1.

Introduction/Overview
This module aims to provide guidance on the preparation of consolidated financial statements at the acquisition
date and at a subsequent date.
2. Learning Outcomes
1. Statethe elements of control
2. Prepare consolidated financial statements at the acquisition date.

3. Prepare consolidated financial statements at a subsequent date

3. Basic Consolidation Procedures

• To deal with consolidation, both PFRS 3 and PFRS 10 should be applied, not just one or the other.
PFRS 10 Consolidated Financial Statements defines control and prescribes specific consolidation
procedures, PFRS 3 Business Combination is more about the measurement of the items in the
consolidated financial statements, such as goodwill, non-controlling interest, etc.
• The objective of PFRS 10 Consolidated Financial Statements is to establish principles for the
presentation and preparation of consolidated financial statements when an entity controls another entity.
• Consolidated financial statements are financial statements that present the assets, liabilities, equity,
income, expenses, and cash flows of a parent and its subsidiaries as those of a single economic entity.
(PAS 27)
• All parent entities are required to prepare consolidated financial statements, except as follows:

a) it is a wholly‑owned subsidiary or is a partially‑owned subsidiary of another entity and all

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 produces financial statements that are available for
public use and comply with PFRSs, in which subsidiaries are consolidated or are measured
at fair value through profit or loss in accordance with this PFRS.
3.1. Control as the basis for consolidation

• The rule is:

o If an investor controls the investee → investor must consolidate

o If an investor does not control the investee → investor does not consolidate

• PFRS 10 provides that investor has control of an investee “when the investor is exposed, or has rights,
to variable returns from its involvement with the investee and has the ability to affect those returns
through its power over the investee”.
• Two or more investors collectively control an investee when they must act together to direct the relevant
activities. In such cases, because no investor can direct the activities without the co-operation of the
others, no investor individually controls the investee. Each investor would account for its interest in
the investee in accordance with the relevant PFRSs, such as PFRS 11 Joint Arrangements, PAS 28
Investments in Associates and Joint Ventures or PFRS 9 Financial Instruments.

3.2. How to assess control?

An investor controls an investee if and only if the investor has all the following:

a. power over the investee;

b. exposure, or rights, to variable returns from its involvement with the investee; and

c. the ability to use its power over the investee to affect the amount of the investor’s returns.

I. Power

• An investor has power over an investee when the investor has existing rights that give it the current
ability to direct the relevant activities.
• Relevant Activities – the activities that significantly affect the investee’s returns.
• An investor with the current ability to direct the relevant activities has power even if its rights to direct
have yet to be exercised.
• If two or more investors each have existing rights that give them the unilateral ability to direct
different relevant activities, the investor that has the current ability to direct the activities that most
significantly affect the returns of the investee has power over the investee.
• Power arises from rights. Sometimes assessing power is straightforward, such as when power over an
investee is obtained directly and solely from the voting rights granted by equity instruments such as
shares and can be assessed by considering the voting rights from those shareholdings. In other cases,
the assessment will be more complex and require more than one factor to be considered, for example
when power results from one or more contractual arrangements.
 Rights that give an investor power over an investee

a. rights in the form of voting rights (or potential voting rights) of an investee;

b. rights to appoint, reassign or remove members of an investee’s key management

personnel who have the ability to direct the relevant activities;

c. rights to appoint or remove another entity that directs the relevant activities;

d. rights to direct the investee to enter into, or veto any changes to, transactions for the
benefit of the investor; and

e. other rights (such as decision‑making rights specified in a management contract) that give
the holder the ability to direct the relevant activities.

A. Administrative Rights

• When voting rights cannot have a significant effect on an investee’s returns, such as when
voting rights relate to administrative tasks only and contractual arrangements determine the
direction of the relevant activities, the investor needs to assess those contractual
arrangements in order to determine whether it has rights sufficient to give it power over the
investee.
B. Unilateral Rights

• If two or more investors each have existing rights that give them the unilateral ability to
direct different relevant activities, the investor that has the current ability to direct the
activities that most significantly affect the returns of the investee has power over the
investee.

