IFRS III- C3- consolidation ABC method.ppt

Chapter 3
Nguyễn Thị Thu Hiền
1

3
1. Elimination of Investment in a Subsidiary (Entry 1)
2. Amortization of fair value differential (Entry 2)
3. Goodwill Impairment Tests (Entry 3)

4
1. Elimination of Investment Account
 Investment account is eliminated
 To ensure that the investment account must be zero
 Substituted with subsidiary’s identifiable net assets and goodwill
(residual)
 Rationale: Avoid recognizing assets in two forms (investment in
parent’s statement of financial position and individual assets and
liabilities of subsidiary)
Share of book
value of
subsidiary’s net
assets at
acquisition date
+
Share of excess
of fair value
over book value
of identifiable
net assets
+
Goodwill
Consideration
transferred by
parent =
Eliminated against
subsidiary’s share
capital, pre-
acquisition retained
earnings and pre-
acquisition other
equity items
What the parent is paying for

5
Illustration 1: Elimination of Investment
Illustration
On 8 August 2010, Parent Co. bought 100% interest in subsidiary for $200,000.
At the date of acquisition, Subsidiary Co. had the following:
Share capital: $50,000
Retained earnings: $30,000
Equity: $80,000
At acquisition date, Subsidiary Co. had an unrecognized intangible asset had a
fair value of $50,000. Tax rate was 20%

6
Parent Subsidiary
Consolidation
adjustments
Consolidated Statement of financial
position
Dr Cr
Assets
Investment in
Subsidiary
200,000 200,000 0
Goodwill (Note 2) 80,000 80,000
Other net assets
(Note 1)
300,000 80,000 50,000 10,000 420,000
500,000 80,000 130,000 210,000 500,000
Equity
Share capital 100,000 50,000 50,000 100,000
Retained earnings 400,000 30,000 30,000 400,000
500,000 80,000 80,000 0 500,000
210,000 210,000

7
Note 1:
Increase in other net assets due to recognition of intangible asset 50,000
Decrease in other net assets due to recognition of deferred tax liability (10,000)
Net increase in other net assets 40,000
Note 2:
Goodwill is excess of the investment amount over the FV of identifiable net assets
Investment in Subsidiary 200,000
Book value of equity or net assets (80,000)
Fair value of intangible asset 50,000
Book value of intangible asset 0
Excess of fair value over book
value
50,000
Deferred tax effects (10,000)
(40,000)
Goodwill 80,000

8
CJE1: Elimination of investment in subsidiary
Dr Share capital 50,000
Dr Retained earnings 30,000
Dr Goodwill 80,000
Dr Intangible asset 50,000
Cr
Investment in
Subsidiary
200,000
Cr Deferred tax liability 10,000
210,000 210,000
Re-enacting CJE
• Building blocks of consolidation worksheet are the legal entity financial
statements of parent and subsidiary
• CJE 1 has to be re-enacted at each reporting date as long as Parent has control
over subsidiary
• Each consolidation process is a fresh-start approach

Ngày 1/1/X0: Công ty M phát
hành 10 triệu CP, mệnh giá 10.000
đ/CP để mua 75% cổ phần của
công ty C. Giá thị trường cổ phần
M là 15.000 đ/CP. Giá trị sổ sách
và giá trị hợp lý tại ngày mua của
công ty C như sau: (Bảng đvt: tỷ
đồng).
Thí dụ 1
GTSS GTHL
Tiền 20 20
HTK 20 40
TSCĐ 40 90
Nợ phải trả (20) (20)
NTT 0 (20)
Tài sản thuần 60 140
Vốn GCSH (40)
LNCPP (20)
Tổng VCSH (60)

10
Ngoài ra tại ngày mua, C còn một khoản nợ tiềm tàng 20 tỉ đồng
đã đủ điều kiện ghi nhận là dự phòng nợ phải trả , và một bằng
phát minh sáng chế thỏa mãn điều kiện ghi nhận 50 tỉ đồng. Thuế
suất thuế TNDN là 20%
Yêu cầu: Xác định LTTM trong 2 trường hợp
(1) Giá trị khoản NCI được xác định trên tài sản thuần theo PP tỉ
lệ.
(2) Giá trị khoản NCI được xác định theo giá trị hợp lý (Bên KKS
đang nắm giữ 2,5 triệu cổ phiếu công ty C, mệnh giá 10.000 đ/CP,
giá thị trường hiện tại 20.000 đ/CP).
Thí dụ 1 (tt).

GTSS GTHL CL
Tiền 20 20 0
HTK 20 40 20
TSCĐ 40 90 50
R/D 0 50 50
Nợ phải trả (20) (20) 0
NTT 0 (20) (20)
DTL (20)
Tài sản thuần 60 140
Vốn GCSH (40)
LNCPP (20)
Tổng VCSH (60)
Thí dụ 1 (tt).

