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Acquisition analysis
Acquisition date eliminating entries
Other elimination entries
CONSOLIDATION PROCEDURES
1. Eliminate the Investment in subsidiary account. This requires:
Measuring the identifiable assets acquired and liabilities assumed in the
business combination at their acquisition-date fair values.
Recognizing goodwill from the business combination.
Eliminating the subsidiary’s pre-combination equity accounts and replacing
them with the non-controlling interest.
2. Add line by line, similar items of assets and liabilities of the
combining constituents. The subsidiary’s assets and liabilities are
included in the consolidated statements at 100% of their amounts
irrespective of the interest acquired by the parent.
CONSOLIDATED FINANCIAL STATEMENTS
(ENTITY THEORY)
AT ACQUISITION DATE PARENT SUBSIDIARY
BALANCE SHEET
ASSETS @ BOOK VALUE @ FAIR VALUE (100%)
LIABILITITES @ BOOK VALUE @ FAIR VALUE (100%)
SHAREHOLDERS’EQUITY
SHARE CAPITAL 100% N/A
RETAINED 100% N/A
EARNINGS
INCOME STATEMENT 100% N/A
*After considering all elimination entries
* Non-controlling interest is recognized for partially owned subsidiaries
EFFECT OF BARGAIN PURCHASE GAIN ON NCI
PFRS 3 states that a gain on bargain purchase can only
be recognized by the acquirer. Gain HAS NO EFFECT
on the calculation of the NCI share of equity, since the
gain is made by the parent paying less than the net fair
value of the acquirer’s share of the identifiable assets,
liabilities and contingent liabilities of the subsidiary.
The NCI receives a share of the fair value of the
subsidiary, and has no involvement with the bargain
purchase gain.
DEFERRED TAXES
The acquiring firm inherits the book values of the assets
acquired for tax purposes. When the acquirer has
inherited the book values of the assets for tax purposes
but has recorded market values for reporting purposes, a
deferred tax needs to be recognized.
Under the current guidelines, the tax effects of the
difference between consolidated book values and the tax
bases must be recorded as deferred tax liabilities or
assets.
CONTROL ACHIEVED IN STAGES
A business combination occurs when the acquirer obtains control
of the acquire. It is at that date of the second acquisition of
shares that the business combination occurs: this is referred to as
a business combination achieved in stages or step acquisition.
PFRS 3 requires that if the acquirer holds a non-controlling
equity investment in the acquire immediately before obtaining
control, the acquirer. An equity investment in asset under PAS 39
(PFRS 9), an associate under PAS 28 or a jointly under PFRS 11.
CONTROL ACHIEVED IN STAGES
A change in ownership leading to a change in the nature of an investment is
reported as a deemed sale of the existing investment at fair value. According
to PFRS 9, an equity interest previously held by the acquire which qualified as
a financial instrument under PFRS9 is treated as if it were disposed of and
reacquired at fair value on the acquisition date, depending on whether the
investment (financial asset) is a:
a. Fair value through OCI – The remeasurement to its acquisition date fair
value and any resulting gain or loss is recognized in other comprehensive
income which shall be transferred directly to retained earnings at any
time.
b. Fair value through profit or loss – The remeasurement to its acquisition-date
fair value and any resulting gain or loss is recognized in profit or loss.
PUSH-DOWN ACCOUNTING
Push-down accounting refers to the practice of revaluing an acquired
subsidiary’s assets and liabilities to their fair values directly on that
subsidiary’s books at the date of acquisition.
In this practice, the revaluations are recorded once the subsidiary’s
books at the date of acquisition, and, therefore, are not made in the
consolidation working papers each time consolidated statements are
prepared. The differences between the fair values and carrying values
of the acquiree’s net assets, and Retained earnings balance at date of
acquisition are closed to Share Premium.
PUSH-DOWN ACCOUNTING
When push-down accounting is used, the subsidiary:
a. Records the goodwill arising from the business combination;
b. Records the acquisition-date fair value adjustments to its identifiable
assets and liabilities;
c. Eliminates the pre-acquisition retained earnings; and
d. The balancing figure after performing (a) to (c) is recorded in the push-
down capital account.
