Consolidated Statement of Financial Position

The formal consolidated statement of financial position resulting from the 100% acquisition of S
Company taken from the consolidated column of the consolidation working paper is presented below:

Illustration 15-6
P Company Subsidiary
Consolidated Statement of Financial Position
December 1,2013

Assets
Current Assets
Cash P120,000
Accounts receivable 72,000
Inventory 70,000
Total Current Assets 262,000
Non-Current Assets
Equipment 338,000
Goodwill 10,000
Total Non-current Assets 348,000
Total Assets P610,000

Liabilities and Equity

Liabilities
Accounts Payable P390,000

Stockholder's Equity
Common stock 100,000
Additional paid in capital 80,000
Retained earnings 40,000
Total stockholder's equity 220,000
Total Liabilities and Equity P610,000

Case 3 : Acquisition at Less than Book Value - Bargain Purchase

A bargain purchase exists when the price paid is less than the fair value of the subsidiary's net
identifiable assets. The excess is treated as gain on acquisition.

Illustration :

Assume that P Company paid only P80,000 for the 100% interest in stockholders' equity of S Company.

P Company would make the following entry to record the acquisition:

Investment in S Company 80,000

Cash 80,000

After posting the above entry recording the investment in S Company, the separate statement of
financial position of P Company will show the following balances of the affected accounts :

Cash 150,000

Investment in S Company 80,000

Before the preparation of working paper elimination entry, the difference(excess) between the
consideration given and the book value of the interest acquired is computed as follows:

Consideration given (price paid) P80,000

Less book value of interest acquired (100%)
Common stock –S Company P50,000
Additional paid-in capital – S Company 30,000
Retained earnings – S Company 20,000 100,000

Gain on Acquisition (P20,000)

Working Paper Elimination Entry

After computing the income from acquisition, working paper elimination entry can now be prepared as
follows :
E(1)

Common stock – S Company 50,000

Additional paid-in capital – S Company 30,000

Retained earnings – S Company 20,000

Investment in S Company 80,000

Retained earnings –P Company (Gain) 20,000

Take note that since only a statement of financial position is being prepared, the gain on acquisition is
closed directly to the parent's retained earnings..

Consolidation Working Paper

The working paper showing the elimination entries and the consolidated amounts to be presented in the
consolidated statement of financial position is shown below :
Illustration 15-6
P Company and Subsidiary
Consolidation Working Paper
December 1,2013
Elimination CONSOLIDATED
P COMPANY S COMPANY DEBIT CREDIT
Assets
Cash P150,000 0 (1) 80,000 P150,000
Accounts receivable 40,000 32,000 72,000
Inventory 50,000 20,000 70,000
Equipment 180,000 158,000 338,000
Investment in S Company 80,000
Total Assets P500,000 210,000 P630,000

Liabilities and Equity

Accounts payable 280,000 110,000 390,000
Common stock
P Company 100,000 100,000
S Company 50,000 (1) 50,000
Additional paid-in capital
P Company 80,000 80,000
S Company 30,000 (1) 30,000
Retained Earnings
P Company 40,000 (1) 20,000 60,000
S Company 20,000 (1) 20,000

Total Liabilities and Equity P500,000 P210,000 P100,000 P100,000 P630,000

Take note that the income from acquisition is not presented in the above working paper, because it is
closed directly to the retained earnings of P Company (P40,000+P20,000)

Consolidated Statement of Financial Position

From the consolidated column, a formal consolidated statement of financial position can now be
prepared.

Acquisition of Partially Owned Subsidiary ( Less than 100% interest)

The consolidation of a parent company and its partially owned subsidiary differs from the consolidation
of a wholly owned subsidiary in one major respect – the recognition of non-controlling interest
( formerly called minority interest).Non-controlling interest (NCI) is a term applied to the rights of
stockholders other than the parent company (controlling interest) to the net income or loss and net
assets of the subsidiary.

The non-controlling interest in the net income of the subsidiary is presented in the consolidated
statement of comprehensive income (to be discussed on Chapter 16) and the non-controlling interest in
the subsidiary's net assets is shown in the consolidated statement of financial position in total and is not
broken into common stock, additional paid-in capital, and retained earnings. The NCI must be shown as
a component of stockholders' equity.

Measurement of Non-controlling Interest

IFRS 3 provides two options of measuring non-controlling interest in an acquiree:

1. at fair value, or

2. at the non-controlling interest's proportionate share of the acquiree's identifiable net assets.

Under option 1, any goodwill that arises at the time of acquisition is allocated between the parent and
the non-controlling interest (NCI)

Under option 1, any goodwill that arises at the time of acquisition is assigned only to the parent.

There is no requirement within IFRS 3 to measure non-controlling interest on a consistent basis for
similar types of business combinations and therefore, an entity has a free choice between the two
options for each transaction undertaken. The option to value NCI at fair value will be used throughout
(unless stated)

For the purpose of measuring non-controlling interest at a fair value, it may be possible to determine the
acquisiotion-date fair value on the basis of active market prices of the equity shares not held by the
acquirer. When a market price is not available, the acquirer ahould measure the fair value of the non-
controlling interest using other valuation techniques (IFRS 3) .
For a detailed illustration of the consolidation procedures for a partially owned subsidiary, the statement
of fiancial position of P Companu (Illustration 15-7) and tbe statement of finacial position amounts and
the fair values of the assets and liabilities of S Company in tge next page (Illustration 15-8) before
acquisition will be used.