12

13
2. Amortization of fair value differential
(Subsequent to Acquisition)
• At acquisition date, we recognize:
– Fair value of identifiable net assets of acquiree as at
acquisition date,
– Intangibles assets, contingent liabilities,
– Deferred tax assets or liabilities on the above, and
– Goodwill as a residual

14
• In subsequent years:
– Subsequent extinguishment of assets and liabilities of subsidiary
must be determined based on the fair values at acquisition date.
– Therefore, subsequent amortization, depreciation and cost of
sales of acquired assets are determined based on fair value as at
acquisition date
– Elimination of consideration transferred, recognition of fair value
adjustments and amortization entries must be repeated until:
i. Date of disposal of the investment in subsidiary; or
ii. Date when control is lost

15
• In subsequent years (cnt).:
 Acquisition method only recognizes fair value at critical event: acquisition date
 New internally-generated goodwill or subsequent appreciation in fair values
are not recognized subsequent to acquisition date
 Since net assets are carried at book value (carrying amount) in the separate
financial statements, the subsequent amortization/depreciation/disposal are
adjusted in the consolidation worksheet
(FV – BV) adjustment
to expense
=
FV of expense
in consolidated
financial
statements
BV of expense in
separate
financial
statements
+
Adjusted in consolidation
worksheet

16
Thí dụ 1 (tt): Chênh lệch GTHL ngày mua.
Cho biết:
1. HTK bán ra trong các năm X0,và X1 lần lượt là: 40% và 35%, năm X3 công ty
con lập dự phòng giảm giá cho số hàng còn lại (giảm 20% so với giá gốc).
2. PPE khấu hao tuyến tính 5 năm
3. R/D khấu hao 3 năm, cuối năm X1 công ty con ghi nhận là TSVH với giá trị 45
tỷ đ
4. Nợ tiềm tàng được công ty con chính thức ghi nhận là dự phòng nợ phải trả
vào năm X2 với giá trị 15 tỷ đồng
Book value Faire value CL
Inventory 20 40 20
PPE 40 90 50
R/D 0 50 50
Contingent L 0 (20) (20)
DTL (20)

17
Illustration 2:
Amortization of Fair Value Differentials
• P Co. paid $6,200,000 and issued 1,000,000 of its own shares to acquire 80% of
S Co. on 1 Jan 20×5
• Fair value of P Co’s share is $3 per share
• Fair value of net identifiable assets is as follows:
Book value Fair value Remaining useful life
Leased property 4,000,000 5,000,000 20 years
In-process R&D 2,000,000 10 years
Other assets 1,900,000 1,900,000
Liabilities (1,200,000) (1,200,000)
Contingent liability (100,000)
Net assets 4,700,000 7,600,000
Share capital 1,000,000
Retained earnings 3,700,000
Shareholders’ equity 4,700,000

18
Illustration 2:
Additional information:
• Contingent liability of $100,000 was recognized as a provision
loss by the acquiree in legal entity financial statement on Dec
20×5
• FV of NCI at acquisition date was $2,300,000
• Net profit after tax of S Co. for 31 Dec 20×5 was $1,000,000
• No dividends were declared during 20×5
• Shareholders’ equity as at 31 Dec 20×5 was $5,700,000
Q1 : Prepare the consolidation adjustments for P Co. for 20×5
Q2 : Perform analytical check on balance of NCI as at 31 Dec 20×5

19
Illustration 2:
 Consideration transferred = Cash consideration + Fair value
of share issued
= $6,200,000 + (1,000,000 × $3)
= $9,200,000
 Deferred tax liability = 20% × ($7,600,000 − $4,700,000)
= $580,000
 Goodwill = Consideration transferred + NCI – Fair value of net
identifiable assets, after-tax
= $9,200,000 + $2,300,000 – ($7,600,000 − $580,000)
= $4,480,000

20
Illustration 2:
• P’s share of goodwill = Consideration transferred – 80% × Fair
value of net identifiable assets, after tax
= $9,200,000 – 80% × $7,020,000
= $9,200,000 – $5,616,000
= $3,584,000
• NCI’s share of goodwill = Consideration transferred – 20% × Fair
value of net identifiable assets, after tax
= $2,300,000 – 20% × $7,020,000
= $2,300,000 – $1,404,000
= $896,000

21
Illustration 2:
Consolidation adjustments for 20×5
CJE 1: Elimination of Investment in Subsidiary
Dr Share capital 1,000,000
Dr Opening retained earnings 3,700,000
Dr Leased property 1,000,000
Dr In-process R&D 2,000,000
Dr Goodwill 4,480,000
Cr Contingent liability 100,000
Cr Deferred tax liability (net) 580,000
Cr Investment in S 9,200,000
Cr Non-controlling interests 2,300,000

22
Illustration 2:
$200,000
Dep exp:
$50,000
Dep. of
leased
property
Based on
book value Based on FV
$250,000
Under dep. by
$50k
$0
Amort exp:
$200,000
Amort. of
R&D
Based on
book value Based on FV
Under amort. by
$200k
CJE 2: Depreciation and amortization of excess of FV over book value
Dr Depreciation of leased property 50,000
Dr Amortization of in-process R&D 200,000
Cr Accumulated depreciation 50,000
Cr Accumulated amortization 200,000

23
Illustration 2:
CJE 3: Reversal of entry relating to provision for loss
Dr Provision for loss 100,000
Cr Loss expense 100,000
Note: Contingent liability was already recognized in CJE 1. The
recognition by the acquiree in its legal entity financial statement results in
double counting; hence this reversal entry is necessary
CJE 4: Tax effects on CJE 2 & CJE 3
Dr Deferred tax liability (net) 30,000
Cr Tax expense 30,000
20% * (200k +
50k − 100k)

