Business Combination and Consolidation

UNIVERSITY OF THE CORDILLERAS Undergrad Review Practical Accounting II Business Combinations / Consolidated Financial Statements

Mark Alyson B. Ngina

IFRS 3 Business Combinations A business combination is a transaction or event in which an acquirer obtains control of one or more businesses. A business is defined as an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return directly to investors or other owners, members or participants. Core principle An acquirer of a business recognises the assets acquired and liabilities assumed at their acquisition-date fair values and discloses information that enables users to evaluate the nature and financial effects of the acquisition. Applying the acquisition method Acquisition method. The acquisition method (called the 'purchase method' in the 2004 version of IFRS 3) is used for all business combinations. Steps in applying the acquisition method are: 1. Identification of the 'acquirer' – the combining entity that obtains control of the acquiree 2. Determination of the 'acquisition date' – the date on which the acquirer obtains control of the acquiree 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 Measurement of acquired assets and liabilities. Assets and liabilities are measured at their acquisition-date fair value (with a limited number of specified exceptions). Measurement of NCI. IFRS 3 allows an accounting policy choice, available on a transaction by transaction basis, to measure NCI either at: a. fair value (sometimes called the full goodwill method), or b. the NCI's proportionate share of net assets of the acquiree (option is available on a transaction by transaction basis). Acquired intangible assets. Must always be recognised and measured at fair value. There is no 'reliable measurement' exception. Goodwill Goodwill is measured as the difference between: a. the aggregate of (i) the acquisition-date fair value of the consideration transferred, (ii) the amount of any NCI, and (iii) in a business combination achieved in stages (see Below), 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 (measured in accordance with IFRS 3). If the difference above is negative, the resulting gain is recognised as a bargain purchase in profit or loss. Business combination achieved in stages (step acquisitions) Prior to control being obtained, the investment is accounted for under IAS 28, IAS 31, or IAS 39, as appropriate. On the date that control is obtained, the fair values of the acquired entity's assets and liabilities, including goodwill, are measured (with the option to measure full goodwill or only the acquirer's percentage of goodwill). Any resulting adjustments to previously recognised assets and liabilities are recognised in profit or loss. Thus, attaining control triggers remeasurement. Provisional accounting If the initial accounting for a business combination can be determined only provisionally by the end of the first reporting period, account for the combination using provisional values. Adjustments to provisional values within one year relating to facts and circumstances that existed at the acquisition date. No adjustments after one year except to correct an error in accordance with IAS 8. Cost of an acquisition Measurement. Consideration for the acquisition includes the acquisition-date fair value of contingent consideration. Changes to contingent consideration resulting from events after the acquisition date must be recognised in profit or loss. Acquisition costs. Costs of issuing debt or equity instruments are accounted for under IAS 32 and IAS 39. All other costs associated with the 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;

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advisory, legal, accounting, valuation and other professional or consulting fees; and general administrative costs, including the costs of maintaining an internal acquisitions department. Contingent consideration. Contingent consideration must be measured at fair value at the time of the business combination. 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 an equity instrument or cash or other assets paid or owed. If it is equity, the original amount is not remeasured. If the additional consideration is cash or other assets paid or owed, the changed amount is recognised in profit or loss. If the amount of consideration changes because of new information about the fair value of the amount of consideration at acquisition date (rather than because of a post-acquisition event) then retrospective restatement is required. 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:  for pre-existing non-contractual relationships (for example, a lawsuit): by reference to fair value  for pre-existing contractual relationships: at the lesser of (a) the favourable/unfavourable contract position and (b) any stated settlement provisions in the contract available to the counterparty to whom the contract is unfavourable. However, where the transaction effectively represents a reacquired right, an intangible asset is recognised and measured on the basis of the remaining contractual term of the related contract excluding any renewals. The asset is then subsequently amortised over the remaining contractual term, again excluding any renewals. Exception to the recognition and measurement principles The IFRS provides limited exceptions to these recognition and measurement principles: a) Leases and insurance contracts. Leases and insurance contracts are required to be classified on the basis of the contractual terms and other factors at the inception of the contract (or when the terms have changed) rather than on the basis of the factors that exist at the acquisition date. b) Contingent Liability. Only those contingent liabilities assumed in a business combination that are a present obligation and can be measured reliably are recognised. That is, it is not necessary that an outflow of future economic benefits is probable. c) Income tax, employee benefits, share-based payment, non-current assets held for sale. Assets and liabilities are required to be recognised or measured in accordance with their respective IFRS’s, rather than at fair value. d) Reacquired rights. The acquirer may reacquire a right that it had previously granted to the acquiree; for example, the right to use the acquirer's technology under a technology licensing agreement. The acquirer recognizes the reacquired intangible right as an asset and determines its fair value on the basis of the remaining contractual term of the contract, regardless of whether market participants would consider potential contractual renewals in determining its fair value. Subsequently, the reacquired right is amortized over the remaining contractual period. e) Indemnification asset. Indemnification assets are recognised and measured on a basis that is consistent with the item that is subject to the indemnification, even if that measure is not fair value. Disclosure The IFRS requires the acquirer to disclose information that enables users of its financial statements to evaluate the nature and financial effect of business combinations that occurred during the current reporting period or after the reporting date but before the financial statements are authorised for issue. After a business combination, the acquirer must disclose any adjustments recognised in the current reporting period that relate to business combinations that occurred in the current or previous reporting periods. IAS 27 Separate Financial Statements The objective of the Standard is to prescribe the accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements. The Standard shall be applied in accounting for investments in subsidiaries, joint ventures and associates when an entity elects, or is required by local regulations, to present separate financial statements. Separate financial statements are those presented by a parent (ie an investor with control of a subsidiary) or an investor with joint control of, or significant influence over, an investee, in which the investments are accounted for at cost or in accordance with IFRS 9 Financial Instruments. When an entity prepares separate financial statements, it shall account for investments in subsidiaries, joint ventures and associates either: a) at cost, or b) in accordance with IFRS 9. The entity shall apply the same accounting for each category of investments. Investments accounted for at cost shall be accounted for in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations when they are classified as held for sale (or included in a disposal group that is classified as