C. Protective Rights

• Protective rights are rights designed to protect the interest of the party holding those rights
without giving that party power over the entity to which those rights relate.
• An investor can have power over an investee even if other entities have existing rights that
give them the current ability to participate in the direction of the relevant activities, for
example when another entity has significant influence. However, an investor that holds only
protective rights does not have power over an investee and consequently does not control
the investee.
• Examples of protective rights include but are not limited to:

a. a lender’s right to restrict a borrower from undertaking activities that could

significantly change the credit risk of the borrower to the detriment of the lender.
 b. the right of a party holding a non‑controlling interest in an investee to approve capital
expenditure greater than that required in the ordinary course of business, or to approve
the issue of equity or debt instruments.

c. the right of a lender to seize the assets of a borrower if the borrower fails to meet
specified loan repayment conditions.

D. Substantive Rights

• An investor, in assessing whether it has power, considers only substantive rights relating to
an investee (held by the investor and others). For a right to be substantive, the holder must
have the practical ability to exercise that right.

E. Voting Rights

• Often an investor has the current ability, through voting or similar rights, to direct the
relevant activities.
• An investor considers the requirements below if the relevant activities of an investee are
directed through voting rights:

1. Power with a majority of the voting rights

• An investor that holds more than half (more than 50%) of the voting rights of an
investee has power in the following situations, unless when it is clearly not the case:

a. the relevant activities are directed by a vote of the holder of the majority of the
voting rights, or

b. a majority of the members of the governing body that directs the relevant
activities are appointed by a vote of the holder of the majority of the voting
rights.

2. Majority of the voting rights but no power

• An investor does not have power over an investee, even though the investor holds the
majority of the voting rights in the investee, when those voting rights are not
substantive.
• For example, an investor that has more than half of the voting rights in an investee
cannot have power if the relevant activities are subject to direction by a government,
court, administrator, receiver, liquidator or regulator.

3. Power without a majority of the voting rights

• An investor can have power even if it holds less than a majority of the voting rights of
an investee. An investor can have power with less than a majority of the voting rights
of an investee, for example, through:

a. a contractual arrangement between the investor and other vote holders;

 b. rights arising from other contractual arrangements;

c. the investor’s voting rights;

d. potential voting rights;

e. a combination of (a)–(d).

4. Contractual arrangement with other vote holders

• A contractual arrangement between an investor and other vote holders can give the
investor power if such arrangement would give the latter:

a. right to exercise voting rights sufficient to give the investor power; or

b. right to direct enough other vote holders on how to vote to enable the investor
to make decisions about the relevant activities.

5. Rights from other contractual arrangements

• Other decision‑making rights, in combination with voting rights, can give an investor
the current ability to direct the relevant activities. For example, the rights specified in
a contractual arrangement in combination with voting rights may be sufficient to give
an investor the current ability to direct the manufacturing processes of an investee or
to direct other operating or financing activities of an investee that significantly affect
the investee’s returns.
• However, in the absence of any other rights, economic dependence of an investee on
the investor (such as relations of a supplier with its main customer) does not lead to the
investor having power over the investee.

6. The investor’s voting rights

• An investor with less than a majority of the voting rights has rights that are sufficient
to give it power when the investor has the practical ability to direct the relevant
activities unilaterally.

7. Potential voting rights

• When assessing control, an investor considers its potential voting rights as well as
potential voting rights held by other parties, to determine whether it has power.
Potential voting rights are rights to obtain voting rights of an investee, such as those
arising from convertible instruments or options, including forward contracts. Those
potential voting rights are considered only if the rights are substantive.
• Substantive potential voting rights alone, or in combination with other rights, can give
an investor the current ability to direct the relevant activities.
II. Returns

• An investor is exposed, or has rights, to variable returns from its involvement with the investee
when the investor’s returns from its involvement have the potential to vary as a result of the
investee’s performance.
• The investor’s returns can be only positive, only negative or both positive and negative.
• Although only one investor can control an investee, more than one party can share in the returns of
an investee. For example, holders of non-controlling interests can share in the profits or distributions
of an investee.

