Illustration 3.7A Multi-year Multi-y ear consol consolidati idation: on: non-cont non-contrrolli olling ng inter interests ests rec ecog ogni nise sed d at fai fairr valu value e
Relevant data Acquisition date: Acquirer : Acquiree: Ownership interest acquired: P's ordinar y shares issued: Market value of P'shares issued: Cash paid by P: Fair value of non-controlling interests: Tax rate:
31 Dec 20x1 P Co. S Co. 90 % 1 ,00 0,00 0 5 ,00 0,00 0 8,260,000 1,400,000 2 0%
All fair value adjustments have have tax effects and give rise to deferred tax, except for goodwill impairment loss.
Balance sheets and fair values at 31 December 20x1 S Co. P Co. Book value Fair value Book value Assets Land Leased buildings - net Equipment - net Investment in S Co. Inventories Receivables - ne ne t Other current assets C ash Equity and liabilities Ordinary shares Retained earnings Other liabilities Loan payable Contingent liabilities
780 ,000 5,20 0,000 2,600 ,000 650 ,000 3 90,000 520,00 0 260,000 10,4 00,000 6,500,0 00 1,170,00 0 9 10,000 1,82 0,000
10,400 ,000 Fair value of net identifiable assets
1,17 0,000 1,560,00 0 6,5 00,000 10,400 ,000 2,21 0,000 9,100,0 00 13,260,000 78 0,000 1,170,00 0 390,000 91 0,000 520,0 00 780,000 260,000 1,690,000 11 ,830,000 38,87 0,000 25 ,870,000 5 ,590,00 0 910,00 0 2,6 00,000 1,8 20,000 4,810 ,000 130 ,000 2,86 0,000 38,870,0 00 8 ,970,000
Balance sheets and fair values at 31 December 20x1 S Co. P Co. Book value Fair value Book value Assets Land Leased buildings - net Equipment - net Investment in S Co. Inventories Receivables - ne ne t Other current assets C ash
780 ,000 5,20 0,000 2,600 ,000
1,17 0,000 1,560,00 0 6,5 00,000 10,400 ,000 2,21 0,000 9,100,0 00 13,260,000 650 ,000 78 0,000 1,170,00 0 90,item 000 was3NOT 90,000recognized 910,00in 0 Note, 3this 520,00 0 0,00IFRS 0 3 7requires 80,000 the individual FS of S52Co. 260,0unrecorded 00 260,0intangibles 00 1,690and ,000 previously pre viously 10,400,00to 0 be 11,recognized 830,000 38due ,870to ,00the 0 contingencies Equity and liabilities application of acquisition method Ordinary shares 6,500,0 00 25 ,870,000 Retained earnings 1,170,00 0 5 ,590,00 0 Other liabilities 9 10,000 910,00 0 2,6 00,000 Loan payable 1,82 0,000 1,8 20,000 4,810 ,000 Contingent liabilities 130 ,000 10,400 ,000 2,86 0,000 38,870,0 00 Fair value of net identifiable assets 8 ,970,000
In 20x2 P Co Co. divide dividend nd income income from from S 409,50 409,500 0 S Co. profit after tax 72 8,000 S Co. dividends declared 455,000
Undervalued inventori inventories es of $130,000 $130,000 – sold in in 20x2
Contingent Contingent liabilities liabilities of $130,000 $130,000 – materialize materialized d (paid off) in 20x2 20x2
Undervalued land of $390,000 – still held by S Co, no depreciation depreciation
Undervalued buildings buildings of $1,300,000 $1,300,000 – useful life life 50 years years from from 1 January 20x2 Overvalued Overvalued equipment equipment of $390,000 $390,000 – useful life life 5 years from from 1 January 20x2 Goodwill Goodwill – impairment impairment loss loss of $520,000 $520,000 in 20x2 recogniz recognized. ed.
In 20x3
Undervalued land of $390,000 $390,000 – sold in 20x3 Undervalued buildings buildings of $1,300,000 $1,300,000 – useful life life 50 years years from from 1 January 20x2 Overvalued Overvalued equipment equipment of $390,000 $390,000 – useful life life 5 years from from 1 January 20x2
Net profit profit after after tax of S Co. - $400,000 $400,000
No dividends were declared by S Co. For 20x3
Required... 1.