ILLUSTRATION 15-7
P Company
Statement of Financial Position
Decmber 1, 2013

ASSETS LIABILITIES AND EQUITY

Current Assets LIABILITIES
Cash P218,000 Accounts Payable P160,000
Accounts Receivabes 144,000 Bonds Payable 400,000
Inventory 160,000 Total Liabilities 560,000
TOTAL 522,000
Non-Current Assets STOCKHOLDER'S EQUITY
Land 200,000 Common Stock, P10 par value 400,000
Building 840,000 APIC 500,000
Equipment (NET) 400,000 Retaines earnings 502,000
TOTAL 1,440,000 TOTAL EQUITY 1,402,000

TOTAL ASSETS P1,962,000 TOTAL LIABILITIES AND EQUITY 1,962,000

 ILLUSTRATION 15-8
S Company
Statement of Financial Position
Decmber 1, 2013

ASSETS BOOK VALUE FAIR VALUE

Accounts Receivable P40,000 P40,000
Inventory 100,000 110,000
Land 80,000 130,000
Buildings(net) 30,000 500,000
Equipment(net) 80,000 120,000
TOTAL ASSETS P600,000 P900,000

LIABILITIES AND EQUITY

LIABILITIES
Accounts Payable P80,000 P80,000
Bonds Payable 200,000 200,000
TOTAL LIABILITIES P280,000 P280,000

STOCKHOLDER'S EQUITY
Common Stock, P1 par value P20,000
APIC 180,000
Retaines earnings 120,000
TOTAL EQUITY P320,000

NET ASSETS P320,000 P620,000

Case 4: Acquisition at More than Fair Value with Adjustment of Subsidiary accounts.

Illustration :

Assume that instead of paying cash, P Company issued 16,000 shares of its P10 par value common stock
for 80% (16,000 shares) of the outstanding shares of S Company . The fair value of P Company's stock is
P50 and yhe fair value of the 20% NCI is assessed to be P170,000. P Company also pays P50,000 in
professional fees to accomplish acquisition.

P Company would make the following entries :

(1) To record the acquisition of S Company stock

Investment in S Company (16,000 shares X P50) 800,000

Common stock (16,000 shares X P10) 160,000

Additional paid-in capital 640,000

(2) To record acquisition-related costs:

Retained earnings - P Company (acquisition expense) 50,000

Cash 50,000

Acquisition expense is to be closed directly to retained earnings of P Company since only the statement
of financial positions are being consolidated.

The consolidation procedures for this case are as follows :

1. Compute goodwill. In accordance with IFRS 3 good will is the excess of:

 The aggregate of :

(i) the acquisition date fair value of the consideration transferred,

(ii) the amount of NCI , and

(iii) the fair value of the parent's previously– held interest in the subsidiary ; over

 The acquisition-date fair value of the net assets acquired.

Using the above, goodwill is computed as follows :

Price paid P800,000

Non-controlling interest 170,000
Total 970,000
Less fair value of net assets acquired 620,000
Goodwill P350,000

The following assumptions should be noted in the computation of goodwill:

  Non-controlling interest is measured at fair value (170,000). If the fair value of the non-
controlling interest is not given, its fair value may be estimated by making an assumption. It
may assumed that idf the parent would pay P800,000 for an 80% interest, then it may be
implied that the entire subsidiary company is worth P1,000,000 (P800,000/80%). Assuming this
is true, the NCI is worth P200,000 (P1,000,000 X 20%) the goodwill the would be P380,000
[ (P800,000 + P124,000) - P620,000 ].

 Non-controlling interest may also be measured on the basis of its proportionate interest in the
acquiree's identifiable net assets. Under this option, NCI is equal to P124,000 (P620,000 x
20%). The goodwill then would be P304,000 [ (P800,000 + P124,000) - P620,000 ].

2. Prepare a Determination and Allocation of excess Schedule, the D and A schedule that follows revalue
the entire entity, including NCI.

FAIR PARENT NCI

VALUE (80%) (20%)
Fair value of Subsidiary P970,000 P800,000 P170,000
Less book value of interest acquired
Common stock P20,000
APIC 180,000
Retained Earnings 120,000
TOTAL EQUITY P320,000 P320,000 P320,000
Interest acquired 80% 20%
Book value P256,000 P64,000
Excess P650,000 P544,000 P106,000
Adjustments of identifiable accounts
Inventory (P110,000 FV- P100,000 BV) P(10,000)
Land (P130,000 FV - P80,000 BV) P(50,000)
Buildings (P500,000 FV - P300,000 BV) P(200,000)
Equipment (P120,000 FV - P80,000 BV) P(40,000)
TOTAL P(300,000)

GOODWILL P350,000

Note the following features of the D & A of excess schedule for a less than 100% parent ownership
interests.
 The " fair value of subsidiary" line contains the fair value of the entire company, the price paid
by the parent, and the fair value of the NCI.

 The total stockholders' equity of the subsidiary (book value of net assets) is allocated 80% to
controlling interest (P256,000) and 20% to NCI (P64,000)

 The entire adjustments of subsidiary net assets (P650,000) will be allocated P544,000 to
controlling interest and P106,000 to NCI.

 When the fair value of an asset exceeds the book value,the difference reduces the excess.
Conversely, when an asset's book value is higher than its fair value, the difference increases
the said excess.