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Stock Acquisition Date of Acquisition

- It is a business combination in which the acquirer is a parent and the acquiree is a
- This results from the parent acquiring a controlling interest in the equity (not net
assets) of the subsidiary (Note: Purchase of net assets does not result in a parentsubsidiary relationship)
- Both parent and subsidiary retain their status as separate legal entities
- From an economic perspective, they are a single reporting entity (Note: In a purchase of
net assets, the legal and economic entities are one)
- Two sets of financial statements must be prepared:
a. Separate financial statements for the parent and subsidiary, in accordance with
PAS 27
b. Consolidated financial statements for the parent, in accordance with PFRS 10
(Note: Consolidation is the process of combining the assets, liabilities, earnings and
cash flows of parent and subsidiary as if they were one economic entity. Consolidated
amounts never appear on the parents books. Reporting is not the same as recording.
Reported numbers are results of spreadsheet analysis)
Separate Financial Statements
- PAS 27 defines separate FS as those presented by a parent, an investor in an associate
or a joint venturer in a joint venture in which the investments are accounted for on the
bases of the direct equity interest rather than on the basis of the reported results and
net assets of the investee.
- The investors separate FS reflect the legal interest in the investment and its direct
benefits (dividends) rather than the larger economic entitlements (share of profits) that
are brought by control or significant influence or contractual arrangement or joint
Consolidated Financial Statements
- The purpose of these FS is to present, primarily for the benefit of the owners and
creditors of the parent, the results of operations and the financial position of a parent
company and all its subsidiaries as if the consolidated group were a single economic
entity (Note: The most relevant is the consolidated balance sheet)
- These ignore the legal aspects of the separate entities (Note: The presumption is that
most users of financial statements prefer to evaluate the economic rather than the legal
- The preparation of consolidated statements is an example of focusing substance rather
than form
- When the subsidiary prepares accounts to a different reporting date from the parent
and the bulk of other subsidiaries in the group, it may prepare additional statements to
the reporting date of the rest of the group. If this is not possible, the subsidiarys account
may still be used for consolidation, provided: that the gap between the reporting dates is
three months or less
- Requisites for a parent to be exempted from preparing consolidated FS:
a. The parent itself is a wholly-owned or partially-owned subsidiary of another entity,
and its owners (those entitled to vote or not) have been informed and do not object
to the parent not to present consolidated financial statements
b. Its debt or equity instruments are not publicly traded
c. It is not in the process of issuing securities in public securities markets
d. The ultimate or intermediate parent publishes consolidated FS that comply with
Definition: Any purchase of by one corporation of the securities of another corporation
1. Debt securities
2. Equity securities
Passive Investment
Active or Strategic
- Made to earn dividends or to earn profits by actively trading it
- Provides a strategic
for short-term profit
or long-term advantage
- Initially recorded at cost and are reported at fair market
by giving the investor
value on each periods statement of financial position or
the ability to either
balance sheet
significantly influence
- The treatment of gains and losses depends on how the
or control the operating
company has elected to classify the investment a choice that
or financial decisions of

the reporting entity makes for each separate passive

investment when the investment is first made. The choices
available under PFRS 9, are:
(1) Fair value thru profit or loss (or held for trading under PAS
- Dividends and changes in fair value are reported in the
income section of the statement of comprehensive income
(2) FVTOCI (or available for sale under PAS 39)
- Dividends are recognized in net income, but changes in
fair value are reported as other comprehensive income,
and the accumulated gains and losses are reported as a
separate component of stockholders equity (Note: The
choice to classify as FVTOCI is irrevocable)

the investee
- Generally,
investments are
considered strategic if
a company owns,
either directly or
indirectly, 20% or more
of the voting shares of
the investee, unless it
can be clearly
demonstrated that the
investments are