III. Ability to use power to affect investor’s return

• An investor controls an investee if the investor not only has power over the investee and exposure
or rights to variable returns from its involvement with the investee, but also has the ability to use
its power to affect the investor’s returns from its involvement with the investee.

4. Accounting Requirements

• A parent shall prepare consolidated financial statements using uniform accounting policies for
like transactions and other events in similar circumstances.
• Consolidation of an investee shall begin from the date the investor obtains control of the investee
and cease when the investor loses control of the investee.

I. Uniform accounting policies

• If a member of the group uses accounting policies other than those adopted in the consolidated
financial statements for like transactions and events in similar circumstances, appropriate
adjustments are made to that group member’s financial statements in preparing the consolidated
financial statements to ensure conformity with the group’s accounting policies.

II. Reporting date

• The financial statements of the parent and its subsidiaries used in the preparation of the
consolidated financial statements shall have the same reporting date.
• When the end of the reporting period of the parent is different from that of a subsidiary, the
subsidiary prepares, for consolidation purposes, additional financial information as of the same
date as the financial statements of the parent to enable the parent to consolidate the financial
information of the subsidiary, unless it is impracticable to do so.
• If it is impracticable to do so, the parent shall consolidate the financial information of the subsidiary
using the most recent financial statements of the subsidiary adjusted for the effects of significant
 transactions or events that occur between the date of those financial statements and the date of
the consolidated financial statements.
• In any case, 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, and the length of the
reporting periods and any difference between the dates of the financial statements shall be the same
from period to period.

III. Measurement

A. Income and Expenses

• An 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 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.

B. Potential Voting Rights

• When potential voting rights, or other derivatives containing potential voting rights, exist, the
proportion of profit or loss and changes in equity allocated to the parent and non‑controlling
interests in preparing consolidated financial statements is determined solely on the basis of
existing ownership interests and does not reflect the possible exercise or conversion of potential
voting rights and other derivatives.

C. Investment in Subsidiaries

• Investments in subsidiaries are accounted for in the parent’s separate financial statements either:

a. At cost;

o Initial measurement = value assigned to the consideration transferred at

the acquisition date
o Subsequent measurement = at cost unless the investment becomes
impaired.

b. In accordance with PFRS 9; or

o Initial measurement = value assigned to the consideration transferred at the acquisition

date
o Subsequent measurement = at fair value
c. Using the equity method

o Initial measurement = value assigned to the consideration transferred at the acquisition

date
o Subsequent measurement = increased or decreased in the changes in the investee’s equity
4.1. Non-controlling interest (NCI)

• A parent shall present non-controlling interests in the consolidated statement of financial position
within equity, separately from the equity of the owners of the parent.
• NCI in the net assets of the subsidiary consists of: (Millan, 2020)

a. The amount determined at acquisition date using PFRS 3;

b. The NCI’s share of changes in equity since the acquisition date.

• The profit or loss and each component of other comprehensive income in the consolidated
statement of profit or loss and other comprehensive income are attributed to the following:
(Millan, 2020)

a. Owners of the parent.

b. Non-controlling interests.

• When the proportion of the equity held by non‑controlling interests changes, an entity shall
adjust the carrying amounts of the controlling and non‑controlling interests to reflect the changes
in their relative interests in the subsidiary. The entity shall recognize directly in equity any
difference between the amount by which the non‑controlling interests are adjusted and the fair
value of the consideration paid or received, and attribute it to the owners of the parent.

4.2. Consolidation procedures

• In consolidating financial statements, the financial statements of the parent and its subsidiaries
should be combined by:

1. combining like items of assets, liabilities, equity, income, expenses and cash flows of
the parent with those of its subsidiaries.

2. offsetting (eliminating) the carrying amount of the parent’s investment in each subsidiary
and the parent’s portion of equity of each subsidiary.

