Accounting For Business Combinations

ACCOUNTING FOR BUSINESS
COMBINATIONS
(Advanced Accounting 2)
LECTURE AID
2020
ZEUS VERNON B. MILLAN

CONSOLIDATED FINANCIAL
Overview on theSTATMENTS
topic:
Chapter Title Sub-
topics___
4 Consol. FS (Part 1) Basic consolidation
procedures
5 Consol. FS (Part 2) Intercompany transactions
6 Consol. FS (Part 3) Miscellaneous topics
7 Consol. FS (Part 4) Complex group structure
Related standard:
• PFRS 10 Consolidated Financial Statements
• PFRS 12 Disclosure of Interests in Other Entities

COMBINATIONS (Advanced
Accounting 2) - (by: MILLAN)
Chapter 4 CONSOLIDATED FS (Part 1)
Learning Objectives
• State the elements of control.
• Prepare consolidated financial
statements at the acquisition date.
• Prepare consolidated financial
statements at a subsequent date

Definition of terms (PFRS 10)
• Parent – an entity that controls one or more

entities.
• Subsidiary – an entity that is controlled by
another entity.
• Group – a parent and its subsidiaries.
• Consolidated financial statements – the
financial statements of a group in which the
assets, liabilities, equity, income, expenses and
cash flows of the parent and its subsidiaries are
presented as those of a single economic entity.

Preparation of Consolidated FS
• A parent entity is required to present consolidated
financial statements, except when all of the
following conditions are met:
a. The parent is a subsidiary of another entity and all
its other owners do not object to the parent not
presenting consolidated financial statements;
b. The parent’s debt or equity instruments are not
traded in a public market (or being processed for
such purpose); and
c. The parent’s ultimate or any intermediate parent
produces consolidated financial statements that are
available for public use and comply with PFRSs.

Elements of Control
• Control exists if the investor has all of the

following:
1. Power over the investee;
2. Exposure, or rights, to variable returns from
its
involvement with the investee; and
3. The ability to use its power over the investee
to affect
the amount of the investor’s returns.

Elements of Control

Accounting requirements
• Consolidated financial statements shall be prepared using

uniform accounting policies.
• The financial statements of the parent and its subsidiaries
used in preparing consolidated financial statements shall
have the same reporting dates. (The maximum difference
in reporting dates is 3 months.)
• Consolidation begins from the date the investor obtains
control of the investee and ceases when the investor loses
control of the investee.

Measurement
• Income and expenses of the subsidiary are based on
the amounts of the assets and liabilities recognized in
the consolidated financial statements at the
acquisition date.
• Investments in subsidiaries are accounted for in the

parent’s separate financial statements either:
a. at cost;
b. in accordance with PFRS 9 Financial Instruments;
or
c. using the equity method.
NCI in net assets of the subsidiary
• Non-controlling interests shall be presented in the
consolidated statement of financial position within equity,
separately from the equity of the owners of the
parent.
• Non-controlling interest in the net assets consists of:

1. The amount determined at the acquisition date using PFRS
3; and
2. The NCI’s share of changes in equity since the acquisition
date.

NCI in profit or loss and comprehensive income
• The profit or loss and each component of other

comprehensive income in the consolidated
statement of profit or loss and other
comprehensive income shall be attributed to the
following:
1. Owners of the parent
2. Non-controlling interests

Preparing the Consolidated financial statements
• Consolidated financial statements are prepared

by combining the financial statements of the
parent and its subsidiaries line by line by
adding together similar items of assets,
liabilities, equity, income and expenses.

Consolidation at date of acquisition
1. Eliminate the “Investment in subsidiary” account. This
requires:
a. Measuring the identifiable assets acquired and
liabilities assumed in the business combination at
their acquisition-date fair values.
b. Recognizing the goodwill from the business
combination.
c. 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.

Consolidation subsequent to date of acquisition
Step 1: Analysis of effects of intercompany

transaction
Step 2: Analysis of net assets
Step 3: Goodwill computation
Step 4: NCI in net assets computation
Step 5: Consolidated retained earnings
computation
Step 6: Consolidated profit or loss computation
Step 7: Computation for profit or loss
attributable to the
owners of the parent and to NCI

Step 1: Analysis of effects of intercompany
transaction
• This is relevant when the parent and subsidiary

had intercompany transactions during the period
or in the previous periods. This is discussed in
the next chapter.

Step 2: Analysis of net assets
(a)
This amount is used for computing goodwill in ‘Step 3’.
(b)
This amount is used for computing NCI in net assets in ‘Step 4’.
(c)
This is used for computing consolidated retained earnings in
‘Step 5’. COMBINATIONS (Advanced
Formula #1: NCI is measured at NCI’s proportionate
share

(continuation)
Formula #2: NCI is measured at fair value

Step 4: Non-controlling interest in net assets
*This amount is zero if NCI is measured at proportionate share.

Goodwill is attributed to NCI only if NCI is measured at fair value.

Step 5: Consolidated retained earnings

Step 6: Consolidated profit or loss

Step 7: Profit or loss attributable to owners of parent and NCI
*FVA is fair value adjustments.

Consolidated Statement of Financial Position

Consolidated total assets

Consolidated total liabilities

Consolidated total equity

APPLICATION OF CONCEPTS

PROBLEM 2: FOR CLASSROOM

DISCUSSION
ACCOUNTING FOR BUSINESS COMBINATIONS (Advanced

OPEN FORUM
QUESTIONS????
REACTIONS!!!!!
ACCOUNTING FOR BUSINESS COMBINATIONS (Advanced Accounting

2) - (by: MILLAN)
END
ACCOUNTING FOR BUSINESS COMBINATIONS (Advanced


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What are the elements of control?

What are the elements of control?

What are the steps in preparing consolidated financial statements?

What are the steps in preparing consolidated financial statements?

ACCOUNTING FOR BUSINESS

ZEUS VERNON B. MILLAN