The two general types are:
1. Structured Entities or Variable Interest Entities or Special Purpose Entities
a. How and why made
- Set up by the reporting enterprise, or the sponsor, to perform a very specific and
narrow function
- Can be created simply by delegating specific powers to certain individuals to act on
behalf of the sponsoring corporation to act on behalf of the sponsoring corporation
in effect, by creating a sort of agency relationship (Note: Compared to a subsidiary, it
is not controlled thru voting power)
- May not even be a corporation, but could instead be a partnership
b. When to consolidate FS
- The first step in determining whether the FS should be consolidated is to determine
if the reporting entity has a variable interest in another entity or referred as a
potential VIE
- Variable interests are investments or other interests that absorb portions of a VIEs
expected losses or receive portions of the entities expected residual returns (Note:
Operations of an entity and its assets tend to create variability, but generally are not
variable interests, while liabilities and equity tend to absorb such)
c. Major issues in its use
- Some reporting entities have entered into arrangements using VIEs that appear to
be designed to avoid reporting assets and liabilities for which they are responsible, to
delay reporting losses that have already been incurred, or to report gains that are not
real (Note: The root of this issue is that majority of the financing is thru debt rather
than equity; in other words, it is thinly capitalized)
2. Subsidiary
a. Definition
A corporation, or an unincorporated entity such as partnership or trust company, that
is controlled by a parent company, which owns a majority of the voting shares or
rights of the subsidiary. Most common type of controlled entity
b. Classifications
May be wholly owned (ownership is 100% of net assets or equity) or partially owned
(less than 100%)
c. When to consolidate FS
Control is the criterion for identifying a parent-subsidiary relationship. PFRS 10 uses
control as the single basis for consolidation. It has three elements: (1) Power over the
investee (2) Exposure, or rights to variable returns and (3) Ability to use power over
the investee
Note: Power arises from rights. Such rights can be straightforward (e.g. thru
voting rights). An investor that holds only protective rights cannot have power
over and control an investee
d. Default presumption in control
For practical reasons, the presumption is that ownership of more than 50% of voting
power constitutes control, in the absence of any evidence to the contrary. PFRS 10 is
based on principles rather than rules, thus the use of this quantitative criterion is
only a guide. (Note: In the context of PFRS 10, the quantitative criterion was not
mentioned, but also not superseded by a new rule)
e. Exclusion from consolidation
PFRS 10 requires that consolidated financial statements are prepared to include all
subsidiaries, both foreign and domestic, other than:

- Those held for sale in accordance with PFRS 5

- Those held under such long-term restrictions that control cannot be operated
(Note: The rules on exclusion are necessarily strict. A subsidiary should not be
excluded simply because it is a loss-making one or its business activities are
dissimilar from those of the group as a whole)
f. What to include in consolidation
The results of undertakings must be included from the date of acquisition to the date
of disposal (i.e. the date the investor loses control). When investment is no longer a
subsidiary, it should be treated as an associate under PAS 28, or joint venture under
PFRS 11 or an investment under PAS 39 or PFRS 9
- Where an entity meets the definition of an investment entity, it does not consolidate its
subsidiaries, or apply PFRS 3 when it obtains control of another entity (Note: Thus,
intragroup related party transactions and outstanding balances are not eliminated)
- It is still required to consolidate a subsidiary where that subsidiary provides services
that relate to the investment entitys investment activities)
- PFRS 10 provides that investment entities should have the following characteristics: (a)
more than one investment (b) more than one investor (c) investors are not related
parties (d) ownership interest is in the form of equity (Note: The absence of any does not
disqualify the entity from being classified as investment entity)
- It is required to be measured at FVTPL in accordance with PFRS 9 or PAS 39
a. Initial recognition
- Under the acquisition method, the stock investment is recorded at its cost as measured
by the fair value of the consideration given or the consideration received, whichever is
more clearly evident
b. Acquisition-related costs
- Treated as expenses in the books of the parent entity, but charged directly to RE in date
of acquisition
(Note: There is an argument that the basis for determination of costs will be under the
general rule of recording costs, which includes direct-acquisition cots as part of the
investment acquired. Whether such is capitalized or not, it does not affect the
computation of goodwill or gain on bargain purchase)
c. Stock issuance costs
- Charge directly to APIC
Goodwill: The premium that a parent pays to acquire the subsidiary and should be
separately recognized as an asset in the consolidated financial statements
Non-controlling interest
- Ownership interests in a subsidiary other than the parent
- This is the equity in a subsidiary not attributable, directly or indirectly, to a parent
- May be referred as NCI in net assets or NCI in equity
(Note: It is possible for NCI to have a debit balance, as when their share of losses in a
subsidiary exceeds their share in the subsidiarys capital, RE and other equity items.
Under such circumstances, PFRS 10 requires the NCI to have a deficit balance)
Measurement of goodwill and NCI at the date of acquisition
Non-controlling interest
1. Full goodwill
The components are:
approach or Fair Value
a. Share of book value of identifiable net
assets of the subsidiary
b. Share of the excess of fair value over book
value of identifiable net assets of subsidiary
at acquisition date
c. Share of goodwill in subsidiary at
acquisition date
2. Partial goodwill
approach or
Proportion of the
Acquirees Identifiable
Net Assets