Prepare Prepare consolidation adjustment at 31 December 20x2
2.
Prepare Prepare consolidation adjustment at 31 December 20x3
Recognize the tax effects of fair value adjustments.
Computation of goodwill Consideration transferred transferred Cash Fair value of new P's shares issued Fair value of NCI
8,26 0,000 5,000,000 13,260,000 1,400,00 0 14,660,000
Less: identifiable net assets Fair Fair valu value e of of iden identif tifiab iable le net assets assets 8,970,0 8,970,000 00 Deferred tax liabilities -260,000 8,710,000 5,950,000
Computation of goodwill Consideration transferred transferred Cash Fair value of new P's shares issued Fair value of NCI
8,26 0,000 5,000,000 13,260,000 1,400,00 0 14,660,000
Less: identifiable net assets Fair Fair valu value e of of iden identif tifiab iable le net assets assets 8,970,0 8,970,000 00 Deferred tax liabilities -260,000 8,710,000 5,950,000 Deferred tax Fair Fair va valu lue e of of ide ident ntif ifia iabl ble e net net asse assets ts 8,97 8,970, 0,00 000 0 Book Book value value of identi identifia fiable ble net assets assets 7,670,0 7,670,000 00 1,300,000 Deferred tax liabilities (20%) 260,000
Computation of goodwill Consideration transferred transferred Cash Fair value of new P's shares issued
8,26 0,000 5,000,000 13,260,000 1,400,00 0 14,660,000
Fair value of NCI Less: identifiable net assets Fair Fair valu value e of of iden identif tifiab iable le net assets assets 8,970,0 8,970,000 00 Deferred tax liabilities -260,000
8,710,000 5,950,000 Goodwill allocation Par Parent ent ($13, ($13,26 260, 0,00 000 0 - (90%* 90%*$8 $8,7 ,710 10,0 ,000 00)) NCI ($1,400,000 - (10%*$8,710,000)
5,42 5,421, 1,00 000 0 (91% 91%) 529,000(9 0(9%) 5,950,000
Consol Con solida idatio tion n jou journa rnall entry entry #1 Dr Ordinary shares (S Co.) Dr Retained earnings (S Co.) Dr Goodwill Dr Inventories D r La n d Dr Buildings - ne ne t Cr Investment in S Co. Cr Equipment - net Cr Contingent liabilities Cr Deferred tax liabilities Cr Non-controlling interests
6,500,000 1,170,00 0 5,95 0,000 130,000 390,00 0 1 ,300,000 13,260,000 390 ,000 1 30,000 260 ,000 1,400,000 15,4 15,440 40,0 ,000 00 15,4 15,440 40,0 ,000 00
Consolidati Conso lidation on wo workshe rksheet et as at 31 Decem December ber 20x1 20x1 P Co. Assets Goodwill Land ‐ net Leased buildings ‐ net Equipment ‐ net Investment in S Co. Inventories Receivables ‐ net Other current assets Cash
1,560,000 10,400,000 9,100,000 13,260,000 1,170,000 910,000 780,000 1,690,000 38,870,000
Equity and liabilities Ordinary shares 25,870,000 Retained earnings 5,590,000 Non‐controlling interests Other liabilities 2,600,000 Loan payable 4,810,000 Contingent liabilities Deferred tax liabilities 38,870,00 38,870,000 0
S Co.
Elim Elimin inat atio ion/ n/Ad Adj. j. Dr. Cr.