3. eliminating 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).
5. Consolidation at acquisition date

The consolidation of financial statements at acquisition date involves the procedures of (a)eliminating the
investment in subsidiary account, (b) by adding line by line, similar items of assets and liabilities, income and
expenses of the parent and subsidiary, and (c) the subsidiary’s pre-combination equity accounts are eliminated
in full and replaced with the non-controlling interest account. (Millan, 2020)

Remember:

Consolidation journal entries are not recorded in either the books of the parent or subsidiaries. These entries
are just used to facilitate the preparation of the consolidation of financial statements.
Illustration: Consolidation at acquisition date
On January 1, 2020, Popoy Co. acquired 80% of the outstanding voting interest in Basha Co.
The financial statements of the two company immediately after the stock acquisition are as
follows:
Popoy Co. Basha Co.
Cash 20,000 10,000
Accounts receivable, net 100,000 200,000
Property, plant and equipment 500,000 340,000
Investment in subsidiary 250,000 -
Total Assets 870,000 550,000

Accounts payable 200,000 200,000

Bonds payable 100,000 50,000
Share capital 280,000 150,000
Share Premium 200,000 50,000
Retained Earnings 90,000 100,000
Total Liabilities and equity 870,000 550,000

The assets and liabilities of Basha Co. are stated at their fair value except for the accounts
receivable which has a fair value of ₱190,000 and property, plant and equipment amounting
to ₱350,000. The goodwill arises from the business combination ₱5,000 and NCI in the net
assets of the subsidiary was ₱45,000.

Requirement: Prepare the consolidated statement of financial position.

Solution:

Popoy Co. Basha Co. Consolidated

Cash 20,000 10,000 30,000

Accounts receivable, net 100,000 190,000 290,000

Property, plant and equipment 500,000 350,000 840,000

Investment in subsidiary 250,000 - -

Goodwill 5,000
Total Assets 1,165,000
The consolidated statement of financial position is as follows:
Popoy Group of Companies
Consolidated Statement of Financial Position
As of January 1, 2020

ASSETS

Cash 30,000

Accounts receivable, net 290,000

Property, plant and equipment 840,000

Goodwill 5,000

Total Assets 1,165,000

LIABILITIES AND EQUITY

Liabilities

Accounts payable 400,000

Bonds payable 150,000

Total Liabilities 550,000

Equity attributable to parent Company

Share capital 280,000 Share Premium 200,000

Retained earnings 90,000

570,000

Non-controlling interest 45,000

Total Equity 615,000

Total Liabilities and Equity 1,165,000

6. Consolidation subsequent to date of acquisition

The consolidation procedures subsequent to acquisition date involves the same procedures of (a)eliminating
the investment in subsidiary account and (b) by adding line by line, similar items of assets and liabilities,
income and expenses of the parent and subsidiary. However, this time, changes in the subsidiary’s net assets
since the acquisition date are considered.
6.1. Subsidiary’s cumulative preference shares

If the subsidiary has If a subsidiary has outstanding cumulative preference shares that are classified as equity
and are held by non‑controlling interests, the entity shall compute its share of profit or loss after adjusting for
the dividends on such shares, whether or not such dividends have been declared. One-year preferred
dividends should be deducted from the subsidiary’s profit before computing for the parent’s share.
7. Relevant provisions of the PFRS for SMEs

Requirement to present consolidated financial statements

• A parent need not present consolidated financial statements if both of the following conditions are
met:
o the parent is itself a subsidiary; and
o its ultimate parent (or any intermediate parent) produces consolidated general-purpose
financial statements that comply with full IFRS or with this Standard.
• A subsidiary is also not consolidated if it is acquired and is held with the intention of selling or
disposing of it within one year from its acquisition date. If a subsidiary previously excluded from
consolidation in accordance with is not disposed of within one year from its acquisition date:

o the parent shall consolidate the subsidiary from the acquisition date. Consequently, if the
acquisition date was in a prior period, the relevant prior periods shall be restated.

o if the delay is caused by events or circumstances beyond the parent’s control and there is
sufficient evidence at the reporting date that the parent remains committed to its plan to sell or
dispose of the subsidiary, the parent shall continue not to consolidate the subsidiary.

• A subsidiary is not excluded from consolidation simply because:

o the investor is a venture capital organization or similar entity.

o its business activities are dissimilar to those of the other entities within the consolidation.

o it operates in a jurisdiction that imposes restrictions on transferring cash or other assets out of
the jurisdiction.