24
Illustration 2:
CJE 5: Allocation of current year profit to non-controlling interests (NCI)
Dr Income to NCI 176,000
Cr NCI 176,000
Net profit after tax 1,000,000
Excess depreciation (50,000)
Excess amortization (200,000)
Reversal of loss from contingent liability 100,000
Tax effects on FV adjustments 30,000
Adjusted net profit 880,000
NCI’s share (20%) 176,000

25

26
3.Goodwill Impairment Test
• IAS 36: Goodwill has to be reviewed annually for impairment
loss
– Reviewed as part of a cash-generating unit (CGU)
• CGU is the lowest level at which the goodwill is
monitored for internal management purposes and
• Not larger than a segment determined under IFRS 8
Operating Segments
– Goodwill will be allocated to each of the acquirer’s CGU, or
group of CGUs

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3. Goodwill Impairment Test
1. Carrying amount:
– Net assets of the cash-generating unit
– It includes entity goodwill attribute to parent and NCI
2. Recoverable amount:
– IAS 36 allows the higher of the below two metrics to determine recoverable
amount:
− Higher of FV less cost to sell (an arms-length measure)
− Uses market based inputs or market participants’ assumptions in the
valuation process
− Value-in-use (VIU)
− Present value of future net cash flows
− Uses internal or entity-specific input to determine the future cash flows
− VIU likely to be more discretionary as assumptions about future cash flows
are required

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3. If carrying amount > recoverable amount
 Impairment loss is first allocated to goodwill
 Then to other assets in proportion to their individual
carrying amounts
 Impairment tests to be carried out on annual basis;
regardless of whether indications of impairment exists
 Impairment once made is not reversible, as it may result
in the recognition of internally-generated goodwill which
is prohibited under IAS 38

29
3.Goodwill Impairment Test
Determine the carrying amount of the CGU
Determine the recoverable amount of the CGU
If carrying amount ≤
recoverable amount
If carrying amount ≥
recoverable amount
No impairment loss
Allocate impairment loss
to goodwill first and
balance to other net assets
Recoverable amount: Higher of fair value or value in use
Steps for impairment test

30
NCI at FV at acquisition
date
NCI as a proportion of
identifiable net asset at
acquisition date
Goodwill on
consolidation
Includes NCI’s goodwill Excludes NCI’s goodwill
Carrying amount of
cash-generating
unit
Goodwill is allocated to cash-
generating unit without
further adjustment
Goodwill has to be grossed up
to include NCI’s share
Notionally adjusted goodwill
= Recognized
goodwill/parent’s interest
Impairment loss
Impairment loss is shared
between parent and NCI on
the same basis on which profit
or loss is allocated
Impairment loss is borne only
by parent as goodwill for NCI
is not recognized

31
Illustration 4:
Goodwill Impairment Test
Company × has 80% ownership in a CGU with identifiable net
assets of $6 million as at 31 Dec 20×1. The recoverable amount
of the CGU as an entity was $5 million as at that date. Determine
the impairment loss of goodwill in the CGU under two alternative
measurement basis:
(a) NC measured at FV at acquisition date. Goodwill recognized
by CGU was $1.2 million
(b) NCI measured as a proportion of FV of identifiable net assets
at acquisition date. Goodwill recognized by CGU was $1
million

32
Illustration 4:
Goodwill Identifiable net assets Total
Carrying amount 1,200,000 6,000,000 7,200,000
Recoverable amount 5,000,000
Impairment loss 1,200,000 1,000,000 2,200,000
Impairment loss borne by
Parent and NCI 1,200,000 1,000,000 2,200,000
Question (a)

33
Illustration 4:
Goodwill Identifiable net assets Total
Carrying amount 1,000,000 6,000,000 7,000,000
NCI's stet share of goodwill 250000 (20% × $1 million/0.8) 250,000
Notionally adjusted carrying
amount 1,250,000 6,000,000 7,250,000
Recoverable amount 5,000,000
Impairment loss 1,250,000 1,000,000 2,250,000
Impairment loss recognized 1000000 (80% × $1.25 million) 1,000,000 1,000,000
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Question (b)

35
1. Intragroup transactions & Principles
2. Intragroup transactions – Inventory
3. Transactions – PPE
4. Downstream sale – Upstream sale
5. Loss in transference
Intragroup transactions

36
• Operational and financial interdependencies within the group
entities
– Lead to intragroup transactions and balances
• Intragroup transactions include for example:
– Buying or selling of inventory
– Transferring of long lived assets
– Rendering or procuring of services
– Providing financing among the companies within the group

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• Intragroup transactions give rise to intragroup balances
– E.g. Loan receivable/payable to or from group companies,
Dividend receivable, Accounts payable/receivable to or from
group companies
• From an economic perspective, an entity is not able to transact
with itself
– Intragroup assets and liabilities, equity, income, expenses
and cash flows relating to transactions between entities of the
group are to be eliminated in full during consolidation
– Elimination adjustments are made in relation to the original
entries passed in the legal entity’s financial statements

38
• Outstanding balances due to or from companies within a group are
eliminated
• Transactions in the income statement between the group
companies are eliminated
• Profit or loss resulting from intragroup transactions that are
included in the asset are eliminated in full (both parent’s & NCI’s
share)
• Tax effects on unrealized profit or loss included in the asset should
be adjusted according to IAS 12 Income Taxes