5,950,000 780,000 390,000 5,200,000 1,300,000 2,600,000 390,000 0 13,260,000 650,000 130,000 390,000 520,000 260,000 10,400,000 6,500,000 6,500,000 1,170,000 1,170,000 1,400,000 910,000 1,820,000 130,000 260,000 10,400,00 10,400,000 0 15,440,00 15,440,000 0 15,440,00 15,440,000 0
Cons Co nsol olid idat ated ed FS 5,950,000 2,730,000 16,900,000 11,310,000 0 1,950,000 1,300,000 1,300,000 1,950,000 43,390,000 25,870,000 5,590,000 1,400,000 3,510,000 6,630,000 130,000 260,000 43,390,000 43,390,000
Consol Con solida idatio tion n jou journa rnall entry entry #1 (20x2) (20x2) Dr Ordinary shares (S Co.) Dr Retained earnings (S Co.) Dr Goodwill Dr Inventories D r La n d Dr Buildings - ne ne t Cr Investment in S Co. Cr Equipment - net Cr Contingent liabilities Cr Deferred tax liabilities Cr Non-controlling interests
6,500,000 1,170,00 0 5,95 0,000 130,000 390,00 0 1 ,300,000 13,260,000 390 ,000 1 30,000 260 ,000 1,400,000
This entry entr y is repeated each year for as long as the investment exixts.
Consol Con solida idatio tion n jou journa rnall entry entry #2 (20x2) (20x2) Dr Cost of sales Cr Inventories
130,000 130 ,000
Dr Depreciation - bu buildings Cr Accumulated depreciation - buildings
26,000
Dr Ac Accu cum mulat ulated ed depr eprecia eciati tion on - equi equipm pmen entt Cr Depreciation equipment
78,0 78,000 00
26,000
7 8,000
Dr Contingent liabilities Cr Contingent liabilities expense
13 0,000
Dr Impairment loss - goodwill Cr Goodwill
520,00 0
Dr Tax expense Cr Dererred tax liabilities
13 0,000
52 0,000 10,40 0 10 ,400
Consol Con solida idatio tion n jou journa rnall entry entry #2 (20x2) (20x2) Dr Cost of sales Cr Inventories
130,000 130 ,000
Dr Depreciation - bu buildings 26,000 Cr Accumulated depreciation - buildings 26,000 To adjust cost of sales based on the fair inventories as at the Dr Ac Accu cum mulat ulated ed depr eprecia eciati tion on - equi equipm pmen entvalue t 78,0 78of ,000 00 acquisition date Cr Depreciation equipment 7 8,0 00 Dr Contingent liabilities Cr Contingent liabilities expense
13 0,000
Dr Impairment loss - goodwill Cr Goodwill
520,00 0
Dr Tax expense Cr Dererred tax liabilities
13 0,000
52 0,000 10,40 0 10 ,400
Consol Con solida idatio tion n jou journa rnall entry entry #2 (20x2) (20x2) Dr Cost of sales Cr Inventories Dr Depreciation - bu buildings Cr Accumulated depreciation - buildings
130,000 130 ,000 26,000 26,000
Dr Ac Accu cum mulat ulated ed depr eprecia eciati tion on - equi equipm pmen entt 78,0 78,000 00 Cr Depreciation equipment 7 8,000 To adjust depreciation based on the fair value Dr Contingent liabilities 13as 0,0at00the acquisition date ($6,500 ($6, 500,00 ,000 0 - $5,2 $5,200,0 20 Cr Contingent liabilities expense 130,00,000) 000 00) / 20 Dr Impairment loss - goodwill Cr Goodwill Dr Tax expense Cr Dererred tax liabilities
520,00 0 52 0,000 10,40 0 10 ,400
Consol Con solida idatio tion n jou journa rnall entry entry #2 (20x2) (20x2) Dr Cost of sales Cr Inventories
