BALIUAG UNIVERSITY

CPA Review Program

Theory of Accounts (FAR & AFAR)

Module 13: Business Combination, Foreign Currency & Hyperinflationary Economy LVC

I. Business Combinations (IFRS 3)

 Merger and consolidation
 Business combination per IFRS
o A transaction or other event in which an acquirer obtains control of one or more businesses. Transactions
sometimes referred to as 'true mergers' or 'mergers of equals' are also business combinations as that term is
used in IFRS3.
 Merger and consolidation per Philippine laws
o Merger – The absorption of one or more corporations by another existing corporation, which retains its
identity. The absorbing corporation continues its existence while the life or lives of the other corporation(s)
is/are terminated.
o Consolidation – the union of two or more corporations into a single new corporation, called the consolidated
corporation, all the constituent corporations thereby ceasing to exist as separate entities.
 Parties to a business combination (stock acquisition)
Party Description
Parent (P) Entity owning controlling interest over another entity
Subsidiary (S) Controlled entity
Non-controlling Interest (NCI) Remaining interest in the controlled entity
 Accounting method for business combination
 The acquisition method ('purchase method' in IFRS 3 2004 ver.) is used for all business combinations.
Method Acquisition Accounting Acquired entity
Asset Acquirer purchased net Acquirer records assets and liabilities Acquiree is dissolved
acquisition assets of acquiree of acquiree at fair value
Stock Investor purchase shares Investor records the acquisition as Investee continue to exist
acquisition of stocks of investee investment
 Steps in applying the acquisition method are:
1. Identification of the 'acquirer'
2. Determination of the 'acquisition date'
3. Recognition and measurement of the identifiable assets acquired, the liabilities assumed and any non-controlling
interest (NCI, formerly called minority interest) in the acquire
4. Recognition and measurement of goodwill or a gain from a bargain purchase
 Determining whether a transaction is a business combination
 Guidance on determining whether a transaction meets the definition of a business combination includes:
 Business combinations can occur in various ways, such as by transferring cash, incurring liabilities, issuing equity
instruments (or any combination thereof), or by not issuing consideration at all (i.e. by contract alone)
 Business combinations can be structured in various ways to satisfy legal, taxation or other objectives, including one
entity becoming a subsidiary of another, the transfer of net assets from one entity to another or to a new entity.
 The business combination must involve the acquisition of a business, which generally has three elements:
1. Inputs – an economic resource (e.g. non-current assets, intellectual property) that creates outputs when one
or more processes are applied to it
2. Process – a system, standard, protocol, convention or rule that when applied to an input or inputs, creates
outputs (e.g. strategic management, operational processes, resource management)
3. Output – the result of inputs and processes applied to those inputs.
 Identifying an acquirer
 The guidance in IFRS 10 is used to identify an acquirer in a business combination, i.e. the entity that obtains 'control'
of the acquiree. If the guidance in IFRS 10 does not clearly indicate which of the combining entities is an acquirer,
IFRS 3 provides additional guidance which is then considered:
a. The acquirer is usually the entity that transfers cash or other assets where the business combination is effected
in this manner.
b. The acquirer is usually, but not always, the entity issuing equity interests where the transaction is effected in
this manner, however the entity also considers other pertinent facts and circumstances including:
o relative voting rights in the combined entity after the business combination