39
 “Offsetting” effect on the group net profit from realized transactions
 Profit recorded by the selling company offset the expense recorded by
buying company
 Elimination is still required to avoid overstatement of individual line
items
Examples:
1. Transactions relating to interest:
 Usually no time lag in the recognizing of interest by borrower and
lender i.e. interest income exactly offsets the interest expense
 Elimination entry:
Dr Interest Income (lender)
Cr Interest Expense (borrower)
Elimination of Realized Intragroup Transactions

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Elimination of Realized Intragroup Transactions
– Exception: borrower capitalizes interest on borrowed money into
the cost of construction of a long-lived asset
2. Transactions relating to services provided
– Provision and consumption of services are simultaneous
– Elimination entry:
– Exception: service receiver capitalizes service fee when the service
provided creates or enhances an asset or extends its useful life
Dr Interest Income
Cr Fixed assets in
progress
Dr Service Income
Cr Service Expense

41

42
2.Intragroup transactions - Inventory
 Carrying amount of inventory is its cost which was the original
purchased price from a third party. Therefore, adjustments are
made to eliminate the profit element in the carrying amount of the
inventory arising from intragroup transaction
 Recognize profit only when the inventory is sold to 3rd party
 Cost of sales in the consolidated financial statements should be
the original cost as transacted with unrelated third parties and
not the transfer price invoiced by one group company to another

43
Intragroup
profit
Revenue, COGS, Inventory
Retained earning, Inventory
Unrealized profit
Deferred tax
asset
Realized profit
Reversal of deferred tax
asset
Inventory, COGS
2.Intragroup transactions - Inventory

44
Example 1 – Current period – All on hand
A parent sold a package of inventory, cost of goods sold: 100
CU, selling price: 150 CU. This inventory is still in warehouse.
The tax rate is 25%.
Required
Explain and prepare journal entries to eliminate inventory-
intragroup transaction.

45
Solution
- Eliminate intragroup profit
- Deferred tax recognition

46
Example 2 – Current period – Partly sold
A parent sold a package of inventory, cost of goods sold:
100 CU, selling price: 150 CU. 30% of the inventory was
sold to third parties.
Required
intragroup transaction.

47
Solution
- Eliminate intragroup profit
- Deferred tax recognition

48
Example 3 – Previous periods – All on hand
In 20X0 a parent sold 100 CU worth of inventory to its
subsidiary with selling price of 150 CU. 30% of this
inventory was sold in 20X0. This inventory was still in
store in 20X1.
Required
intragroup transaction on consolidated financial statements
in 20x1

49
Solution
- Eliminate unrealized profit:
- Deferred tax recognition – opening balance:

50
Example 3 – Previous periods – Partly sold
In 20X0 a parent sold 100 CU worth of inventory to its
subsidiary with selling price of 150 CU. 30% of this
inventory was sold in 20X0. 40% of the remaining
inventory was sold to third parties in 20X1.
Required
intragroup transaction on consolidated financial statements
in 20x1

51
Solution
- Eliminate unrealized profit
- Deferred tax recognition – opening
balance
- Recognized realized profit
- Reversal of deferred tax

52

53
3.Intragroup transactions - PPE
• When fixed assets (FA) are transferred at a marked-up price
– The unrealized profit (or loss) must be eliminated from the carrying amount
of FA
– Account for the FA as if the transfer did not take place (group’s view)
Acc. Dep.
NBV
Original
cost
Before
Transfer
After
Transfer
Trans
fer
price
Mark up
$40,00
0
+
Acc. Dep.
NBV
Prof
it on
sale

54
1. Restate the FA carrying amount to the NBV as of the date of
transfer
2. Profit on sale of FA is adjusted out of consolidated income
statement if sale occurred in same period
3. Subsequent depreciation is determined on the basis of the
original historical cost of asset & estimated useful life
(include revision of estimate)
 “New” depreciation that is expensed to the legal entity’s
financial statements is calculated on the basis of the
transfer price

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− The difference between the legal entity’s depreciation* and
group’s depreciation is adjusted to:
 Consolidated income statement for current year
 Opening RE for prior year accumulated depreciation
4. The profit or loss on transfers of FA is realized through the series
of higher or lower depreciation charge subsequently
 Over the remaining useful life, aggregate of the additional
depreciation equals the “profit” of the sale
5. Tax effect must be adjusted on the unrealized profit and
subsequent corrections of depreciation

56
Example 4 – PPE transaction
A is an 100% owned subsidiary of B. On Jan 1st 2019, B sold an
plant to A for 400 CU in cash (carrying amount: cost 600 CU,
accumulated depreciation 400 CU). The plant had an estimated
useful life of 4 years from the date of sale. The income tax rate
was 30%.
Require
Prepare consolidation adjustments to eliminate effects of
intragroup sale of the plant on consolidated financial statements
in 2019, 2020

62

63
Downstream Sale
Parent
Subsidiary
90 %
owned
Sales were
made from
parent to
subsidiary
Unrealized profit
resides in Parent’s
book
In downstream sale, NCI’s share of profit of the subsidiary is not affected
because the adjustment affects the parent’s profit not the subsidiary
Mark-up inventory
remains on
Subsidiary’s SFP

