Business Combination (PFRS 3)

CHANGES IN OWNERSHIP
 Change in Ownership interest
Subsequent increase or decrease in
ownership interest but parent retains
control
Accounting Treatment
Equity transaction; no gain or loss is
recognized; goodwill is not adjusted
Fair value of consideration less Change in
NCI equal direct adjustment in equity
owners of the parent (i.e., RE – Parent)

Subsequent decrease in ownership interest Treat transaction as sale of subsidiary.

and parent losses control Accordingly,
a. Derecognize assets and liabilities of
the subsidiary from the consolidated
financial statements

b. Remeasure any interest retained in the

former subsidiary at fair value

c. Recognize gain or loss computed as

follows:

Cash xx
Investment xx
Goodwill xx
Net identifiable assets xx
Gain on disposal xx
Sample Problem
On January 1, 2013, P, Co. acquired 80% interest
in S, Inc. by issuing 5,000 shares with fair value of
P15 per share and part value of P10 per share. S’s
identifiable assets have a fair value of P90,000.
Goodwill has been computed under each of the
available options under PFRS 3 (fair value and
proportionate share).

As of December 31, 2013, S, Inc. increased its net

assets (after fair value adjustments) by P10,000 to
P100,000.
 NCI at
Proportionate NCI at Fair
share of FV of value
subsidiary’s net
identifiable
assets
Consideration 75,000 75,000
transferred
NCI in the acquiree 18,000 18,750
Previously held equity - -
interest in the acquiree
Total 93,000 93,750
Fair value of net
identifiable net assets (90,000) (90,000)
Goodwill 3,000 3,750
 NCI at
Proportionate NCI at Fair
share of FV of value
subsidiary’s net
identifiable
assets
NCI at Acquisition date
–January 1, 2013 18,000 18,750
Subsequent increase
(20% x P10,000) 2,000 2,000
Carrying amount of
NCI – Jan. 1, 2014 20,000 20,750
Case 1: Acquisition of all
remaining NCI

On January 1, 2014, P, Co. acquired all of the

remaining 20% NCI in S, Inc. for P30,000.

Entry in P, Co.’s separate books:

Investment in subsidiary 30,000

Cash 30,000
 NCI at Proportionate share
of FV of subsidiary’s net
identifiable assets
% Owners of % NCI Net
Parent assets of
S, Co.
Before the
transaction 80% 80,000 20% 20,000 100,000
After the
transaction 100% 100,000 - - 100,000
Change –
Inc.(Dec.) 20,000 (20,000) -
Consolidation Working Paper
Entries
Jan. 1, 2014

NCI 20,000
Share Premium– P 10,000
Investment in subsidiary 30,000

Note: if there is no adequate amount of share

premium, retained earnings is debited
NCI at Fair value
% Owners of % NCI Net
Parent assets of
S, Co.
(grossed-
up)
Before the
transaction 80% 83,000 20% 20,750 103,750
After the
transaction 100% 103,750 - - 103,750
Change –
Inc.(Dec.) 20,750 (20,750) -
Consolidation Working Paper
Entries
Jan. 1, 2014

NCI 20,750
Share Premium– P 9,250
Investment in subsidiary 30,000

Note: if there is no adequate amount of share

premium, retained earnings is debited
Case 2: Acquisition of part
of remaining NCI

On January 1, 2014, P, Co. acquired additional

12% equity interest held by NCI in S, Inc. for
P20,000.

Entry in P, Co.’s separate books:

Investment in subsidiary 20,000

Cash 20,000
 NCI at Proportionate share
of FV of subsidiary’s net
identifiable assets
% Owners of % NCI Net
Parent assets of
S, Co.
Before the
transaction 80% 80,000 20% 20,000 100,000
After the
transaction 92% 92,000 8% 8,000 100,000
Change –
Inc.(Dec.) 12,000 (12,000) -
Consolidation Working Paper
Entries
Jan. 1, 2014

NCI 12,000
Share Premium – P 8,000
Investment in subsidiary 20,000

Note: if there is no adequate amount of share

premium, retained earnings is debited
NCI at Fair value
% Owners of % NCI Net
Parent assets of
S, Co.
(grossed-
up)
Before the
transaction 80% 83,000 20% 20,750 103,750
After the
transaction 92% 95,450 8% 8,300 103,750
Change –
Inc.(Dec.) 12,450 (12,450) -
Consolidation Working Paper
Entries
Jan. 1, 2014

NCI 12,450
Share Premium– P 7,550
Investment in subsidiary 20,000

Note: if there is no adequate amount of share

premium, retained earnings is debited
Case 3: Disposal of part of
controlling interest – control
not lost
On January 1, 2014, P, Co. sold its 10% interest
in S, Inc. for P20,000.