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o the existence of any large minority interest if no other owner or group of owners has a significant voting
interest
o the composition of the governing body and senior management of the combined entity
o the terms on which equity interests are exchanged
 The acquirer is usually the entity with the largest relative size (assets, revenues or profit)
 For business combinations involving multiple entities, consideration is given to the entity initiating the combination,
and the relative sizes of the combining entities.
 Acquisition date
 An acquirer considers all pertinent facts and circumstances when determining the acquisition date, i.e. the date on
which it obtains control of the acquiree. The acquisition date may be a date that is earlier or later than the closing
date.
 Acquired assets and liabilities
 IFRS 3 establishes the following principles in relation to the recognition and measurement of items arising in a
business combination:
a. Recognition principle. Identifiable assets acquired, liabilities assumed, and non-controlling interests in the
acquiree, are recognized separately from goodwill.
b. Measurement principle. All assets acquired and liabilities assumed in a business combination are measured at
acquisition-date fair value.
 In applying the principles, an acquirer classifies and designates assets acquired and liabilities assumed on the basis
of the contractual terms, economic conditions, operating and accounting policies and other pertinent conditions
existing at the acquisition date. For example, this might include the identification of derivative financial instruments
as hedging instruments, or the separation of embedded derivatives from host contracts.
 However, exceptions are made for lease classification (between operating and finance leases) and the classification
of contracts as insurance contracts, which are classified on the basis of conditions in place at the inception of the
contract.
 Acquired intangible assets must be recognized and measured at fair value in accordance with the principles if it is
separable or arises from other contractual rights, irrespective of whether the acquiree had recognized the asset
prior to the business combination occurring. This is because there is always sufficient information to reliably
measure the fair value of these assets.
 Goodwill
 Goodwill is measured as the difference between:
a. the aggregate of (i) the value of the consideration transferred (generally at fair value), (ii) the amount of any
non-controlling interest, and (iii) in a business combination achieved in stages, the acquisition-date fair value
of the acquirer's previously-held equity interest in the acquiree, and
b. the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.
 This can be written in simplified equation form as follows:
Goodwill = Consideration + Amount of non- + Fair value of previous - Net assets
transferred controlling interests equity interests recognized
 If the difference above is negative, the resulting gain is a bargain purchase in profit or loss, which may arise in
circumstances such as a forced seller acting under compulsion. However, before any bargain purchase gain is
recognized in profit or loss, the acquirer is required to undertake a review to ensure the identification of assets and
liabilities is complete, and that measurements appropriately reflect consideration of all available information.
 Choice in the measurement of non-controlling interests (NCI)
 IFRS 3 allows an accounting policy choice, available on a transaction by transaction basis, to measure non-
controlling interests (NCI) either at:
a. fair value (sometimes called the full goodwill method)
b. the NCI's proportionate share of net assets of the acquiree.
NCI Method Valuation Formula NCI share in
goodwill?
Fair value Full 1. Fair value is determinable NCI value is given Yes
goodwill 2. Computed fair value (P interest ÷%P) x %NCI
Proportionate Partial Proportionate share in the FV FV of NA of S x %NCI No
share goodwill of the net assets of S
NOTE: If the value of NCI using full goodwill method is less than the value computed when partial goodwill had been used, then the
value of NCI should be the proportionate share.

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 Business combination achieved in stages (step acquisitions)
 Prior to control being obtained, an acquirer accounts for its investment in the equity interests of an acquiree in
accordance with the nature of the investment by applying the relevant standard, (IFRS 9, IFRS 11, IAS 28).
 As part of accounting for the business combination, the acquirer remeasures any previously held interest at fair
value and takes this amount into account in the determination of goodwill. Any resultant gain or loss is recognised
in profit or loss or other comprehensive income as appropriate.
 Measurement period
 If the initial accounting for a business combination can be determined only provisionally by the end of the first
reporting period, the business combination is accounted for using provisional amounts.
 Adjustments to provisional amounts, and the recognition of newly identified asset and liabilities, must be made
within the 'measurement period' where they reflect new information obtained about facts and circumstances that
were in existence at the acquisition date.
 The measurement period cannot exceed one year from the acquisition date and no adjustments are permitted
after one year except to correct an error in accordance with IAS 8.
 Contingent consideration
 Contingent consideration must be measured at fair value at the time of the business combination and is taken into
account in the determination of goodwill. If the amount of contingent consideration changes as a result of a post-
acquisition event (such as meeting an earnings target), accounting for the change in consideration depends on
whether the additional consideration is classified as an equity instrument or an asset or liability:
a. If classified as an equity instrument, the original amount is not remeasured.
b. If classified as an asset or liability is measured at fair value at each reporting date and changes in fair value are
recognized in profit or loss.
 Acquisition costs
 Costs of issuing debt or equity instruments are accounted for under IFRS 9.
 All other costs associated with an acquisition must be expensed, including reimbursements to the acquiree for
bearing some of the acquisition costs. Examples of costs to be expensed include finder's fees; advisory, legal,
accounting, valuation and other professional or consulting fees; and general administrative costs, including the
costs of maintaining an internal acquisitions department.
Acquisition cost Example Accounting
Indirect acquisition cost General and administrative cost during Expense
acquisition
Direct acquisition cost Payment to professional consultants, due Expense
diligence audit fees, legal advice
Cost to issue & register Documentary stamp, SEC fees, underwriting cost Debit to share premium/ APIC,
stocks excess to RE
 Pre-existing relationships and reacquired rights
 If the acquirer and acquiree were parties to a pre-existing relationship (for instance, the acquirer had granted the
acquiree a right to use its intellectual property), this must be accounted for separately from the business
combination. In most cases, this will lead to the recognition of a gain or loss for the amount of the consideration
transferred to the vendor which effectively represents a 'settlement' of the pre-existing relationship. The amount
of the gain or loss is measured as follows:
a. for pre-existing non-contractual relationships (for example, a lawsuit): by reference to fair value
b. for pre-existing contractual relationships: at the lesser of (a) the favorable/unfavorable contract position and
(b) any stated settlement provisions in the contract available to the counterparty to whom the contract is
unfavorable.
 Contingent liabilities
 Until a contingent liability is settled, cancelled or expired, a contingent liability that was recognized in the initial
accounting for a business combination is measured at the higher of the amount the liability would be recognized
under IAS 37, and the amount less accumulated amortization.