64
Upstream: Subsidiary is the seller
The group’s profit is changed
NCI
Unrealized profit and relating
deferred tax (of subsidiary)
Non-controlling interest
Retained earnings
(Unrealized profit –
deferred tax expense) x
NCI’s proportion
Adjustment entry

65
Impact on NCI When an Unrealized Profit Arises from
an Intragroup Transfer of FA
• Downstream sales:
– No impact on NCI
– Elimination of unrealized profit from the carrying amount of the FA
will apply only to the parent
• Upstream sales:
– NCI is adjusted against:
 Unrealized profit on sale of FA
 Subsequent depreciation to unwind the unrealized profit
 Tax effect on profit and depreciation adjustments

66
Illustration 1: Upstream Sale
• S is a wholly owned subsidiary of P
• On 1 April 20×1, S sold inventory costing $7,000 to its P for $10,000
• On 5 Jan 20×2, P sold the inventory to external party for $15,000
• Assumed tax rate of 20%. Year-end is 31 Dec 20×1.
Q1 What are the consolidation journal entries as at YE 31 Dec 20×1 ?
Dr Sales (S’s I/S) 10,000
Cr Cost of sales (S’s I/S) 7,000
Cr Inventory (P’s SFP) 3,000
This entry is to reduce current year profits and overstatement of
inventory from the unrealized profit of $3,000
Dr Deferred tax asset (Group SFP) 600 (3,000 * 20%)
Cr Tax expense (S’s I/S) 600
This entry is to reduce current year profits and overstatement of
inventory from the unrealized profit of $3,000

67
Q2: What are the consolidation entries as at 31 Dec 20×2?
(1)
(2)
Dr Opening RE (S’s SFP) 3,000
Cr Cost of Sale (P’s I/S) 3,000
This entry is to reduce previous year profit through opening RE
and recognize profit in the current year when the inventory is sold
to a 3rd party
Dr Tax expense (Group’s P/L) 600
Cr Opening RE (S’s SFP) 600
Since the profit is realized in this year, the tax expense should be
recognized in the group’s income statement in the current year
or
Dr Deferred tax asset 600
Cr Opening RE 600
Dr Tax expense 600
Cr Deferred tax asset 600

68
If sale to an external party is only made in 20×3:
(1)
(2)
Cr Inventory (P’s I/S) 3,000
and eliminate “unrealized” profit in the current year when the
inventory remains unsold to external 3rd party
Dr Deferred tax asset (Group’s P/L) 600
This entry reinstates the prepaid tax and implicitly shifts the tax
expense from the past period to the future period

69
If sale to an external party is only made in 20×3:
(1)
(2)
Cr Inventory (P’s I/S) 3,000
and eliminate “unrealized” profit in the current year when the
inventory remains unsold to external 3rd party
Dr Deferred tax asset (Group’s P/L) 600
This entry reinstates the prepaid tax and implicitly shifts the tax
expense from the past period to the future period

70
Illustration 2:
Upstream and Downstream Sales
 P invested in 70% of shares of S
 Intercompany transfers of inventory are as follows:
 Tax rate: 20%
 Net profit after tax of S: $800,000 (31 Dec 20×3)
$900,000 (31 Dec 20×4)
20×3 20×4
Sale of inventory from P to S
Original cost of inventory
Gross profit
Percentage unsold to 3rd party at year end
$60,000
$(50,000)
$10,000
10% 4%
Sale of inventory from S to P
Original cost of inventory
Gross profit
Percentage unsold to 3rd party at year end
$200,000
$(170,000)
$30,000
30% 0%

71
Example 4 – PPE transaction (cont)
A is an 80% owned subsidiary of B. On Jan 1st 2019, B sold an
plant to A for 400 CU in cash (carrying amount: cost 600 CU,
accumulated depreciation 400 CU). The plant had an estimated
useful life of 4 years from the date of sale. The income tax rate
was 30%.
Require
Prepare consolidation adjustments to eliminate effects of
intragroup sale of the plant on consolidated financial statements
in 2019, 2020

72

73
 Need to reassess whether the loss is indicative of impairment loss
 If loss is indicative of impairment loss:
 Loss is not adjusted out of the carrying amount of asset
 Only reverse the sale and cost of sale account for inventory
 Only reverse the sale and accumulated depreciation for FA
 If loss is not indicative of impairment loss:
 Same as unrealized profit treatment
 Unrealized loss is adjusted out of the carrying amount of asset
 Realized only when the inventory is sold to 3rd party or
depreciation for FA are corrected

74
Illustration 5:
Unrealized Loss Arising from Intragroup Transfers
Example 1
 Parent transferred inventory to subsidiary during the year ended 31 Dec 20×6
 The loss on transfer indicated an impairment loss on the inventory
What is the consolidation journal entry?
Implicit recognition of $20,000 of loss in the consolidated income statement
Transfer price $60,000
Original Cost $80,000
Gross loss ($20,000)
Dr Sale 60,000
Cr Cost of Sales 60,000
Eliminate the transfer of inventory – no adjustment is made to
remove the unrealized loss