The components are:

a. Share of book value of identifiable net
assets of the subsidiary
b. Share of the excess of fair value over book
value of identifiable net assets of subsidiary
at acquisition date

Includes the NCIs
share of goodwill

NCIs share of
goodwill is not

Note: Under the first approach, NCI are determined with reference to either active market price of equity shares of
the subsidiary at acquisition date or other valuation techniques. Fair value per share of NCI may differ from FV of
the acquirer because a control premium may be paid by the acquirer.

Theories for NCI


n of NCI

Entity or economic unit theory

NCI are deemed to be as important a
stockholder of the combined entity as
are the majority stockholders. The
distinction between the parent and the
NCI both are included in equity
Within equity, but separate from the
equity of the owners of the parent
Consolidated equity (CI and NCI) =
Consolidated assets minus consolidated

FV of assets

Recorded in full


An asset of the economic entity, and

recognized in full. Internally-generated
goodwill is recorded in full.
Not deducted to profit (Note: Net profit
of subsidiary is reported in full. Total
comprehensive income is attributed to
CI and NCI, even if this results in the NCI
having a debit balance)

NCIs share
of current

Parent theory
Focuses on the information needs of
the parent company shareholders

Neither part of equity nor debt, but

separate component in the balance
Consolidated equity plus NCI =
Consolidated assets minus
consolidated liabilities
Recognized only in respect of
parents share (Note: Assets and
liabilities of subsidiary are shown at
book, not fair value)
An asset of the parent only.
Internally-generated goodwill is not
Shown as a deduction to profit to
show the final profit that is
attributable to the parent company

Note: The third theory is the proprietary theory. Under the theory, the parent is seen as having a direct interest in
the subsidiarys assets and liabilities. This perspective results in a pro-rata or proportional consolidation whereby
the parents interest is directly multiplied to each individual asset and liability of the subsidiary and combined with
the parents assets and liabilities.

- Although two sets of accounts have to be prepared (separate and consolidated FS), only
one set of book ledgers has to be kept by the legal entities. There are no ledgers kept for
the group entity
- The following are to be noted:
a. Consolidation adds the elements on the FS of subsidiaries and the structured
entities to the parents
b. On the balance sheet, there will be no investment account
c. On the statement of comprehensive income, the revenues and expenses will be
totals for each item for the parent plus the controlled entities
d. The effects of any and all intercompany transactions will be eliminated to avoid
double counting
REAR steps to consolidation
1. Reliable measurement
a. Calculate cost and fair value adjustments
- Under the acquisition method, the carrying values of the parent are combined with
the acquisition-date fair values of the purchased subsidiaries
- The fair value adjustments (FVA) is either a fair value increment due to
undervaluation or a fair value decrement due to overvaluation. These represent the
total amount of additional net upward valuation or downward valuations that must be
made in the subsidiarys net assets upon consolidation
b. Allocate FVA thru over- or undervaluation of assets and liabilities
- FVA is first allocated to the various identifiable assets and liabilities of the acquiree
to the full extent of their fair value increments or decrements. Any excess of the FVA
after the allocation process is allocated to goodwill
2. Eliminate all intercompany transactions and balances
- Eliminations are changes that prevent certain amounts on the separate entity
statements from appearing on the consolidated statements
- Adjustments are made to alter reported amounts to reflect the economic substance of
transactions rather than their nominal amount
3. Amortize the FVA
4. Recognize NCI

Approaches to Consolidation
a. Direct Approach
Concept: Prepares the consolidated statements by setting up the formats of the
statements and computing each consolidated balance directly
When to use: If the statements to be consolidated are fairly simple (because it is
spontaneously appealing, thus we can work directly the statements and see clearly
what is happening to them)
b. Workpaper Approach
Concept: Uses a multi-columnar worksheet to enter the trial balances of the parent
and each subsidiary
When to use: If situations are complex (because even if it is less spontaneous, it is
more methodical)

Business Combinations