 Contingent payments to employees and shareholders

 As part of a business combination, an acquirer may enter into arrangements with selling shareholders or
employees. In determining whether such arrangements are part of the business combination or accounted for
separately, the acquirer considers a number of factors, including whether the arrangement requires continuing
employment, the level or remuneration compared to other employees, whether payments to shareholder

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employees are incremental to non-employee shareholders, the relative number of shares owns, linkages to
valuation of the acquiree, how the consideration is calculated, and other agreements and issues.
 Where share-based payment arrangements of the acquiree exist and are replaced, the value of such awards must
be apportioned between pre-combination and post-combination service and accounted for accordingly.
 Indemnification assets
 Indemnification assets recognized at the acquisition date are subsequently measured on the same basis of the
indemnified liability or asset, subject to contractual impacts and collectibility. Indemnification assets are only
derecognized when collected, sold or when rights to it are lost.

II. Consolidated Financial Statements (IFRS 10)

 Control
 An investor controls an investee if and only if the investor has all of the following elements:
1. power over the investee, i.e. the investor has existing rights that give it the ability to direct the relevant
activities (the activities that significantly affect the investee's returns)
2. exposure, or rights, to variable returns from its involvement with the investee
3. the ability to use its power over the investee to affect the amount of the investor's returns.
 Level of equity ownership and its accounting treatment
Equity Interest Description Investment account Accounting Standard(s)
method
< 20% Nominal interest
> 20% < 50% Significant
influence
> 50% Control
 Regardless of the interest acquired, there may still be a presence of significant influence or control
Evidence of significant influence Evidence of Control (all of the following)
 BOD representation  Power over investee
 Policy making participation  Exposure or right to variable returns from investment
 Material transactions between parties with the investee
 Interchange of managerial personnel  Ability to use power over the investee to affect the
 Provision of essential technical information amount of investor returns.
 Preparation of consolidated financial statements
 A parent prepares consolidated financial statements using uniform accounting policies for like transactions and
other events in similar circumstances.
 However, a parent need not present consolidated financial statements if it meets all of the following conditions:
a. it is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and its other owners,
including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not
presenting consolidated financial statements
b. its debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an
over-the-counter market, including local and regional markets)
c. it did not file, nor is it in the process of filing, its financial statements with a securities commission or other
regulatory organization for the purpose of issuing any class of instruments in a public market, and
d. its ultimate or any intermediate parent of the parent produces financial statements available for public use
that comply with IFRSs, in which subsidiaries are consolidated or are measured at fair value through profit or
loss in accordance with IFRS 10.
 Consolidation procedures
 Consolidated financial statements
a. combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent with those of its
subsidiaries
b. offset (eliminate) the carrying amount of the parent's investment in each subsidiary and the parent's portion
of equity of each subsidiary (IFRS 3, account for any related goodwill)
c. eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating to
transactions between entities of the group (profits or losses resulting from intragroup transactions that are
recognized in assets, such as inventory and fixed assets, are eliminated in full).
 A reporting entity includes the income and expenses of a subsidiary in the consolidated financial statements from
the date it gains control until the date when the reporting entity ceases to control the subsidiary. 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.