75
Illustration 5:
Example 2
 Parent transferred fixed asset to subsidiary during the year ended 31 Dec
20×6
 The loss on transfer indicated an impairment loss on the fixed asset
What is the consolidation journal entry?
Original cost $200,000
Accumulated depreciation 50,000
NBV at date of transfer $150,000
Loss on transfer $(30,000)

76
Illustration 5:
Dr Fixed asset 80,000
Cr Accumulated depreciation 80,000
Reinstatement of accumulated depreciation $50,000
Recognition of impairment loss of fixed asset 30,000
Adjustment to accumulated depreciation $80,000
Reclassification of loss on sale to impairment loss
Dr Impairment loss 30,000
Cr Loss on sale 30,000
Note: subsequent depreciation will take into account any revision in
useful life of the impairment in value

77
Transfers of Assets at a Loss
 A number of other situations exists when the loss on transfer is:
 Either wholly an artificial or “unrealized” loss; or
 Combination of artificial or “unrealized” loss and impairment loss
 To determine whether a loss on an intra-group transfer includes an
impairment loss and/or artificial or “unrealized” loss:
 Compare the transfer price against the fair value of the asset at
date of transfer and its carrying amount

78
Illustration 6:
Transfers at a Loss
Background:
 Parent Co. transferred inventory to Subsidiary Co. on 4 April 20×1
 Assume that the inventory had not yet been resold to third parties
Situation A:
Carrying amount in P’s books $100,000
Fair value $100,000
TP FV=CA OC
“Artificial loss” “Impairment loss”

79
Illustration 6:
Transfers at a Loss
Situation A:
“Artificial loss” adjusted as if an unrealized loss of $10,000
Impairment loss of $20,000 is recognized; no reversal on consolidation
Group Legal entity
LCNRV test at year end “What should be” “What is” Difference
Original cost $120,000 $90,000
NRV $100,000 $100,000
LCNRV $100,000 $90,000 $10,000
CJE: Eliminate intercompany transfer
Dr Sales 90,000
Dr Inventory 10,000
Cr Cost of sales 100,000

80
Illustration 6:
Transfers at a Loss
Situation B:
Fair value $120,000
TP OC=CA FV
“Artificial loss”
Adjusted as if an
unrealized loss
$10,000
No adjustment
required as no breach
of LCNRV rule

81
Illustration 6: Transfers at a Loss
Situation B:
Group Legal entity
Original cost $100,000 $90,000
NRV $120,000 $120,000
LCNRV $100,000 $90,000 $10,000
CJE: Eliminate intercompany transfer
Dr Sales 90,000
Dr Inventory 10,000

82
Illustration 6:
Transfers at a Loss
Situation C:
Fair value $90,000
FV=CA OC TP
Impairment loss
should be
recognized
$10,000
Unrealized gain
should be adjusted
out
$20,000

83
Situation C:
Group Legal entity
Original cost $100,000 $120,000
NRV $90,000 $90,000
LCNRV $90,000 $90,000 0
Impairment loss $10,000 $30,000 $20,000

84
Situation C:
CJE 1: To reverse unrealized gain in inventory
Dr Sales 120,000
Cr Inventory 20,000
CJE 2: To adjust the excess impairment loss
Dr Inventory 20,000
Cr Impairment loss (COS) 20,000
Combined CJE: Elimination of sales and cost of sales
Dr Sales 120,000

86
1. Consolidation theories
2. Non – controlling interest
3. Consolidated Retained Earnings

87
• Theories relating to consolidation are critical when the percentage of ownership in
a subsidiary is less than 100%
• Termed “partially owned subsidiary”, where the remaining percentage is owned
by shareholders who are collectively referred to as “non-controlling interest”
(NCI)
Parent
90%
Subsidiary
Non-controlling interests
10%
Both parent and non-controlling interest have a proportionate share of the subsidiary’s:
• Net profit;
• Dividend distribution;
• Share capital
• Retained profits and changes in equity

88
Who are the primary users
of the consolidated
financial statements?
Both non-controlling
interest and majority
shareholders
Benefit of parent company
shareholders
How should non-
controlling interests be
reported in the consolidated
balance sheet?
Shown as equity in BS
based on:
Consolidated equity
=
Consolidated assets
−
Consolidated liabilities
Shown as equity in BS
based on:
Consolidated equity
=
Consolidated assets
−
Consolidated liabilities
+
NCI
Issues Entity Theory Parent Theory

89
Issues Entity Theory Parent Theory
Should net assets of the
subsidiary acquired be
shown at full fair values
or at the parent’s share of
the fair value?
Fair value of net assets
of subsidiary at date of
acquisition reported in
full
NCI net assets of
subsidiary at date of
acquisition shown at
book value
Do non-controlling
shareholders have a share
of goodwill?
Asset of parent and
restricted to parent’s
share
Goodwill = asset of
economic unit, and
reflected in full
How should net profit of
partially-owned
subsidiary be reported?
Reported in full as
accruing to both
majority and NCI
NCI’s share of current
profit is a deduction of final
profit

90
Summary of Differences
Attributes Entity Theory Parent Theory
Fair value differences in
relation to identifiable
assets and liabilities at
date of acquisition
Recognized in full,
reflecting both parent’s
and NCI’s share of fair
value adjustments
Recognized only in
respect of parent’s
share
Presentation of NCI As part of equity
Neither as equity or
debt
Goodwill
Goodwill is an entity
asset and should be
recognized in full as at
date of acquisition
Goodwill is parent’s
asset

91
Hoang Trong Hiep, MSc, CFE 91
Proprietary Theory
 Relevant to accounting for joint ventures
 Parent seen as having a direct interest in a subsidiary’s assets
and liabilities
– Resulting in proportional or pro-rata consolidation
(parent’s interest is directly multiplied to each individual
asset or liability of subsidiary and combined with parent’s
assets and liabilities).