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held for sale). The measurement of investments accounted for in accordance with IFRS 9 is not changed in such circumstances. IFRS 10 Consolidated Financial Statements The objective of this IFRS is to establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. To meet the objective, this IFRS: a) requires an entity (the parent) that controls one or more other entities (subsidiaries) to present consolidated financial statements; b) defines the principle of control, and establishes control as the basis for consolidation; c) sets out how to apply the principle of control to identify whether an investor controls an investee and therefore must consolidate the investee; and d) sets out the accounting requirements for the preparation of consolidated financial statements. Key Definitions: Consolidated financial statements Control of an investee Parent Power Protective rights Relevant activities

The financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity An investor controls 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 An entity that controls one or more entities Existing rights that give the current ability to direct the relevant activities 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 Activities of the investee that significantly affect the investee's returns

Control An investor determines whether it is a parent by assessing whether it controls one or more investees. An investor considers all relevant facts and circumstances when assessing whether it controls an investee. An investor controls an investee if and only if the investor has all of the following elements: a) 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) b) exposure, or rights, to variable returns from its involvement with the investee c) the ability to use its power over the investee to affect the amount of the investor's returns. Power arises from rights. Such rights can be straightforward (e.g. through voting rights) or be complex (e.g. embedded in contractual arrangements). An investor that holds only protective rights cannot have power over an investee and so cannot control an investee. An investor must be exposed, or have rights, to variable returns from its involvement with an investee to control the investee. Such returns must have the potential to vary as a result of the investee's performance and can be positive, negative, or both. A parent must not only have power over an investee and exposure or rights to variable returns from its involvement with the investee, a parent must also have the ability to use its power over the investee to affect its returns from its involvement with the investee. When assessing whether an investor controls an investee an investor with decision-making rights determines whether it acts as principal or as an agent of other parties. A number of factors are considered in making this assessment. For instance, the remuneration of the decision-maker is considered in determining whether it is an agent. 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:  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  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)  it did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market, and  its ultimate or any intermediate parent of the parent produces consolidated financial statements available for public use that comply with IFRSs. Furthermore, post-employment benefit plans or other long-term employee benefit plans to which IAS 19 Employee Benefits applies are not required to apply the requirements of IFRS 10. Consolidation procedures Consolidated financial statements:  combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent with those of its subsidiaries  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 Business Combinations explains how to account for any related goodwill)

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-

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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 recognised in assets, such as inventory and fixed assets, are eliminated in full). An entity must use uniform accounting policies for reporting like transactions and other events in similar circumstances. 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 in subsidiaries must be presented in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent.

Changes in the ownership interests A. No Loss of Control 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 (ie transactions with owners in their capacity as owners). B. Loss of control / Deconsolidation If a parent loses control of a subsidiary, the parent: a) derecognises the assets and liabilities of the former subsidiary from the consolidated statement of financial position. b) recognises any investment retained in the former subsidiary at its fair value 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 fair value shall be 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) recognises the gain or loss associated with the loss of control attributable to the former controlling interest. Examples of loss of control 1. Liquidation, receivership and administration. When a subsidiary becomes a subject of insolvency proceedings involving the appointment of a receiver or liquidator, if the effect is that the shareholders cease to have the power to govern the financial and operating policies. Although this will often be the case in a liquidation, a receivership or administration order may not involve loss of control by shareholders. 2. Seizure of assets or operation. An example of loss of control is seizure of assets or operations of an foreign subsidiary by local government.

Note: Short-term restrictions on cash flows from a subsidiary and severe long-term restrictions impairing the ability to transfer funds to the parent does not necessarily precludes control. Acquiring additional shares in the subsidiary after control was obtained This is accounted for as an equity transaction with owners (like acquisition of 'treasury shares'). Goodwill is not remeasured. Disclosure The disclosure requirements for interests in subsidiaries are specified in IFRS 12 Disclosure of Interests in Other Entities. Investment Joint Venture

Current IAS 31 Investment in Joint Venture

Subsidiary

IAS 27 Consolidated and Separate Financial Statements

Associate

IAS 28 Investment in Associate

January 1, 2013 IAS 28 Investment in Associates and Joint Venture IFRS 11 Joint Arrangements IFRS 12 Disclosure of Interest in Other Entities IFRS 10 Consolidated Financial Statement IAS 27 Separate Financial Statement IFRS 12 Disclosure of Interest in Other Entities IAS 28 Investment in Associate and Joint Venture IFRS 12 Disclosure of Interest in Other Entities