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 The parent and subsidiaries are required to have the same reporting dates, or consolidation based on additional
financial information prepared by subsidiary, unless impracticable. Where impracticable, the most recent financial
statements of the subsidiary are used, adjusted for the effects of significant transactions or events between the
reporting dates of the subsidiary and consolidated financial statements.
 The difference between the date of the subsidiary's financial statements and that of the consolidated financial
statements shall be no more than three months.
 Non-controlling interests (NCIs)
 A parent presents non-controlling interests in its consolidated statement of financial position within equity,
separately from the equity of the owners of the parent.
 A reporting entity attributes the profit or loss and each component of other comprehensive income to the owners
of the parent and to the non-controlling interests. The proportion allocated to the parent and non-controlling
interests are determined on the basis of present ownership interests.
 The reporting entity also attributes 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.
 Changes in ownership interests
 Changes in a parent's ownership interest in a subsidiary that do not result in the parent losing control of the
subsidiary are equity transactions (i.e. transactions with owners in their capacity as owners).
 When the proportion of the equity held by non-controlling interests changes, the carrying amounts of the
controlling and non-controlling interests area adjusted to reflect the changes in their relative interests in the
subsidiary.
 Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the
consideration paid or received is recognized directly in equity and attributed to the owners of the parent.
 Loss of control
 If a parent loses control of a subsidiary, the parent:
a. Derecognizes the assets and liabilities of the former subsidiary from the consolidated statement of financial
position.
b. Recognizes any investment retained in the former subsidiary when control is lost and subsequently accounts
for it and for any amounts owed by or to the former subsidiary in accordance with relevant IFRSs. That retained
interest is remeasured and the remeasured value is regarded as the fair value on initial recognition of a financial
asset in accordance with IFRS 9 or, when appropriate, the cost on initial recognition of an investment in an
associate or joint venture.
c. Recognizes the gain or loss associated with the loss of control attributable to the former controlling interest.
 If a parent loses control of a subsidiary that does not contain a business in a transaction with an associate or a joint
venture gains or losses resulting from those transactions are recognized in the parent's profit or loss only to the
extent of the unrelated investors' interests in that associate or joint venture.
 Investment entities consolidation exemption
 Investment entity, an entity that:
a. Obtains funds from one or more investors for the purpose of providing those investor(s) with investment
management services.
b. Commits to its investor(s) that its business purpose is to invest funds solely for returns from capital
appreciation, investment income, or both.
c. Measures and evaluates the performance of substantially all of its investments on a fair value basis.
 Where an entity meets the definition of an 'investment entity', it does not consolidate its subsidiaries, or apply IFRS
3 when it obtains control of another entity.
 IFRS 10 provides that an investment entity should have the following typical characteristics:
a. it has more than one investment
b. it has more than one investor
c. it has investors that are not related parties of the entity
d. it has ownership interests in the form of equity or similar interests.
 The absence of any of these typical characteristics does not necessarily disqualify an entity from being classified as
an investment entity.
 An investment entity is required to measure an investment in a subsidiary at fair value through profit or loss in
accordance with IFRS 9.
 However, an investment entity is still required to consolidate a subsidiary where that subsidiary provides services
that relate to the investment entity’s investment activities.

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 Because an investment entity is not required to consolidate its subsidiaries, intragroup related party transactions
and outstanding balances are not eliminated.
 The exemption from consolidation only applies to the investment entity itself. Accordingly, a parent of an
investment entity is required to consolidate all entities that it controls, including those controlled through an
investment entity subsidiary, unless the parent itself is an investment entity.
 Consolidated Comprehensive Income (CI)/Net Income
Parent Company Approach Entity Approach
 Consolidated CI does not include share of NCI in  Consolidated CI includes NCI share in CI of
CI of S. S.
CI – P xx CI – P xx
Less: Dividend Income – P xx Less: Dividend Income – P xx
CI from own operation – P xx CI from own operation – P xx
Add: Adjusted CI of S Add: Adjusted CI of S
CI – S xx CI – S xx
Amortization _(xx)__ xx Amortization _(xx)__ xx
Total xx Consolidated CI xx
Less: NCI share in CI of S xx Attributable to NCI xx
Consolidated CI xx Attributable to P xx

NOTE: The standard does not prescribe the approach in presentation of consolidated income. Entity approach is widely used
since NCI is presented in the statement of financial position. Consolidated CI attributable to P is closed to consolidated RE

 Elimination Entries
Details First Year of Operation Second Year and Subsequent Period
1. Elimination entries
at date of
acquisition

2. Elimination of
intercompany
dividends.

3. Elimination of
intercompany
receivable/payable

4. Amortization of
Excess

5. Share of NCI in CI
of subsidiary

6. Share of NCI in
previous CI of
subsidiary.
7. Previous dividends
paid by subsidiary.

III. Separate Financial Statements (IAS 27)

 Requirement for separate financial statements
 IAS 27 does not mandate which entities produce separate financial statements available for public use. It applies
when an entity prepares separate financial statements that comply with IFRS.