92
Example 1
 One 01/01/2019, P Co acquired 80% of issued shares of S Co.
for $1,200,000, paid in cash. Net asset of S Co. at acquisition
date is $1,200,000. All assets were measured at their fair value,
except for a machine had its fair value higher than its carrying
amount, by $100,000. Tax rate is 0%. 20% of issued shares of
S Co. has a market value at $300,000
 Net asset of S Co. at 31/12/20x1: $1,270,000
 Net profit after tax (NPAT) of S Co.: $70
 Net profit after tax (NPAT) of P Co.: $350

93
Solution
Net profit after tax and NCI
Parent theory
NCI’s share of net profit is after tax completed as follows:
= 20% × S’s net profit after tax
= 20% × $70
= $14
Entity Theory
NCI are not shown as a deduction but included in entity-wide NPAT.
Disclosure is made of the amount of NPAT that relates to NCI
= (100% × P’s NPAT) + (80% × S’s NPAT)
= (100% × $350) + (80% × $70)
= $406

94
Solution
Goodwill
Parent Theory
Goodwill = Investment in S – P’s ownership %
× (FV of S’s identifiable net assets at date of acquisition)
= $1,200 – (80% × $1,300)
= $160
Entity theory
Parent’s share of goodwill = $160
NCI’s share of goodwill = Fair value of NCI – share of FV of
identifiable net assets
= $300 – (20% × $1,300)
= $40

95
Solution
Presentation of NCI
Parent Theory
Non-controlling interests are shown separately from equity
Non-controlling interests = Non-controlling interest % × BV of S’s equity
= 20% × $1,270
= $254
Entity Theory
Non-controlling interests are deemed to have an equity interest and are thus
presented as a component in equity
Non-controlling interests = Non-controlling interest % × (BV of S’s equity
+ FV adjustments) + NCI’s share of
goodwill
= 20% × ($1,270 + $100) + $40
= $314

96

97
 NCI only arises in consolidated financial statements where:
 one or more subsidiaries are not wholly owned by the parent (IFRS 10)
• NCI are entitled to their share of retained earnings of the subsidiary from
incorporation
 No distinction between pre-acquisition and post-acquisition retained earnings
for NCI
• Same applies to OCI
 NCI collectively have a share of accumulated OCI arising from incorporate date
to the current date
• NCI are normally a credit balance
 Share of residual interests in the net assets of a subsidiary
 Total equity (parent’s and NCI) = Assets – Liabilities

98
Analysis of Non-Controlling Interests
Balance of
non-
controlling
interests at
reporting
date
Share of
book value of
subsidiary’s
equity at
reporting
date
Share of book
value of
remaining (FV
– BV) of
identifiable
net assets at
reporting date
Unimpaired
goodwill
attributable
to NCI
= + +
• The analysis of non-controlling interests enables us to efficiently assess
the balance of non-controlling interests
• Another method of arriving at the non-controlling interests is to build up
the balance chronologically through the consolidation process

99
Elements of non-controlling interests
Beginning of
current year
End of
current year
Date of
acquisition
Incorporation
date
NCI have a share
of
1. Share capital
2. Retained
earnings
3. Other equity
4. Fair value
differentials
5. Goodwill
NCI have a share of
1. Change in share
capital
2. Change in
retained earnings
3. Change in other
equity
4. Past
amortization of
fair value
differential
5. Past impairment
of goodwill
NCI have a share
of
1. Profit after tax
2. Current
amortization of
fair value
differential
3. Current
impairment of
goodwill
4. Dividends as a
repayment of
profits
5. Change in other
equity

100
NCI – At acquisition date
Non-controlling
interests
Measured at Fair value
at acquisition date
(include goodwill)
Fair value method
Full goodwill method
Measured as a proportion of the
recognized amounts of the identifiable
assets as at acquisition date
Proportionate method
Partial goodwill method

101
NCI – At acquisition date – FV method
• Under the fair value basis:
– FV is determined by either the active market prices of
subsidiary’s equity share at acquisition date or other
valuation techniques
– FV per share of NCI may differ from parent because of
control premium paid by parent (e.g. 20% premium over
market price to gain control)
– NCI comprises of 3 items:
Non-controlling
interests
Share of book value
of net assets
Share of
unamortized
FV adjustment
(FV – BV)
Goodwill attributable to
NCI

102
NCI – At acquisition date
– Proportionate method
• Under proportionate method:
– NCI is a proportion of the acquiree’s identifiable net assets (i.e.
not full fair value)
– NCI comprises of 2 items:
Non-controlling
interests
Share of book value
of identifiable net assets
Share of
unamortized
of FV adjustments
(FV – BV)