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Classifying Investments The Binfathi Group’s investment in Al-Taweel Limited 1. Binfathi has a 15% holding in the shares of Al-Taweel Limited. In addition, one of Binfathi’s subsidiaries, Gulfwings Inc., which is 60% owned, has a holding of 55% of the shares in Al-Taweel. Binfathi’s effective share of Al-Taweel Limited is, therefore, 48% (15% + (60% of 55%)). How should this investment be classified? a. A subsidiary b. An associate c. A jointly controlled company d. None of these categories A - Al-Taweel is a subsidiary through the Gulfwings’ majority holding of the share capital, and would be even if Binfathi did not have its 15% direct holding. 70% of the voting shares in Al-Taweel are controlled either directly or indirectly by Binfathi. It is not relevant that the existence of a non-controlling interest in the intermediate subsidiary reduces Binfathi’s effective share to below 50%. It is the chain of control that is significant. Thus, Binfathi should consolidate Al-Taweel and eliminate 52% as non-controlling interests. The Binfathi Group’s investment in Bamco Construction Company 2. Binfathi has a 25% holding in Bamco Construction Company. The remaining 75% of the shares is held by two other companies, which are parties to an agreement between themselves as to the conduct of Bamco’s business. Binfathi is represented on the board of Bamco, but most of the decisions are made by directors representing the other two companies. How should this investment be classified by the Binfathi Group? a. Clearly a subsidiary b. Clearly an associate c. Clearly a jointly controlled entity d. Possibly an associate or just an investment D - As per IAS 31, Bamco appears to be a jointly controlled entity, but the venturers appear to be the other two parties, whereas Binfathi ranks only as an investor because it is not a party to the joint control agreement. Still, Bamco could be an associate of Binfathi, depending on whether Binfathi exercises significant influence over it. The Binfathi Group’s investment in Calco Fabricating Limited 3. Binfathi has a 100% holding in Calco Fabricating Limited, which is located in a politically unstable country. The government of that country recently announced that it will not allow any remittances of profits or other cash disbursements to be made to foreign investors for the foreseeable future and has threatened to nationalize foreign-owned investments without compensation. At the moment, however, Calco continues to trade within its own local market. How should this investment be classified? a. A subsidiary b. An associate c. A jointly controlled entity d. Probably a jointly controlled company but possibly an associate A - According to IAS 27 the existence of severe long-term restrictions is one of the factors to consider when deciding whether Calco is controlled by Binfathi. However, such restrictions do not preclude control. If, after considering all the facts, control still exists, then Calco is a subsidiary and should be consolidated; otherwise, it should be accounted for under IAS 39. The Binfathi Group’s investment in Darweesh Establishment 4. Binfathi has a 10% holding in Darweesh Establishment. Each of the seven other investors in Darweesh holds between 10% and 20% of its equity. The Darweesh Establishment owns a fleet of ships that is used by all the investors to transport their own products around the world. The operation of Darweesh and of its fleet is the subject of a detailed agreement among all the investors. Binfathi has a director on the board of Darweesh, but in accordance with the agreement, the entity is operated by one of the other investors, who receives a fee for this service. How should this investment be classified? a. A subsidiary b. An associate c. Probably a jointly controlled entity d. None of the above C - This appears to be a jointly controlled entity under IAS 31. Although one of the other parties operates it, it does not have the control on Darweesh, because the control is exercised only within the terms of the joint agreement. Under IAS 31’s benchmark treatment, it will be proportionately consolidated, although equity accounting is an allowed alternative treatment. The Binfathi Group’s investment in Emir Holding Company (EHC) 5. Binfathi has a 49% holding in Emir Holding Company (EHC), which is located in a foreign country. EHC’s business is to import goods from the Binfathi Group and sell them locally. Local laws do not permit foreign investors to hold a majority stake or to have a majority of board members on companies in that country. Thirty-one percent is held by a local bank, whose investment is funded by a deposit of the same amount lodged by Binfathi. This holding is held in trust by the bank for Binfathi as per trustship agreement. A local entrepreneur who is also the chief executive officer holds the remaining 20%. How should this investment be classified? a. A subsidiary b. An associate

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c. d.

A jointly controlled entity Probably a jointly controlled entity but possibly an associate

A The answer to this depends on whether Binfathi controls EHC, which in a real case would have to be evaluated in the light of all the detailed facts, particularly what has been agreed upon by the other shareholders. However, it seems likely EHC is a subsidiary of Binfathi, notwithstanding Binfathi's apparent inability to exercise control. Binfathi has the largest equity investment in the entity, and it appears that the bank is, in substance, holding its stake as a nominee for Binfathi. Furthermore, the fact that EHC’s business is dependent on imports from Binfathi gives it a commercial dominance that makes it unlikely that the 20% shareholder would act against the wishes of Binfathi. Accordingly, it appears that EHC is a subsidiary of Binfathi. Thus, EHC should be consolidated, and it is for consideration whether the minority interest is 20% or 51%. Assuming no dividends will be paid (31% of which would prima facie be due to the bank), the bank’s apparent independent holding likely has no substance and EHC likely is an 80% subsidiary. Problems: Business Combination 1. CPA’s acquisition of BSA for cash proceeded as follows: 23 January 2 March 12 June 1 July 30 October 15 November 25 November

Approach made to the management of BSA seeking endorsement of the acquisition Public offer made for 100% of the equity shares of BSA, conditional on regulatory approval, shareholder approval and receiving acceptances representing 60% of BSA’s shares Regulatory approval received Shareholder approval received Acceptances received to date represent 50% of BSA’s shares Acceptances received to date represent 95% of BSA’s shares Cash paid out to BSA’s accepting shareholders