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 Financial statements in which the equity method (IAS 28) is applied are not separate financial statements. Similarly,
the financial statements of an entity that does not have a subsidiary, associate or joint venturer's interest in a joint
venture are not separate financial statements.
 An investment entity that is required, throughout the current period and all comparative periods presented, to
apply the exception to consolidation for all of its subsidiaries in accordance with IFRS 10 presents separate financial
statements as its only financial statements.
 Accounting method and Measurement
 When an entity prepares separate financial statements, investments in subsidiaries, associates, and jointly
controlled entities are accounted for either:
a. at cost
b. in accordance with IFRS 9 Financial Instruments (Fair value)
c. using the equity method as described in IAS 28
 Investments that are accounted for at cost and classified as held for sale in accordance with IFRS 5 are accounted
for in accordance with IFRS 5. Investments carried at cost should be measured at the lower of their carrying amount
and fair value less costs to sell. The measurement of investments accounted for in accordance with IFRS 9 is not
changed in such circumstances.
 If an entity elects, in accordance with IAS 28 or IFRS 10, to measure its investments at fair value through profit or
loss in accordance with IFRS 9, it shall also account for those investments in the same way in its separate financial
statements.
 When a parent ceases to be an investment entity, the entity can account for an investment in a subsidiary at cost
(based on fair value at the date of change or status) or in accordance with IFRS 9.
 Accounting Methods for Investment Account
Cost Method Equity Method
 Used when the acquirer exercised  Used when the investor exercised significant
control over the acquired entity. influence over the investee.
 Used in accounting for investment in  Used in accounting for investment in
subsidiary associate. Alternatively, may be used in
 Investment account is maintained at its accounting for investment in subsidiary
original cost.  Investment account is increased by share in
 Income from investment is the dividend net income of investee and decreased by
income received from its subsidiary dividend received from investee
 Income from investment is the share in the net
income of investee.
Transactions Journal Entries Journal Entries

Stock
acquisition

Dividend
received

Share in net
income

 Recognition of dividends
 An entity recognizes a dividend from a subsidiary, joint venture or associate in profit or loss in its separate financial
statements when its right to receive the dividend in established.
 Group reorganizations
 Specified accounting applies in separate financial statements when a parent reorganizes the structure of its
group by establishing a new entity as its parent in a manner satisfying the following criteria:
a. The new parent obtains control of the original parent by issuing equity instruments in exchange for existing
equity instruments of the original parent.
b. The assets and liabilities of the new group and the original group are the same immediately before and after
the reorganization.
c. The owners of the original parent before the reorganization have the same absolute and relative interests in
the net assets of the original group and the new group immediately before and after the reorganization.

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 Where these criteria are met, and the new parent accounts for its investment in the original parent at cost, the
new parent measures the carrying amount of its share of the equity items shown in the separate financial
statements of the original parent at the date of the reorganization.
 The above requirements:
a. Apply to the establishment of an intermediate parent within a group, as well as establishment of a new
ultimate parent of a group.
b. Apply to an entity that is not a parent entity and establishes a parent in a manner that satisfies the above
criteria.
c. Apply only where the criteria above are satisfied and do not apply to other types of reorganizations or for
common control transactions more broadly.

IV. The Effects of Changes in Foreign Exchange Rates (IAS 21)

 Functional and Presentation currency
 Functional currency – The currency of the primary economic environment in which the entity operates.
 Presentation currency – The currency in which financial statements are presented.