130,000 130 ,000
Dr Depreciation - bu buildings Cr Accumulated depreciation - buildings
26,000
Dr Ac Accu cum mulat ulated ed depr eprecia eciati tion on - equi equipm pmen entt Cr Depreciation equipment
78,0 78,000 00
Dr Contingent liabilities Cr Contingent liabilities expense Dr Impairment loss - goodwill Cr Goodwill Dr Tax expense Cr Dererred tax liabilities
26,000
7 8,000 13 0,000 13 0,000
To adjust52depreciation based on the 0,00 0 fair value as at the date 52acquisition 0,000 ($2,210 ($2 ,210,00 ,000 0 - $2,6 $2,600, 00,000) 000) / 5 10,40 0 10 ,400
Consol Con solida idatio tion n jou journa rnall entry entry #2 (20x2) (20x2) Dr Cost of sales Cr Inventories
130,000 130 ,000
Dr Depreciation - bu buildings Cr Accumulated depreciation - buildings
26,000
Dr Ac Accu cum mulat ulated ed depr eprecia eciati tion on - equi equipm pmen entt Cr Depreciation equipment
78,0 78,000 00
Dr Contingent liabilities Cr Contingent liabilities expense Dr Impairment loss - goodwill Cr Goodwill Dr Tax expense Cr Dererred tax liabilities
26,000
7 8,000 13 0,000 13 0,000
520,00 0 To eliminate the of 52recognition 0,000 expense in the S Co. I/S and contingent in CJE #1 10,40liabilities 0 10 ,400
Consol Con solida idatio tion n jou journa rnall entry entry #2 (20x2) (20x2) Dr Cost of sales Cr Inventories
130,000 130 ,000
Dr Depreciation - bu buildings Cr Accumulated depreciation - buildings
26,000
Dr Ac Accu cum mulat ulated ed depr eprecia eciati tion on - equi equipm pmen entt Cr Depreciation equipment
78,0 78,000 00
Dr Contingent liabilities Cr Contingent liabilities expense Dr Impairment loss - goodwill Cr Goodwill Dr Tax expense Cr Dererred tax liabilities
26,000
7 8,000 13 0,000 13 0,000
To adjust tax expense relating to 520,00 0 understated unders tated profit p rofit in S Co.’ Co.’s I/S I/ S 52 0,000 10,40 0 10 ,400
Understated profit in S Co Co.'s .'s income statement Cost of sales - inventor y Depreciation - bu buildings Depreciation - equipment Contingent liabilities expense Income tax adjustment
130 ,000 26,000 -7 8 , 0 0 0 -130,000 -52,000 10,400
Note, deferred tax liability should NOT considered goodwill asset and its impairment.
Consol Con solida idatio tion n jou journa rnall entry entry #3 (20x2) (20x2) Dr Income to NCI Cr Non-controlling interest
2 4,960 24,960
Adjustment of S Co.'s net profit after tas Net profit after tax as reported by S Co. Increase in in co cost of of sales of of un underv rvaalued in inventory Increase in depreciation on underv rvaalued buildings Decrease in depreciation on overv rvaalued equipment Decrease in expense on recognized contingency Increase in tax expense Impairment loss on goodwill Adjusted net profit after tax of S Co. NCI's share (10%)
72 8,000 -1 3 0 , 0 0 0 -2 6 , 0 0 0 78,00 0 130,00 0 -1 0 , 4 0 0 -5 2 0 , 0 0 0 249,600 24,960
Consol Con solida idatio tion n jou journa rnall entry entry #4 (20x2) (20x2) Dr Dividend income Dr Non-controlling interest Cr Dividends (S Co.)