Required: Identify the acquisition date. Answer: The acquisition date, being the date on which CPA obtains control over BSA, is 30 October. (hint: board examination date) 2. Riki Co. acquires the entire share capital of Doom Co. by issuing 100,000 new P1 ordinary shares at a fair value at the acquisition date of P2.50. The professional fees associated with the acquisition are P20,000 and the issue costs of the shares are P10,000. The carrying value of the net assets of Doom Co. at the time of acquisition is P150,000, which is equal to its fair value. Other information related to the acquisition includes the following: a) If Doom’s profits for the first full year following acquisition exceed P2 million, Riki Co. will pay additional consideration of P6 million in cash three months after that year end. It is doubtful whether Doom Co. will achieve this profit, hence the acquisition-date fair value of this contingent consideration is P100,000. b) A contract exists whereby Riki Co. will buy certain components from Doom Co. over the next five years. The contract was signed when market prices for these components were markedly higher than they are at the acquisition date. At the acquisition date the fair value of the amount by which the contract prices are expected to exceed market prices over the next five years is P1.5 million. Question 1: What amount should Riki present for goodwill in its statement of financial position at December 31, 2011, according to IFRS3 Business combinations? a. P250,000 b. P230,000 c. P200,000 d. P190,000 C – The contract is not part of the business combinations. Riki Co. now controls Doom Co and can therefore cancel this contract. P1.5 million of the consideration should be recognized as an expense (i.e. cancelling the contract) in profit or loss, rather than treated as transferred in the business combination. Question 2: Using the data given above and assuming that Doom Co. achieves its earnings target, how should the difference of the additional consideration and its acquisition date fair value treated? a. The difference should be added to the consideration transferred, but not addition to goodwill b. The difference should be added to the consideration transferred, but added to the amount of goodwill initially recognized. c. The difference should be recognized as an income. d. The difference should be recognized as an expense in profit or loss. D - The additional consideration relates to events after the acquisition date, so should be recognized as an expense in profit or loss. 3. ABC acquired 750,000 of the 1 million equity shares of LMN at a price of P5 each at the time when the total fair value of LMN’s assets less liabilities was P4 million. ABC estimated that the price paid included a premium of P0.50 per share in order to gain control over LMN. Compute for the following a. Fair value of non-controlling interest using the full goodwill method – P1,125,000 b. The amount of goodwill using the full goodwill method – P875,000 c. The non-controlling interest using the partial goodwill method – P1,000,000

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d. The amount of goodwill using the partial goodwill method – P750,000 Full Goodwill Method - P1,125,000 (250,000 shares × (P5.00 – 0.50). Proportionate Method - 1 million (P4 million × 25%). 4. On July 1, 2010 The Magna Company acquired 100% of The Natural Company for a consideration transferred of P160,000. At the acquisition date the carrying amount of Natural's net assets was P100,000. At the acquisition date a provisional fair value of P120,000 was attributed to the net assets. An additional valuation received on May 31, 2011 increased this provisional fair value to P135,000 and on July 30, 2011 this fair value was finalized at P140,000. What amount should Magna present for goodwill in its statement of financial position at December 31, 2011, according to IFRS3 Business combinations? a. P20,000 b. P40,000 c. P25,000 d. P60,000 C. The consideration transferred should be compared with the fair value of the net assets acquired, per IFRS3 para 32. When provisional fair values have been identified at the first reporting date after the acquisition, adjustments arising within the measurement period (a maximum of 12 months from the acquisition date) should be related back to the acquisition date. Subsequent adjustments are recognized in profit or loss, unless they can be classified as errors under IAS8 Accounting policies, changes in accounting estimates and errors. See IFRS3 paras 45 and 50. The final amount of goodwill is P160,000 consideration transferred less P135,000 fair values at 31 May 2008 = P25,000. 5. At the acquisition date, an acquirer has established fair values for items recognized as an expense in profit or loss by the acquiree and is trying to decide whether they can be classified as identifiable assets. a) In-process development of new compounds for food flavoring – P500,000 b) Patents developed internally – P2,500,000 c) Selling efforts leading to an order backlog – P3,000,000 d) Franchise agreements developed internally – P700,000. What is the amount to be recognized as identifiable intangible asset? a. P0 b. P3,200,000 c. P6,200,000 d. P6,700,000 D- All of the above items could be sold to another buyer and are therefore separable, hence they should all be recognized as identifiable intangible assets. 6. SGV acquired ABS on 30 June 2010. By 31 December 2010, the end of its 2010 reporting period, SGV had provisional fair values for the following:  Trademarks effective in certain foreign territories of P400,000. These had an average remaining useful life of 10 years at the acquisition date. The acquisition date fair value was finalized at P500,000 on 31 March 2011.  Trading rights in other foreign territories of P600,000. These had an average remaining useful life of 5 years at the acquisition date. The acquisition date fair value was finalized at P300,000 on 30 September 2011. Based on the information above, which of the following statement is correct? a. In SGV’s 2010 financial statements, amortization of trademarks and trading rights amounts to P160,000 b. In SGV’s 2010 financial statements, amortization of trademarks and trading rights amounts to P55,000 c. The difference between the initial and finalized fair value of the trading rights is recognized in profit or loss prospectively from 30 September 2011. d. The difference between the initial and finalized fair value of the trading rights is recognized in as either adjustment to goodwill or gain on bargain purchase C – The amortization on trademark during 2010 should be adjusted by P5,000 (P100,000/10 years x 6/12 months) 7. TV5 acquired an 80% interest in GMA for P900,000. The carrying amounts and fair values of DEF’s identifiable assets and liabilities at the acquisition date were as follows: Carrying amount Fair value Tangible non-current assets 375,000 350,000 Intangible non-current assets 0 200,000 Current assets 400,000 350,000 Liabilities (300,000) (300,000) Contingent liabilities 0 (30,000) 475,000 570,000 If TV5 has decided to measure the non-controlling interest at its share of DEF’s identifiable net assets, what is the amount of gain on bargain purchase? a. P444,000 b. P555,000 c. P666,000 d. P0 D Consideration transferred Non-controlling interest (20% of Php570,000 fair value) Fair value of net assets acquired Goodwill

900,000 _114,000 1,014,000 _570,000 444,000

8. The Lampard Company acquired a 70% interest in The Ohau Company for P1,960,000 when the fair value of Ohau's identifiable assets and liabilities was P700,000 and elected to measure the noncontrolling interest at its share of the identifiable net assets. Annual impairment reviews of goodwill

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have not resulted in any impairment losses being recognized. Ohau's current statement of financial position shows share capital of P100,000, a revaluation reserve of P300,000 and retained earnings of P1,400,000. Under IFRS3 Business combinations, what figure in respect of goodwill should now be carried in Lampard's consolidated statement of financial position? a. P160,000 b. P700,000 c. P1,260,000 d. P1,470,000 D 9. The National Company acquired 80% of The Local Company for a consideration transferred of P100,000. The consideration was estimated to include a control premium of P24,000. Local's net assets were P85,000 at the acquisition date. Which of the following statements is in accordance to IFRS3 Business combinations? I. Goodwill should be measured at P32,000 if the non-controlling interest is measured at its share of Local's net assets. II. Goodwill should be measured at P34,000 if the non-controlling interest is measured at fair value. a.