Entry in P, Co.’s separate books:

Cash 20,000
Investment in subsidiary 9,375*
Gain on sale 10,625
* (75,000 x 10/80)
 NCI at Proportionate share
of FV of subsidiary’s net
identifiable assets
% Owners of % NCI Net
Parent assets of
S, Co.
Before the
transaction 80% 80,000 20% 20,000 100,000
After the
transaction 70% 70,000 30% 30,000 100,000
Change –
Inc.(Dec.) (10,000) 10,000 -
Consolidation Working Paper
Entries
Jan. 1, 2014

Investment in subsidiary 9,375

Gain on sale 10,625
Non-controlling interest 10,000
Share Premium– P 10,000
NCI at Fair value
% Owners of % NCI Net
Parent assets of
S, Co.
(grossed-
up)
Before the
transaction 80% 83,000 20% 20,750 103,750
After the
transaction 70% 72,625 30% 31,125 103,750
Change –
Inc.(Dec.) (10,375) (10,375) -
Consolidation Working Paper
Entries
Jan. 1, 2014

Investment in subsidiary 9,375

Gain on sale 10,625
Non-controlling interest 10,375
Share Premium – P 9,625
Case 4: Subsidiary issues additional
shares – Control not lost
The 80% interest acquired by P, Co. on January 1,
2013 represents 40,000 shares of S, Inc.’s
outstanding shares as of that date.
On January 1, 2014, S, Inc. issues additional 10,000
shares with par value per share of P1 to other
investors for P2.50 per share.

Entry in S, Inc. separate books:

Cash 25,000
Share Capital 10,000
Share Premium 15,000
NCI at Proportionate share of FV
of subsidiary’s net identifiable
assets
% Owners % NCI Net
of Parent assets
of S,
Co.
Before the
transaction 80% 80,000 20% 20,000 100,000
After the
transaction 66.67 83,333 33.33% 41,667 125,000
%
Change –
Inc.(Dec.) 3,333 21,667 25,000
Consolidation Working Paper
Entries
Jan. 1, 2014

Share Capital – S 10,000

Share Premium – S 15,000
Non-controlling interest 21,667
Share Premium– P 3,333

Note: if there is no adequate amount of share

premium, retained earnings is debited
 NCI at Fair value
% Owners % NCI Net
of Parent assets of
S, Co.
(grossed
-up)
Before the
transaction 80% 83,000 20% 20,750 103,750
After the
transaction 66.67% 85,833 33.33% 42,917 128,750
Change –
Inc.(Dec.) 2,833 22,167 25,000
Consolidation Working Paper
Entries
Jan. 1, 2014

Share Capital – S 10,000

Share Premium – S 15,000
Non-controlling interest 22,167
Share Premium– P 2,833
Loss of control
 A parent may lose control over a subsidiary
even without a change in the parent’s
ownership interest when a subsidiary becomes
subject to the control of a government, court,
administrator or regulator, or as a result of a
contractual agreement
 A parent may lose control over a subsidiary
even without the investor involved in that even
decision making rights are given to another
party or the decision making rights previously
granted to the investor has elapsed
Loss of control

 An investor that has power over an investee

can lose control of an investee if the investor
ceases to be entitled to receive returns
 An investor may lose control over a subsidiary
if the investor’s previous status as a principal
changes to an agent
When a parent loses control over
a subsidiary, the parent shall
a. Derecognize the assets and liabilities of the
former subsidiary from the consolidated
statement of financial position
b. Recognize any investment retained in the
former subsidiary at its fair value at the date
control is lost and subsequently account for the
investment in accordance with relevant PFRSs.
That fair value shall be regarded as the fair
value on initial recognition of a financial asset in
accordance with PFRS 9 or, when appropriate,
the cost on initial recognition of an investment
in an associate or joint venture
When a parent loses control over
a subsidiary, the parent shall
c. Recognize the gain or loss associated with
the loss of control attributable to the former
controlling interest. The gain or loss on
disposal of controlling interest to be
recognized in profit or loss.
FV of consideration received
xx
FV of investment retained in the
former subsidiary
xx
Carrying amount of NCI held by
other investors at derecognition
date (including accumulated OCI
attributable to NCI)
xx
Total xx
Less: Carrying amount of former
subsidiary’s net identifiable
assets at derecognition date xx
Loss of control - Deconsolidation
On January 1, 20x1, ABC Co. acquired 80% interest in
XYZ Inc. by issuing 5,000 shares with fair value of P15
per share and par value of P10 per share. ABC elected
to measure NCI at its proportionate share in XYZ’s net
identifiable assets. The acquisition resulted to
goodwill of P3,000. There has been no impairment of
goodwill.
On January 1, 20x2, ABC Co. sells 60% of its interest in
XYZ, Inc. for P100,000. ABC’s remaining 20% interest
in XYZ has a fair value of P25,000. the remaining
investment in XYZ, Inc. gives ABC significant
influence over XYZ.
FV of consideration received 100,000
FV of investment retained in the
former subsidiary 25,000
Carrying amount of NCI held by
other investors at derecognition
date (including accumulated OCI
attributable to NCI) 20,000
Total 145,000
Less: Carrying amount of former
subsidiary’s net identifiable
assets at derecognition date 100,000
Carrying amount of goodwill
at derecognition date 3,000