40 9,500 45,50 0 4 55,000
Reconciliation of non-controlling interest with net assets of S Co. From the consoli From consolidatio dation n jurnal entri entries es NCI as at the acquisition date 1,400,000 NCI's share of current profit after tas 24,960 NCI's share of dividends -45,500 NCI as at 31 December 20x2 1,379,460
Reconciliation of non-controlling interest with net assets of S Co. Analytical check on NCI as at 31 December 20x2
Book value of shareholders' of shareholders' equity Unamortized FV differentials Adjusted identifiable net assets
7,943,000 1,081,600 9,024,600
NCI's share of identifiable of identifiable net assets (10%) 902,460 NCI's share of unimpaired of unimpaired goodwill Goodwill attributable to NCI 529,000 Impairment loss ‐52,000 477,000 1,379,460 NCI as at 31 December 20x2
Reconciliation of non-controlling interest with net assets of S Co. Analytical check on NCI as at 31 December 20x2 Book value of of shareholders' shareholders' equity 7,943,000
Unamortized FV differentials Adjusted identifiable net assets
1,081,600 9,024,600
NCI's share of identifiable of identifiable net assets (10%) NCI's share of unimpaired of unimpaired goodwill Goodwill attributable to NCI 529,000 Impairment loss ‐52,000
902,460
477,000 1,379,460
Book value of of shareholders' shareholders' equity as at 31 December 20x2
Share capital Retained earnings As at 1 January 20x2 Net profit after tax Dividends declared As at 31 December 20x2 Book value of of shareholders' shareholders' equity
6,500,000 1,170,000 728,000 ‐455,000 1,443,000 7,943,000
Reconciliation of non-controlling interest with net assets of S Co. Analytical check on NCI as at 31 December 20x2
Book value of shareholders' of shareholders' equity
7,943,000
Unamortized FV differentials
1,081,600
Adjusted identifiable net assets
9,024,600
NCI's share of identifiable of identifiable net assets (10%) NCI's share of unimpaired of unimpaired goodwill Goodwill attributable to NCI 529,000 Impairment loss ‐52,000
902,460
477,000 1,379,460
Unamortized FV differentials as at 31 December 20x2
Undervalued land ($1,170,000 ‐ $780,000) Undervalued buildings [($6,500,000 ‐ $5,200 $5,200,0 ,000 00)* )*49 49/5 /50] 0] Overvalued equipment [($2,210,000 ‐ $2,600,000)*4/5] Tax effects
390,000 1,274 1,274,0 ,000 00 ‐312,000 1,352,000 270,400
Net of of ttax
1,081,600
Consol Con solida idatio tion n jou journa rnall entry entry #1 (20x3) (20x3) Dr Ordinary shares (S Co.) Dr Retained earnings (S Co.) Dr Goodwill Dr Inventories D r La n d Dr Buildings - ne ne t Cr Investment in S Co. Cr Equipment - net Cr Contingent liabilities Cr Deferred tax liabilities Cr Non-controlling interests
6,500,000 1,170,00 0 5,95 0,000 130,000 390,00 0 1 ,300,000 13,260,000 390 ,000 1 30,000 260 ,000 1,400,000
This entry entr y is repeated each year for as long as the investment exixts.
Consol Con solida idatio tion n jou journa rnall entry entry #2 (20x3) (20x3) Dr Retained earnings Dr Non-controlling interests Cr Goodwill
468,000 52,000 520 ,000
This entry is to re-enact the impairment loss on goodwill.
Consol Con solida idatio tion n jou journa rnall entry entry #3 (20x3) (20x3) Dr Retained earnings Cr Non-controlling interest
2 7,300 27,300
This entry entr y is to allocate post-acquisition R/E of S Co. from the date of acquisition to the beginning beginn ing of the current period. R/E at beginning of current period (1/1/20x3) R/E at acquisition date (31/12/20x1) Change in retained earnings NCI's share (10%)
1,44 3,000 1,170,000 27 3,000 27,300
Consol Con solida idatio tion n jou journa rnall entry entry #4 (20x3) (20x3) Dr Ac Acccumul umulat ated ed depr eprecia eciati tion on - equi equipm pmen entt 78,0 78,000 00 Dr Contingent liabilities 1 30,000 Cr Inventories 13 0,000 Cr Accumulated depreciation - buildings 26,00 0 Cr Dererred tax liabilities 1 0,400 Cr Retained earnings 37,4 40 Cr Non-controlling interest 4,160 Prior-year Prior-year adjustment adju stment