I only

b. II only

c. Both I and II

d. Neither I nor II

C Consideration transferred NCI Net assets Goodwill

NCI at share of net assets P100,000 17,000 P117,000 85,000 P 32,000

NCI at FV P100,000 19,000 P119,000 85,000 P 34,000

10. Roxas Holdings, a subholding of the Roxas Group, makes an offer for all the equity shares of Contrado on 1 July 2010. The consideration for the offer is 50,000 shares in Roxas together with 10,000 cash. Roxas also agreed to pay two employees an additional amount of 10,000 each at the end of two years after the acquisition if they are still in the employment of Contrado. The offer is accepted on 1 August 2010, at which point Contrado's assets and liabilities were as listed below. Assets Goodwill Land and buildings Plant and equipment Net pension asset Intangible assets Inventories: F/G Inventories: RM Accounts receivable Cash

10,000 8,000 12,000 4,600 4,000 20,000 4,000 5,000 400

Liabilities Accounts payable Income tax payable Long-term loan Total

9,060 9,940 30,000 49,000

Additional Information:  Contrado is expected to incur a loss of 5,000 for the rest of the year to 31 December 2010.  Contrado has accumulated tax losses carried forward of 10,000. The tax rate is 30%. These are not recognized in Contrado's balance sheet. After the acquisition, Roxas Holdings will, beyond reasonable doubt, be able to use all of Contrado's accumulated loss carryforwards against future taxable profits of Roxas Holdings.  The goodwill carried in Contrado's balance sheet relates to an acquisition it made three years ago.  The market value of the land and buildings for their existing use as production sites is appraised at 18,000. The appraiser believes that the fair value of the plant and equipment is not materially different from its book value.  Two years ago, Contrado bought the right to make use of the technology under a technology licensing agreement from Binfathi Holding plc. Contrado paid 8,000 for the license for a period of four years. Contrado has the option to renew the license for another four years at the end of the period. A similar agreement can currently be obtained on the same terms as the original one.  Apart from this license, Contrado owns the rights to a number of patented products, which was a significant reason behind Roxas's desire to buy the company. No active market exists for these intangible assets, but the production director of Roxas believes them to be worth at least 40,000. However, the chief financial officer is skeptical about this, pointing to Roxas's current poor performance; in any event, he does not think it likely that an independent expert could be found to give a valuation of the patents.  The finished goods are valued at 20,000 based on the costs incurred by Contrado to produce the goods. Roxas can sell them in an arm's length transaction for 23,000, after deduction of the costs incurred to sell the goods. The current replacement cost of the raw material inventory amounts to 6,000. The book value of the raw material inventory in Contrado is 4,000.  The long-term loan is at a fixed rate of 10%, interest is payable annually on 1 August and the principal is repayable on 1 August 2012. Since the loan was originally taken out, interest rates have fallen, and an equivalent loan could now be obtained at 6%. Acquiree already paid the interest due on 1 August 2010.  The amount of the pension plan asset includes 350 of actuarial losses that are not required to be recognized under IAS 19. An actuarial appraisal of the plan at the date of acquisition estimates that the investments held have a fair value of 27,000 and the pension obligation a present value of 24,400.

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

Roxas's own share price was 0.40 when it made the offer on 1 July 2010 and 0.42 when it was accepted on 1 August 2010. It incurred professional fees of 2,000, and the chief financial officer has calculated that the cost of senior management time devoted to researching, launching and completing the offer amounted to 800.

What is the amount of goodwill to be included in the consolidated financial statements of Roxas Holdings Group? a. P11,660 b. P11,440 c. P12,460 d. P14,680 B Solution: A. Identify the acquirer B. Determination of the acquisition date C. Recognize and measure the assets of Contrado. Book Value Assets Goodwill 10,000 Patents 0 License agreement 4,000 Unutilized losses 0 Land and buildings 8,000 Plant and equipment 12,000 Net pension asset 4,600 Inventories: F/G 20,000 Inventories: RM 4,000 Accounts receivable 5,000 Cash 400 Total 68,000

Fair Value 0 0 4,000 3,000 18,000 12,000 2,600 23,000 6,000 5,000 400 74,000

Liabilities Accounts payable Income tax payable Long-term loan Operating loss provision Total