Push-down accounting simplifies the consolidation process because the
consolidation journal entries mainly involve only the elimination of the
investment in subsidiary.
CONSOLIDATED FINANCIAL STATEMENTS
– Subsequent to date of acquisition
CONSOLIDATION SUBSEQUENT TO DATE OF
ACQUISITION
The consolidated procedures subsequent to the acquisition
date involve the same procedures of
(a) eliminating the investment in subsidiary account and
(b) adding, line by line, similar items of assets, liabilities,
income and expenses of the parent and the subsidiary.
However, this time, we need to consider also the changes in
the subsidiary’s net assets since the acquisition date.
CONSOLIDATION SUBSEQUENT TO DATE OF ACQUISITION
The Eliminating Entries
1. Date of acquisition eliminating entries
2. Amortization of excess of fair value over
3. Elimination of intercompany gains/profits or losses
4. Elimination of dividend income
5. Share of NCI in the net income (loss) of the
subsidiary
THE CONSOLIDATED RETAINED EARNINGS
Consolidated retained earnings is computed by adding the
parent’s retained earnings from its own operations (excluding
any income from consolidated subsidiaries recognized by the
parent) and the parent’s proportionate share of the net income
of each subsidiary since the date of acquisition, adjusted for
differential write-off and goodwill impairment. This is the same
approach used to compute the parent’s retained earnings when
the parent accounts for subsidiaries using the equity method on
its books.
THE NON CONTROLLING INTEREST
An entity shall attribute the profit or loss and each
component of other comprehensive income to the
owners of the parent and to the non-controlling
interests. The entity shall also attribute total
comprehensive income to the owners of the parent
and to the non-controlling interests even if this results
in the non-controlling interests having a deficit
balance.
THE NON CONTROLLING INTEREST
The balance of Non controlling interest in the shareholders’
equity after the date of acquisition is computed as the
total of the NCI recognized at acquisition date and
changes in the equity accounts of the subsidiary, which
includes the following:
Net income or net loss
Dividends paid by subsidiary
Other comprehensive income
Consolida Consolidate Non-
Share Share ted d Other controlli
CONSOLIDATED STATEMENT OF CHANGES IN
Capit Premiu Retained Comprehen ng
al m earnings sive income interest
SHAREHOLDERS’
Beginning Balance
EQUITY xxxx xxxx xxxx xxxx xxxx
Comprehensive Income:
Profit or loss
attributable to: xxxx
Controlling interest xxxx
Non-controlling interest
OCI attributable to:
Controlling interest xxxx
Non-controlling interest xxxx
Dividends paid to:
Controlling interest (xxxx)
Non-controlling interest (xxxx)
Ending balance xxxx xxxx xxxx xxxx xxxx
INTERCOMPANY TRANSACTIONS
(Intercompany sale of inventory)
Affiliated companies may make intercompany sales of inventory or
other assets.
Intercompany sales of inventory are eliminated with the objective
of eliminating the effects of intercompany sales of merchandise in
order to present consolidated balances for sales, cost of sales, and
inventory as if the intercompany sale had never occurred.
As a result, the recognition of income or loss on the intercompany
transaction, including its allocation between the noncontrolling and
controlling interest, is deferred until the profit or loss is confirmed
by sale of the merchandise to non-affiliates or to outsiders.
INTERCOMPANY TRANSACTIONS
(Intercompany sale of inventory)
Working paper procedures are designed to accomplish the following
financial reporting objectives in the consolidated financial statements:
•Consolidated sales include only sales to parties outside the affiliated
group.
•Consolidated cost of sales includes only the cost to the affiliated
group, of goods that have been sold to outside parties outside the
affiliated group.
•Consolidated inventory on the balance sheet is recorded at a value
equal to cost to the affiliated group.
INTERCOMPANY TRANSACTIONS
(Intercompany sale of depreciable assets)
A company may sell property or equipment to an affiliate for a price
that differs from its book value.
• In the year of the sale, the amount of intercompany gain (loss)
recorded by the selling affiliate must be eliminated in consolidation.
• After the sale, the purchasing affiliate will calculate depreciation on
the basis of its cost, which is the intercompany selling price.
