciating the PPE based on the cost when
the latter was sold by the parent to the former
which is higher than the original historical cost of
the PPE. Therefore, there is excess depreciation
that will have to be eliminated,
Entry: Dr. Accumulated depreciation
(excess depreciation); Cr. Depreciation
Eliminating Entry No. 11
Its purpose is to recognize the share of the
non-controlling interest in the comprehensive
income of the acquiree.
Formula:
Comprehensive income from own
operations - acquiree
Amortization of excess
+
Realized intercompany profit in the
beginning inventory from upstream
sale
Unrealized profit in the ending inventory
from upstream sale
Unrealized gain in the upstream sale of
PPE
+
Excess depreciation on PPE acquired
through a downstream sale
=
Realized comprehensive income from own
operations - acquiree
*
Non-controlling interest’s percentage
ownership over the subsidiary
=
Realized comprehensive income
attributable to NCI
Entry: Dr. NCI in CI of subsidiary; Cr. Noncontrolling interest
Consolidated
Comprehensive
Income
Attributable to the Acquirer
Comprehensive income from own
operations - acquirer
Dividend income - acquirer.
+
Realized intercompany profit in the
beginning inventory from
downstream sale
Unrealized profit in the ending inventory
from downstream sale
Unrealized gain in the downstream sale of
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ADVANCED FINANCIAL ACCOUNTING AND REPORTING
Consolidated Financial Statements (PFRS 10)
+
=
+
=
PPE
Excess depreciation on PPE acquired
through an upstream sale
Realized comprehensive income from own
operations - acquirer
Realized comprehensive income from own
operations - acquiree
Non-controlling interest’s percentage
ownership over the subsidiary
Consolidated comprehensive income
attributable to the acquirer
Consolidated Retained Earnings
Retained earnings, reporting date acquirer
+
Acquirer’s share in the adjusted
undistributed earnings of the
acquiree
=
Consolidated retained earnings, reporting
date
or
+
=
Retained earnings, beginning of reporting
period
Consolidated comprehensive income
attributable to the acquirer
Dividends paid - acquirer
Consolidated retained earnings, reporting
date
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