9,060 9,940 30,000 0 49,000

9,060 9,940 32,200 0 51,200

1. Goodwill. Goodwill relating to previous acquisitions is not an identifiable asset that can be recognized in an acquisition. Assigning a nil value to it means that it will, in effect, be subsumed into the value of the goodwill recognized on this acquisition. 2. Patents. Intangible assets should be recognized whether or not they have been recognized by the acquiree, but only if they meet the definition of an intangible asset and can be measured reliably 3. License agreement. In principle, a reacquired right should be recognized as an intangible asset separately from goodwill and measured on the basis of the remaining contractual term regardless of whether market participants would consider potential renewals. The fair value is therefore 4,000. As the terms of the agreement are similar to current market rates, no gain or loss is recognized on acquisition. 4. Unutilied losses. Under IFRS 3 (Revised), previously unrecognized deferred tax assets in respect of loss carryforwards are recognized if their recovery is sufficiently assured. The amount recognized is the losses of 10,000 at the effective rate of 30%, which is 3,000 5. Land and buildings. Land and buildings are measured at their fair value. The fair value of land and buildings is usually determined from market-based evidence by appraisal that is normally undertaken by professionally qualified valuers 6. Net pension asset. The pension asset is based on an up-to-date valuation of the plan; that is, 27,000 minus 24,400. Actuarial losses and other amounts that are not recognized on an ongoing basis under IAS 19 are not relevant to fair value allocations. 7. Inventories; F/G. The fair value of the finished goods is 23,000 (what Binfathi expects to sell the finished goods for after the costs to sell are deducted). 8. Raw Materials: The raw materials are included at their current replacement value of 6,000 9. Long-term loan: The fair value of the loan is determined by discounting the future payments of both principal and interest at the current rate of 6% as follows: [3,000 / 1.06] + [30,000 / (1.06 x 1.06)] + [3,000 / (1.06 x 1.06)] = 32,200. 10. Operating loss provision: No provision for future operating losses can be made under IFRS 3 (Revised). D. Recognizing and measuring other assets and liabilities of Contrado Book Value Fair Value Total assets 68,000 74,000 Total liabilities 49,000 51,200 Net assets 19,000 22,800 Deferred tax on adjustments 0 3,240 Net assets at fair value 19,560 10,000 (land/buildings) plus -2,000 (pension) plus +3,000 (finished goods) plus 2,000 (raw materials) plus -2,200 (long-term loan) = 10,800 x 30% (tax effect) = 3,240

Page 9 of 21

E.

Recognizing and measuring goodwill or gain on acquisition of Contrado Net assets at fair value 19,560 Non-controlling interest 0 Fair value of previous investment in Contrado 0 Fair value of the consideration transferred 31,000 Goodwill 11,440 The consideration payable for the acquisition equals 21,000 (fair value of shares issued – share price at date of acquisition [50,000 x 0.42]) + 10,000 (cash), or 31,000. Goodwill is 31,000 19,560, or 11,440. The contingent consideration to the employees is not part of the consideration of the transaction but employee costs. Transaction costs are expensed (if they meet the definition of transaction costs per IAS 39 they may be recognized in equity)

11. The Mooneye Company acquired a 70% interest in The Swain Company for P1,420,000 when the fair value of Swain's identifiable assets and liabilities was P1,200,000. Mooneye acquired a 65% interest in The Hadji Company for P300,000 when the fair value of Hadji's identifiable assets and liabilities was P640,000. Mooneye measures non-controlling interests at the relevant share of the identifiable net assets at the acquisition date. Neither Swain nor Hadji had any contingent liabilities at the acquisition date and the above fair values were the same as the carrying amounts in their financial statements. Annual impairment reviews have not resulted in any impairment losses being recognized. Under IFRS3 Business combinations, what figures in respect of goodwill and of gains on bargain purchases should be included in Mooneye's consolidated statement of financial position? a. Goodwill: P580,000; Gain on bargain purchase: P116,000 b. Goodwill: 0; Gain on bargain purchase: P116,000 c. Goodwill: 0; Gain on bargain purchase: 0 d. Goodwill: P580,000; Gain on bargain purchase: 0 D 12. On October 1, 2010 The Tingling Company acquired 100% of The Greenbank Company when the fair value of Greenbank's net assets was P116,000 and their carrying amount was P120,000. The consideration transferred comprised P200,000 in cash transferred at the acquisition date, plus another P60,000 in cash to be transferred 11 months after the acquisition date if a specified profit target was met by Greenbank. At the acquisition date there was only a low probability of the profit target being met, so the fair value of the additional consideration liability was P10,000. In the event, the profit target was met and the P60,000 cash was transferred. What amount should Tingling present for goodwill in its statement of consolidated financial position at December 31, 2011, according to IFRS3 Business combinations? a. P94,000 b. P80,000 c. P84,000 d. P144,000 A The consideration transferred should be compared with the fair value of the net assets acquired, per IFRS3 para 32. The contingent consideration should be measured at its fair value at the acquisition date; any subsequent change in this cash liability comes under IAS39 Financial instruments: recognition and measurement and should be recognized in profit or loss, even if it arises within the measurement period. See IFRS3 paras 39, 40 and 58. Goodwill is the P210,000 (P200,000 + P10,000 acquisition date fair value of contingent consideration) less P116,000 fair value of net assets = P94,000. 13. 100% of the equity share capital of The Raukatau Company was acquired by The Sweet Company on June 30, 2010. Sweet issued 5,000 new P100 par ordinary shares which had a fair value of P800 each at the acquisition date. In addition the acquisition resulted in Sweet incurring fees payable to external advisers of P200,000 and share issue costs of P180,000. In accordance with IFRS3 Business combinations, goodwill at the acquisition date is measured by subtracting the identifiable assets acquired and the liabilities assumed from a. P4.00 million b. P4.18 million c. P4.20 million d. P4.38 million A The answer is CU4.00 million. Goodwill is calculated by reference to the consideration transferred plus noncontrolling interest (nil in this case) plus the fair value of any shares in Raukatau already held by Sweet (nil in this case). Professional fees should be recognized in profit or loss and the issue costs deducted from the fair value of the shares issued. The consideration transferred is CU4 million (500,000 x CU8). See IFRS3 paras 37 and 53. 14. On September 31, 2011 Azang Co. issues 2.5 shares in exchange for each ordinary share of Pitot Co. or a total of 150,000 ordinary shares in exchange for all 60,000 ordinary shares of Pitot Co. All of Pitot Co.’s shareholders exchange their shares in Pitot Co. The statements of financial position of Azang Co. and Pitot Co. immediately before the business combination are: Azang Co. Pitot Co. Current assets 500,000 700,000 Non-current assets 1,300,000 3,000,000 Total Assets 1,800,000 3,700,000 Current liabilities Non-current liabilities Total Liabilities