• A subsidiary is an entity that is controlled by the parent. Control is the power to govern the financial
and operating policies of an entity so as to obtain benefits from its activities. Control is presumed to
exist when the parent owns, directly or indirectly through subsidiaries, more than half of the voting
power of an entity.

Special purpose entities (SPE)

• An entity that is created to accomplish a narrow objective. Such an SPE may take the form of a
corporation, trust, partnership or unincorporated entity.
• If an entity has created a special purpose entity (SPE) to accomplish a narrow and well-defined
objective, the entity shall consolidate the SPE when the substance of the relationship indicates that the
SPE is controlled by that entity
Consolidation procedures

• The consolidated financial statements present financial information about the group as a single
economic entity. In preparing consolidated financial statements, an entity shall:

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

b. eliminate the carrying amount of the parent’s investment in each subsidiary and the parent’s
portion of equity of each subsidiary.

c. measure and present non-controlling interest in the profit or loss of consolidated subsidiaries for
the reporting period separately from the interest of the owners of the parent.

d. measure and present non-controlling interest in the net assets of consolidated subsidiaries
separately from the parent shareholders’ equity in them. Non-controlling interest in the net assets
consists of:

i. the amount of the non-controlling interest at the date of the original combination calculated
in accordance with Section 19 Business Combinations and Goodwill; and
ii. the non-controlling interest’s share of changes in equity since the date of the combination.

Intragroup balances and transactions

• Intragroup balances and transactions, including income, expenses and dividends, are eliminated in full

Uniform reporting date

• The financial statements of the parent and its subsidiaries used in the preparation of the consolidated
financial statements shall be prepared as of the same reporting date unless it is impracticable to do
so.
• If it is impracticable → subsidiary’ financial statements should be adjusted for the effects of significant
transactions or events that occur between the date of those financial statements and the date of the
consolidated financial statements.

Uniform accounting policies

• Consolidated financial statements shall be prepared using uniform accounting policies for like
transactions and other events and conditions in similar circumstances.
• If a member of the group uses accounting policies other than those adopted in the consolidated financial
statements → appropriate adjustments are made to its financial statements in preparing the consolidated
financial statements.
Acquisition and disposal of subsidiaries

• The income and expenses of a subsidiary are included in the consolidated financial statements from the
acquisition date until the date on which the parent ceases to control the subsidiary.
• When a parent ceases to control a subsidiary, the difference between the proceeds from the disposal of
the subsidiary and its carrying amount at the date that control is lost is recognized in profit or loss in
the consolidated statement of comprehensive income (or the income statement, if presented) as the gain
or loss on the disposal of the subsidiary.
• The cumulative amount of any exchange differences that relate to a foreign subsidiary recognized in
other comprehensive income is not reclassified to profit or loss on disposal of the subsidiary.
• If an entity ceases to be a subsidiary but the investor continues to hold investment in the former
subsidiary, the investment is accounted for:
a. At fair value, with changes in the fair value recognized in profit or loss; or

b. At cost less accumulated impairment loss.

• Investments in quoted shares and investments for which the fair value can be measured reliably are
measured at fair value. Measurement at cost is appropriate only when fair value cannot be measured
reliably. The carrying amount of the investment at the date that the entity ceases to be a subsidiary shall
be regarded as the cost on initial measurement of the financial asset.
• If the investment retained in the former subsidiary qualifies as an investment in associate or an interest
in a jointly controlled entity, the investment is accounted for:

a. At fair value, with changes in the fair value recognized in profit or loss; or

b. At cost less accumulated impairment loss; or

c. Using the equity method.

Non-controlling interest in subsidiaries

• An entity shall present non-controlling interest in the consolidated statement of financial position within
equity, separately from the equity of the owners of the parent
• An entity shall disclose a non-controlling interest in the profit or loss of the group separately in the
statement of comprehensive income
• Profit or loss and each component of other comprehensive income shall be attributed to the owners of
the parent and to the non-controlling interest. Total comprehensive income shall be attributed to the
owners of the parent and to the non-controlling interest even if this results in the non-controlling interest
having a deficit balance.