Cost of sales Depreciation of buildings Depreciation of equipment Realization of contingent liabilities Increase in tax expense Total prior-year adjustment Adjusted to consolidated R/E (90%) Allocated to NCI (10%)
-130,000 -2 6 , 0 0 0 78,0 00 130,000 -10,400 41,600 37,440 4,160
Consol Con solida idatio tion n jou journa rnall entry entry #5 (20x3) (20x3) Dr Profit on sale of land C r La n d
390,000 390,000
Dr Depreciation - bu buildings Cr Accumulated depreciation - buildings
26,00 0
Dr Ac Acccumul umulat ated ed depr eprecia eciati tion on - equi equipm pmen entt Cr Depreciation equipment
78,0 78,000 00
Dr Deferred tax liabilities Cr Deferred tax expense
67,60 0
26,00 0
78,000
67,600
Consol Con solida idatio tion n jou journa rnall entry entry #5 (20x3) (20x3) Dr Profit on sale of land C r La n d
390,000 390,000
Dr Depreciation - bu buildings Cr Accumulated depreciation - buildings
26,00 0
Dr Ac Acccumul umulat ated ed depr eprecia eciati tion on - equi equipm pmen entt Cr Depreciation equipment
78,0 78,000 00
Dr Deferred tax liabilities Cr Deferred tax expense
67,60 0
26,00 0
78,000
67,600
To adjust overstated profit before tas of $338,000 in S Co.’s I/S
Consol Con solida idatio tion n jou journa rnall entry entry #6 (20x3) (20x3) Dr Income to NCI Cr Non-controlling interest
1 2,960 12,960
Computation Net profit after tax of S Co. for 20x3 40 0,000 Current adjustments Cost of sales of undervalued land -3 9 0 , 0 0 0 Depr Deprec ecia iati tion on of unde underv rval alue ued d buil buildi ding ngss -26,0 26,000 00 Depreciation of of ov overv rvaalued equipment 78,000 -338,000 Tax expense adjustment 6 7 , 6 0 0 -2 7 0 , 4 0 0 Adjusted net profit after tax of S Co. 129,600 NCI's share (10%) 12,960
Reconciliation of non-controlling interest with net assets of S Co. From the consoli From consolidatio dation n jurnal entri entries es NCI as at the acquisition date 1,400,000 NCI's share of past goodwill impairment -52,000 NCI's share of post-acquisition R/E 27,300 NCI's share of prior-year adjustments 4,160 NCI's share of current profit after tas 1 2,960 NCI as at 31 December 20x3 1,392,420
Reconciliation of non-controlling interest with net assets of S Co. Analytical check check on NCI as at 31 December 20x2 Book value of shareholders' equity 8,3 43,000 Unamortized FV differentials 81 1,200 Adjusted identifiable net assets 9,154,2 00
NCI's share of identifiable net assets (10%) 915,420 NCI's share of unimpaired goodwill Goodwill attributable to NCI 529,0 00 Impairment loss -5 2 , 0 0 0 477,00 0 NCI as at 31 December 20x3 1,392,420
Reconciliation of non-controlling interest with net assets of S Co. Analytical check check on NCI as at 31 December 20x2 Book value of shareholders' equity 8,343,000 Unamortized FV differentials 81 1,200 Adjusted identifiable net assets 9,154,2 00
NCI's share of identifiable net assets (10%) NCI's share of unimpaired goodwill Goodwill attributable to NCI 529,0 00 Impairment loss -5 2 , 0 0 0 NCI as at 31 December 20x3
915,420
477,00 0 1,39 2,420
Book value of shareholders' equity as at 31 December 20x2 Share capital 6,500,000 Retained earnings As at 1 January 20x3 1,443,000 Net profit after tax 4 00,000 Dividends declared 0 As at 31 December 20x3 1,843,000 Book value of shareholders' equity 8,343,000
Reconciliation of non-controlling interest with net assets of S Co. Analytical check check on NCI as at 31 December 20x2 Book value of shareholders' equity 8,3 43,000 Unamortized FV differentials 811,200 Adjusted identifiable net assets 9,154,2 00
NCI's share of identifiable net assets (10%) NCI's share of unimpaired goodwill Goodwill attributable to NCI 529,0 00 Impairment loss -5 2 , 0 0 0 NCI as at 31 December 20x3
915,420
477,00 0 1,39 2,420
Unamortized FV differentials differentials as at 31 December 20x2 Underv rvaalued buildings ($ ($6,500,000 - $5,200,000)*48/50 1,248 ,000 Overvalued equipment ($2,210,000 - $2,600,000)*3/5 -2 3 4 , 0 0 0 1,014,000 Tax effects 202,800 Net of tax 811,200