 Translation of Foreign Currency Financial Statements (Non-hyperinflationary economy)

 Translation approaches
Particular Closing/Current Rate Method Temporal Method

Translation From functional currency to From foreign currency (LCU) to the

presentation currency functional currency
Foreign operation Operates independently Integral with parent’s operations
Translation gain or loss Other comprehensive income Profit or loss

 Translation of statement of financial position accounts

Accounts Current Rate Method Temporal Method
Monetary assets
Non-monetary assets at costs
Non-monetary assets fair value

Share capital
Dividends
Pre-acquisition retained
earnings
Post acquisition retained
earnings
Translation gains/losses

 Translation of income statement accounts

Accounts Current Rate Method Temporal Method
Sales
Cost of sales
Expenses
Other income/expense items
that result in inflow or outflow
of monetary items
Depreciation, amortization and
other allocation of
nonmonetary items
Other appropriation of profits

 Monetary and nonmonetary items

Cash and cash equivalents
Marketable securities at fair value
Marketable securities at cost
Inventories
Prepaid rent, insurance, advertising
Trade receivables

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Property, plant and equipment
Intangible assets
Prepaid interest
Refundable Deposits
Deferred charges
Cash surrender value
Trade payables
Accrued expenses
Deferred income tax assets
Deferred income tax liabilities
Liability for refundable deposits
Bonds payable
Other long-term debt
Unearned revenue
Provisions to be paid in cash
Other deferred credits
Share capital
Finance lease liability
Share premium
Non-controlling interest
 Convenience translation
 Sometimes, an entity displays its financial statements or other financial information in a currency that is different
from either its functional currency or its presentation currency simply by translating all amounts at end-of-period
exchange rates. This is sometimes called a convenience translation.
 A result of making a convenience translation is that the resulting financial information does not comply with all
IFRS, particularly IAS 21. In this case, the following disclosures are required:
a. Clearly identify the information as supplementary information to distinguish it from the information that
complies with IFRS.
b. Disclose the currency in which the supplementary information is displayed.
c. Disclose the entity's functional currency and the method of translation used to determine the supplementary
information
 Foreign currency transactions
a. Importation
b. Exportation
c. Borrowing
d. Lending
 Exchange rates
 Forward rate – The exchange rate applicable to a financial transaction that will take place in the future.
 Spot rate – The exchange rate for immediate settlement on a currency. The rate in which currencies can be
exchanges today.
a. Selling spot rate – Used for importing and borrowing transactions
b. Buying spot rate – Used for exporting and lending transactions
 Important dates in foreign currency transactions
a. Transaction date – The date the transaction (i.e. buying, selling) transpired.
b. Reporting date – Date of the financial statement.
c. Settlement date – Date of payment or collection.
 Forex gain or loss
 Gain or loss is computed at the reporting date and settlement date. The resulting gain or loss is included in profit
or loss.

V. Financial Reporting in Hyperinflationary Economies (IAS 29)

 Characteristics which may indicate the existence of hyperinflation
 Characteristics of the economic environment of a country which indicate the existence of hyperinflation
a. The general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign
currency. Amounts of local currency held are immediately invested to maintain purchasing power.

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b. The general population regards monetary amounts not in terms of the local currency but in terms of a
relatively stable foreign currency. Prices may be quoted in that currency.
c. Sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power
during the credit period, even if the period is short.
d. Interest rates, wages, and prices are linked to a price index.
e. The cumulative inflation rate over three years approaches, or exceeds, 100%.
 IAS 29 describes characteristics that may indicate that an economy is hyperinflationary. However, it concludes
that it is a matter of judgment when restatement of financial statements becomes necessary.
 Restatement formula
Restatement factor = (Price index at reporting date ÷ Price index on base period) x Carrying amount
 Guidelines for restatement
1. Monetary items stated in the measuring unit at reporting period are not restated.
2. All nonmonetary items are restated from date of acquisition unless they are carried at current values (net
realizable value and fair market values) at reporting date.
3. Revalued assets must be restated from date of revaluation.
4. Restated amount s are compared to net realizable value (inventories), recoverable amounts (PPE), market value
(financial assets at fair value). These items are reduced if they exceed the said values.
5. Income statement items are restated from original date of transaction. Average index may be used for
expediency.
6. Revaluation surplus prior to restatement is eliminated.
7. Retained earnings would be the balancing figure in the statement of financial position.
 Translation guidelines
 All accounts shall be translated at the current/closing rate at the date of the most recent reporting date.
 Last year comparatives restated accordingly shall be translated at this year’s closing rate except that when the
amounts are translated into the currency of non-hyperinflationary economy. In such case, comparative amounts
shall be those that were presented in the prior year financial statements.