103
Non-Controlling Interests’ Share of Goodwill
• Under the fair value option:
– Journal entry to record NCI at fair value (re-enacted each year):
Dr Share capital of subsidiary
Dr Retained earnings at acquisition date
Dr Other equity at acquisition date
Dr FV differentials (FV – BV)
Dr Goodwill (Parent & NCI)
Dr/Cr Deferred tax asset / (liability) on fair value adjustment
Cr Investment in subsidiary
Cr FV differentials (BV – FV)
Cr Non-controlling interests (At fair value)

104
In summary
Fair value method Proportionate method
Book value of net assets
Fair value – Book value of net
assets
Goodwill

105
Allocation to Non-controlling Interests
1. Allocation of the change in equity from date of acquisition to the
beginning of the current period
• No distinction between pre-acquisition or post-acquisition profits
• To transfer the NCI’s share of subsidiary’s retained earnings to NCI
Dr Retained earnings (NCI % × in RE from acquisition date to
beginning of current period)
Cr NCI

106
2. Allocation of current profit after tax to NCI
• Attribution of profit to NCI is not expense item and should not be
shown above the profit after tax line
• Without attribution, retained earnings of the group would be over-stated
and NCI’s share of equity would be under-stated
• The same attribution principle applies to Other Comprehensive Income
(OCI) – NCI are attributed their share of OCI arising during a period
 Examples: Revaluation surplus or deficit on property, PPE and
intangible assets etc.
Dr Income to NCI
Cr NCI

107
3. Allocation of dividends to NCI
• Reverses the profit and loss effects of dividends in
consolidated income statement
• A repayment of profits by a subsidiary
• Reduces the NCI’s residual stake in the net assets of the
subsidiary
Dr Dividend income (Parent)
Dr NCI (Equity)
Cr Dividends declared (Subsidiary)

108

109
 Balance in retained earnings is the net result of transactions
involving income and expenses.
 Two methods to obtaining via:
 Consolidation process through listing out all the consolidation
adjustments that affect the retained earnings
 Analytical approach
P’s RE + P’s
share of
investee’s
post-
acquisition
RE
P’s share of
expensing of
FV-BV of
INA and
goodwill
P’s share of
unrealized
profit or loss
at reporting
date
Consolidate
d retained
earnings at
reporting
date
– – =

110
Illustration 7
P’s retained earnings as at 31 December 20×6 $1,000,000
S’s retained earnings as at 31 December 20×6 $500,000
S’s pre-acquisition retained earnings $300,000
P’s ownership interests in S acquired on 1 July 20×4 90%
Dividend income from S recognized by P during post-
acquisition period
$90,000
Dividend declared by S during post-acquisition period $100,000

111
Illustration 7
 Consolidated retained earnings as at 31 December 20×6
= P’s retained earnings as at 31 December 20×6 + P’s share of S’s
post-acquisition retained earnings at 31 December 20×6
= $1,000,000 + [90% × ($500,000 – $300,000)]
= $1,000,000 + $180,000*
= $1,180,000
*The dividend income from S of $90,000 that is recognized in P’s legal
entity retained earnings will be offset by 90% of dividends declared by
S that is included in the $180,000.

112
3.Consolidated Retained Earnings
 Under-or over-valued identifiable net assets at acquisition date of a
subsidiary would be expensed, depreciated or consumed by the
acquiree overtime. Hence requiring consolidation adjustments.
 These adjustments would have to be represented in the analytical
check as they would not be recorded in the legal entity’s books.
 This applies to goodwill impairment loss that is attributable to the
parent company.

113
Illustration 8
 Illustration 8 is an extension of Illustration 7
 Assuming that S’s intangible asset was undervalued by $50,000 at
acquisition date
 Intangible asset had a remaining useful life of 10 years from
acquisition date
 Consolidated retained earnings reflected the amortization of 2.5
years of the intangible asset.
P’s share of post acquisition retained earnings of S $180,000
P’s share of cumulative amortization of the intangible
asset, after tax
($9,000)

114
3.Consolidated Retained Earnings
 Parent company’s legal entity retained earnings may include:
 Remaining unrealized profit from downstream transfers
 Share of post-acquisition retained earnings of S may include:
 Remaining unrealized profit from upstream transfers
 Remaining unrealized profit (loss) must be removed to arrive at the
consolidated retained earnings.
 Downstream transfers: entire remaining amount has to be
removed
 Upstream transfers: amount is the same as the adjustment to
arrive at the non-controlling interests’ balance.

115
 Following from Illustration 8
Illustration 9
Transfer of inventory from P Co. to S Co.
% unsold at 31 December 20×6 30%
Transfer of equipment from S Co. to P Co.
Net book value at date of sale $100,000
Remaining useful life at date of sale 10 years
Remaining useful life at 31 December 20×6 6 years

116
Illustration 9
 Consolidated retained earnings balance at 31 December 20×6
P’s share of post acquisition retained earnings of S $180,000
P’s share of cumulative amortization of the intangible
asset, after-tax
($9,000)
P’s share of unrealized profit from upstream sale, after-tax
(Note A)
($8,640)
P’s share of unrealized profit from downstream sale, after-
tax (Note B)
($7,200)

117
Illustration 9
 Note A:
P’s share of unrealized profit from upstream sale
= 90% × 80% × ($20,000/10 × 6)
= $8,640
 Note B:
P’s unrealized profit from downstream sale
= 30% × 80% × ($100,000 – $70,000)
= $7,200

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