• The depreciation recorded by the purchasing affiliate will therefore,
be excessive (deficient) from a consolidated point of view and will
also require adjustment.
INTERCOMPANY TRANSACTIONS
(Intercompany sale of depreciable assets)
From the view of the consolidated entity, the intercompany gain (loss) is considered to be
realized from the use of the property or equipment in the generation of revenue. Because
such use is measured by depreciation, the recognition of the realization of intercompany
profit (loss) is accomplished through depreciation adjustments.
In the consolidated financial statements:
• To report as gains or losses in the consolidated income statement only those that result from
the sale of depreciable property to parties outside the affiliated group.
• To present property in the consolidated balance sheet at its cost to the affiliated group.
• To present accumulated depreciation in the consolidated balance sheet based on the cost
to the affiliated group of the related assets.
• To present depreciation expense in the consolidated income statement based on the cost to
the affiliated group of the related assets.
DECONSOLIDATION AND DERECOGNITION OF
SUBSIDIARY
PFRS 10 considers that when a parent’s ownership interest in a
subsidiary decreases to the point that it no longer controls that
subsidiary, a significant event occurs.
A parent that has been including a subsidiary in its consolidated
financial statements should exclude that company from future
consolidation if the parent can no longer exercise control over it. Control
might be lost for a number of reasons, such as the parent sell some or all
of its interest in the subsidiary, the subsidiary issues additional common
stock, the parent enters into an agreement to relinquish control, or the
subsidiary comes under the control of the government or other regulator.
DECONSOLIDATION AND DERECOGNITION OF
SUBSIDIARY
If a parent loses control of a subsidiary:
1. and no longer holds an equity interest in the former subsidiary, it
recognizes a gain or loss for the difference between any proceeds
received from the event leading to loss of control, and the carrying
amount of the parent’s equity interest.
2. but maintains a non-controlling equity interest in the former subsidiary,
it must recognize in income a gain or loss for the difference, at the date
control is lost, between.
3. an interest is retained, that interest is measured at fair value, and this
is factored into the calculation of the gain or loss on disposal.
DECONSOLIDATION AND DERECOGNITION OF
SUBSIDIARY
The gain or loss on disposal is therefore calculated as follows:
Fair value of the proceeds (if any) from the transaction that resulted to the loss of
control
Add: Fair value of any retained non-controlling equity investment in the former
subsidiary, at the date control is lost.
Add: Carrying value of the non-controlling interest in the former subsidiary at the
date control is lost.
Less: Carrying value of the former subsidiary’s net assets at the date control is lost.
Add or less: Any amounts included in other components of equity, which relate to the
subsidiary, that would be required to be reclassified to profit or loss or another
component of equity if the parent had disposed of the related assets and liabilities.
DECONSOLIDATION AND DERECOGNITION OF
SUBSIDIARY
When control is lost:
1. The parent derecognizes all assets, liabilities and non-controlling
interest at their carrying amount.
2. Any retained interest in the former subsidiary is recognized at its
fair value at the date of control is lost.
3. If the loss of control of the former subsidiary involves the
distribution of equity interests to owners of the parent acting in
their capacity of owners, that distribution is recognized at the
date control is lost.
CHANGE IN OWNERSHIP – WITHOUT LOSS OF
CONTROL
Under PAS 27, changes in
ownership interest in a subsidiary
that does not result to the loss of
control are accounted for as
transfers within equity.
REVERSE ACQUISITION (TAKEOVERS)
A reverse acquisition occurs when an enterprise obtains
ownership of the shares of another enterprise but, as part of
the transaction, issued enough voting shares as consideration
that control of the combined enterprise passes to the
shareholders of the acquired enterprise. Although, legally, the
enterprise that issues the shares is regarded as the parent or
continuing enterprise, the enterprise whose former shareholders
not control the combined enterprise is treated as the acquirer
for reporting purposes.
REVERSE ACQUISITION (TAKEOVERS)
The issuing enterprise (the legal parent) is deemed
to be the acquiree and the company being
acquired in appearance (the legal subsidiary) is
deemed to have acquired control of the assets and
business of the issuing enterprise.