Multiple Choice Questions

1. A horizontal merger is a merger between
a. Two or more firms from different and unrelated markets.
b. Two or more firms at different stages of the production process.
c. A producer and its supplier.
d. Two or more firms in the same market.
2. Snow White Co. is a wholly owned subsidiary of Fantasy Co. Both companies have separate general ledgers and
prepare separate financial statements. Which of the following statement is correct?
a. Consolidated financial statements should be prepared for both Snow White and Fantasy.
b. Consolidated financial statements should only be prepared by Fantasy and not be Snow White.
c. After consolidation, the accounts of both Fantasy and Snow White should be changed to reflect the consolidated
totals for future ease in reporting.
d. After consolidation, the accounts of both Fantasy and Snow White should be combined together into one general
ledger accounting system for future ease in reporting.
3. A subsidiary shall be excluded from consolidation when
a. The investor is a venture capital organization, mutual fund, unit trust or similar entity.
b. The business activities of the subsidiary are dissimilar from those of the other entities within the group.
c. There is evidence that control is intended to be temporary because the subsidiary is acquired with the intention
to dispose of it within twelve months from the date of acquisition.
d. The subsidiary is operating under severe long-term restrictions that significantly impair its ability to transfer funds
to the parent.
4. The term “control” means ownership, directly or indirectly through subsidiaries of
a. More than one-half of the outstanding voting stock of another company.
b. At least 20% of the voting stock of another company.
c. At least 50% of the voting stock of another company.
d. At least 10% of the voting stock of another company.
5. Acer Co. has significant investment in three separate entities, These investments are:
1. 40% ownership of the voting stock of King Co.
2. 60% ownership of the voting stock of Queen Co.
3. 100% ownership of the voting stock of Jack Co.
Which of Acer’s investments would be consolidated with Acer in its consolidated financial statements?
a. Jack only

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b. Queen and Jack
c. King, Queen and Jack
d. King only
6. Which one of the following is not necessarily a post-combination characteristic of a legal acquisition?
a. The combining firms remain separate legal entities.
b. A parent-subsidiary relationship exist.
c. The acquiring firm owns 100% of the voting stock of the acquired firm.
d. The combining firms are under common economic control.
7. A “group” for consolidation purpose is
a. A parent and all its subsidiaries.
b. An entity that has one or more subsidiaries.
c. An entity, including an unincorporated entity such as partnership that is controlled by another entity.
d. An entity that obtains control over entities or businesses.
8. It is the portion of profit or loss and net assets of subsidiary attributable to equity interest that are not owned directly
or indirectly through subsidiaries by the parent.
a. Non-controlling interest
b. Controlling interest
c. Residual interest
d. Subsidiary interest
9. It is the entity that has the controlling financial interest.
a. Investor
b. Parent
c. Associate
d. Affiliate
10. Which of the following terms best describes the financial statements of a parent in which the investments are
accounted for on the basis of the direct equity interest?
a. Single financial statements
b. Combined financial statements
c. Separate financial statements
d. Consolidated financial statements
11. In 2015, Popsie Co. acquired 80% of the voting stock of Sonny Co. in a legal acquisition. Which one of the following is
least likely to be a type of intercompany balance that results from transactions between Popsie and Sonny during
2015?
a. Receivable
b. Inventory
c. Goodwill
d. Revenue
12. An entity acquired an investment in a subsidiary with the view to dispose of this investment within six months. The
investment in the subsidiary has been classified as held for sale and is to be accounted for in accordance with PFRS 5.
The subsidiary has never been consolidated. How should the investment in the subsidiary be treated in the financial
statement?
a. Purchased accounting should be used.
b. Equity accounting should be used.
c. The subsidiary should not be consolidated but PFRS 5 should be used.
d. The subsidiary should remain off balance sheet.
13. X owns 50% of Y’s voting shares. The boards of directors consists of 6 members. X appoints three of them and Y
appoints the other three. The casting vote at meetings always lies with the directors appointed by X. Dose X have
control over Y?
a. No, control is equally split between X and Y.
b. Yes, X holds 50% of the voting power and has the casting vote at board meetings in the event there is no majority
decision.
c. No, X owns only 50% of the entity’s shares and therefore does not have control.
d. No, control can be exercised only through voting power, not through a casting vote.
14. Penn Corp., a manufacturing company, owns 75% of the common stock of Sell Inc., an investment company. Sell owns
60% of the common stock of Vane Inc., an insurance company. In Penn’s consolidated financial statements, should
consolidation accounting or equity method accounting be used for Sell and Vane?
a. Consolidation used for Sell and equity method for Vane.
b. Consolidation used for both Sell and Vane.
c. Equity method used for Sell and consolidation for Vane
d. Equity method used for both Sell and Vane.
15. A subsidiary, acquired for cash in business combination, owned inventories with a market value greater than the book
value as of the date of combination. A consolidated balance sheet prepared immediately after the acquisition would
include this difference as part of
a. Deferred credits
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b. Goodwill
c. Inventories
d. Retained earnings
16. When a parent-subsidiary relationship exists, consolidated financial statements are prepared in recognition of the
accounting concept of
a. Reliability
b. Materiality
c. Legal entity
d. Economic entity
17. A subsidiary was acquired for cash in a business combination. The purchase price exceeded the fair value of
identifiable net assets. The acquired company owned equipment with a market value in excess of the carrying
amount as of the date of combination. A consolidated balance sheet prepared would
a. Report the unamortized portion of the excess of the market value over the carrying amount of the equipment as
part of goodwill.
b. Report the unamortized portion of the excess of the market value over the carrying amount of the equipment as
part of plant and equipment.
c. Report the excess of the market value over the carrying amount of the equipment as part of plant and
equipment.
d. Not report the excess of the market value over the carrying amount of the equipment because it would be
expensed as incurred.
18. When push-down accounting has been implemented
a. Subsidiary records have been adjusted to reflect the market value increases resulting from the purchase by a
parent company.
b. The minority interest in the subsidiary is shown on its own line in the equity section of the subsidiary only balance
sheet.
c. Any debt incurred by the parent in acquiring the subsidiary is recorded at its market value by the subsidiary.
d. The issuer and the combiner’s equity sections are merged.
19. According to IAS 21, The Effects of Changes in Foreign Exchange Rates, exchange differences should be
recognized either in profit or loss or in other comprehensive income. Are the following statements about the
recognition of exchange differences in respect of foreign currency transactions reported in an entity’s functional
currency TRUE or FALSE?
I. Any exchange difference on the settlement of a monetary item should be recognized in profit or loss.
II. Any exchange difference on the translation of a monetary item at a rate different to that used at initial
recognition should be recognized in other comprehensive income.
Statement I Statement II
a. False False
b. False True
c. True False
d. True True
20. An entity will primarily generate and expend cash in one primary economic environment. According to IAS 21,
The Effects of Changes in Foreign Exchange Rates, the correct term for the currency of this primary economic
environment is the
a. Presentation currency c. Reporting currency
b. Functional currency d. Reporting currency
21. According to IAS 21, The Effects of Changes in Foreign Exchange Rates, at which rate should an entity’s non-
current assets be translated when its functional currency figures are being translated into different presentation
currency?
a. The closing rate c. The average rate
b. The historical rate d. The spot exchange rate
22. On October 1, Year 1, Mild Co. purchased machinery from a foreign company with payment due on April 1, Year
2. If Mild’s Year 1 operating income included no foreign currency transaction gain or loss, the transaction could
have been
a. Been denominated in Philippine pesos.
b. Resulted in an extraordinary gain.
c. Cause a foreign currency transaction gain to be reported as a contra account against machinery.
d. Cause a foreign currency transaction gain to be reported in other comprehensive income.
23. In preparing consolidated financial statement of a Philippine parent company with a foreign subsidiary, the
foreign subsidiary’s functional currency is the currency
a. In which the subsidiary maintains its accounting records.
b. Of the country in which the subsidiary is located.
c. Of the country in which the parent is located.
d. Of the environment in which the subsidiary primarily generates and expends cash.
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24. A foreign subsidiary’s functional currency is its local currency, which has not experienced significant inflation.
The weighted average exchange rate for the current year is the appropriate exchange rate for translating
_Wages expenses_ _Sales to customers_
a. Yes No
b. Yes Yes
c. No Yes
d. No No

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“Finally, brethren, whatever is true, whatever is honorable, whatever is right, whatever is pure,
whatever is lovely, whatever is of good repute, if there is any excellence and if anything worthy of
praise, dwell on these things.” Philippians 4:8

“The superior man thinks always of virtue; the common man thinks of comfort.” Confucius
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