300,000 400,000 700,000

600,000 1,100,000 1,700,000

Page 10 of 21

Retained earnings Share Capital 100,000 shares 60,000 shares Total Shareholders’ Equity

800,000

1,400,000

1,100,000

600,000 2,000,000

Total Liabilities and Shareholders’ Equity

1,800,000

3,700,000

300,000

The fair value of each ordinary share of Pitot Co. at September 31, 2011 is P40. The quoted market price of Azang Co.’s ordinary shares at that date is P16. All assets and liabilities book values equal their fair values except Azang’s Co.’s non-current assets with fair value of P1,500,000 and Pitot Co. non-current assets at P3,500,000. Question 1: What is the amount of goodwill on the combination? a. P300,000 b. P400,000 c. P3,000,000 d. P3,500,000 A As a result of Azang Co. (legal parent, accounting acquiree) issuing 150,000 ordinary shares, Pitot Co. shareholders own 60 per cent of the issued shares of the combined entity (ie 150,000 of 250,000 issued shares). The remaining 40 per cent are owned by Azang Co. shareholders. If the business combination had taken the form of Pitot Co. issuing additional ordinary shares to Azang Co. shareholders in exchange for their ordinary shares in Azang Co., Pitot Co. would have had to issue 40,000 shares for the ratio of ownership interest in the combined entity to be the same. Pitot Co. shareholders would then own 60,000 of the 100,000 issued shares of Pitot Co. - 60 per cent of the combined entity. As a result, the fair value of the consideration effectively transferred by Entity B and the group’s interest in Azang Co. is P1,600,000 (40,000 shares with a fair value per share of P40). Consideration transferred (40,000 x P40) P1,600,000 Less: Fair Value of Net Asset Acquired Current assets 500,000 Non-current assets 1,500,000 Current liabilities ( 300,000) Non-current liabilities ( 400,000) 1,300,000 Goodwill P 300,000 Question 2: How much total assets to be shown in the consolidated statement of financial position? a. P5,500,000 b. P6,000,000 c. P8,000,000 d. P9,500,000 B Question 3: How much total liabilities to be shown in the consolidated statement of financial position? a. P2,800,000 b. P2,600,000 c. P2,400,000 d. P3,000,000 C Question 4: How much is the consolidated retained earnings on December 31, 2011? a. P800,000 b. P1,000,000 c. P1,200,000 d. P1,400,000 D Question 5: How much is the consolidated share capital on December 31, 2011? a. P2,200,000 b. P2,400,000 c. P6,200,000 d. P6,300,000 A – The share capital of the legal entity will be reflected in the consolidated FS (250,000 shares) 250,000 shares (600,000 + 1,600,000) Question 6: Assume the same facts as above, except that only 56,000 of Pitot Co. 60,000 ordinary shares are exchanged. How much should be shown as noncontrolling interest? a. P132,000 b. P134,000 c. P136,000 d. P138,000 B Retained Earnings (1,400,000 x 56/60) 1,306,000 Equity [(600,000 x 56/60) + 1,600,000) 2,160,000 (240,000 shares) NCI [(1,400,000 x 4/60) + (600,000 x 4/60)] 134,000 Total SHE 3,600,000 15. BaneHallow has a 70% ownership interest in EHC, giving it control. On 1 January 2010, Binfathi acquires an additional 15% interest. At that date, equity of EHC is as follows: Share capital – 1,000,000; Other Comprehensive income – 500,000; Accumulated profits – 800,000. On 1 January 2010, the non-controlling interest in EHC had a value of 610,000. Binfathi paid 400,000 for the additional 15% interest in EHC. Which of the following statements is correct? a. BaneHallow recognizes a decrease in non-controlling interest of 400,000 and an increase in the parent's equity attributable to EHC of 400,000. b. BaneHallow recognizes a decrease in non-controlling interest of 305,000 and an increase in goodwill of 305,000. The remaining 95,000 is recognized as a reduction of equity. c. BaneHallow recognizes a decrease in non-controlling interest of 305,000 and an increase in the parent's equity attributable to EHC of 305,000. The remaining 95,000 is recognized as goodwill. d. BaneHallow recognizes a decrease in non-controlling interest of 305,000 and an increase in the parent's equity attributable to EHC of 305,000. The remaining 95,000 is recognized as a reduction of the parent's equity. D 16. Pitlord owns 75% of Shadow Fiend’s voting shares and loses control of Shadow Fiend by selling 40% of Shadow Fiend’s shares for P400,000. The fair value of Pitlord’s remaining investment in Shadow Fiend is P335,000. At the time of the sale, the carrying amount of the NCI is P220,000, and the carrying

Page 11 of 21

amount of Shadow Fiend’s net assets is P870,000. What would Pitlord’s gain or loss assuming there are no previously recognized items to reclassify to profit or loss: a. P55,000 b. P70,000 c. P80,000 d. P85,000 D Proceeds of sale of 40% investment P 400,000 Fair value of retained 35% investment 335,000 Carrying amount of NCI at time of sale 220,000 955,000 Less: Carrying amount of Shadow Fiend’s net assets at time of sale (870,000) Gain recognized by Pitlord P 85,000

Page 12 of 21

Problems: Consolidated Financial Statement 1. Paco Company acquired 100 percent of the stock of Garland Corp. on December 31, 2010. The stockholder's equity section of Garland's balance sheet at that date is as follows:

Common Stock Additional Paid-in Capital Retained Earnings Total

P 300,000 500,000 400,000 P1,200,000

Paco financed the acquisition by using P880,000 cash and giving a note payable for P400,000. Book value approximated fair value for all of Garland's assets and liabilities except for buildings which had a fair value P60,000 more than its book value and a remaining useful life of 10 years. Any remaining differential was related to goodwill. Paco has an account payable to Garland in the amount of P30,000. Required: 1) Present all eliminating entries needed to prepare a consolidated statement of financial position immediately following the acquisition. 2) What additional eliminating entry must be prepared at December 31, 2011? Requirement 1 E1 Common Stock – Garland Additional Paid-in Capital Retained Earnings Differential Investment in Subsidiary - Garland E2

E3

300,000 500,000 400,000 80,000 1,280,000

Goodwill Buildings Differential

20,000 60,000

Accounts Payable Accounts Receivable

30,000

80,000

30,000

Requirement 2 Depreciation Expense Accumulated Depreciation

6,000 6,000

2. On January 1, 2011, David Corporation paid P800,000 and issued 18,000 shares of P50 par ordinary shares with market value of P1,320,000 for all the net assets of Goliath Corporation. In addition, David paid P12,000 for registering and issuing the 18,000 shares and P20,000 for indirect costs of the business combination. Summary balance sheet information for the companies immediately before the merger is as follows:

Cash Inventories Other current assets Plant assets - net Current liabilities Other liabilities Ordinary shares, P50 par Retained earnings

David Corporation Book Value P1,400,000 480,000 120,000 1,040,000 640,000 320,000 1,680,000 400,000

Goliath Corporation Book Value Fair Value P160,000 P160,000 320,000 400,000 80,000 80,000 720,000 1,120,000 120,000 120,000 200,000 160,000 800,000 160,000

The total assets immediately after the merger is a. P 4,488,000 c. P 4,608,000 b. P 4,008,000 d. P 5,440,000 C 2. The total stockholders’ equity after the merger is a. P 3,368,000 c. P 4,210,000 b. P 5,410,000 d. P 3,460,000 A 3. Lea Company acquired all of Tenzing Corporation's stock on January 1, 2010 for P1,500,000 cash. On December 31, 2011, the statement of financial position of the two companies showed the following amounts: Cash Accounts Receivable Land Buildings and Equipment

Lea Company P550,000 600,000 800,000 3,000,000

Tenzing Corp. P250,000 300,000 450,000 2,000,000

Page 13 of 21

Less: Accumulated Depreciation Investment in Tenzing Corporation Total Assets

(1,500,000) 1,550,000 P5,000,000

(800,000) . P2,200,000

Accounts Payable Taxes Payable Notes Payable Common Stock Retained Earnings Total Liabilities and Equity

P400,000 200,000 750,000 1,000,000 2,650,000 P5,000,000

P150,000 150,000 500,000 500,000 900,000 P2,200,000

Tenzing Corporation reported retained earnings of P750,000 at the date of acquisition. The difference between the acquisition price and underlying book value is assigned to buildings and equipment with a remaining economic life of five years from the date of acquisition. What is the amount of consolidated buildings and equipment and its related accumulated depreciation to be included in the 2011 consolidated financial statements of Lea and Tenzing corporation, respectively? a. P5,000,000; P2,300,000 b. P5,000,000; P2,400,000 c. P5,250,000; P2,300,000 d. P5,250,000; P2,400,000 D Eliminating Entries 1 Commons Stock – Tenzing Corporation Retained Earnings Differential Investment in Subsidiary – Tenzing To eliminate investment balance

500,000 900,000 150,000

2

250,000

1,550,000

Buildings and Equipment Accumulated Depreciation Differential To assign the differential

Cash Accounts Receivable Land Buildings and Equipment Investment in Tenzing Corporation Differential Total Debits Accumulated Depreciation Accounts Payable Taxes Payable Notes Payable Common Stock Retained Earnings Total Liabilities and Equity

100,000 150,000

Lea Company P550,000 600,000 800,000 3,000,000

Tenzing Corp. P250,000 300,000 450,000 2,000,000

1,550,000 . P6,500,000

. P3,000,000

(1,500,000) P400,000 200,000 750,000 1,000,000 2,650,000 P5,000,000

(800,000) P150,000 150,000 500,000 500,000 900,000 P2,200,000

Debit

(2)

250,000

(1)

15,000

(1) (1)

Credit

(1) (2)

1,550,000 150,000

(2)

100,000

500,000 900,000 P180,000

. P180,000

Consolidate d B/S P800,000 900,000 1,250,000 5,250,000

. P8,200,000 2,400,000 550,000 350,000 1,250,000 1,000,000 2,650,000 P8,200,000

4. Balance sheet data for P Corporation and S Company on December 31, 2011, are given below: P Corporation S Company Cash P 70,000 P 90,000 Merchandise Inventory 100,000 60,000 Property and equipment (net) 500,000 250,000 Investment in S Company 260,000 . Total assets P 930,000 P 400,000 Current liabilities Long term liabilities Common stock Retained earnings Total liabilities & SE

P180,000 200,000 300,000 250,000 P930,000

P 60,000 90,000 100,000 150,000 P400,000

P Corporation purchased 80% interest in S Company on December 31, 2011 for P260,000. S Company’s property and equipment had a fair value of P50,000 more than the book value shown above. All other book values approximated fair value. In the consolidated statement of financial position as of December 31, 2011,

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The amount of total stockholders’ equity (using full goodwill method) to be reported is a. P 550,000 c. P 750,000 b. P 610,000 d. P 615,000 D 5. The amount of non-controlling interest (using full goodwill) will be a. P 50,000 c. P 110,000 b. P 60,000 d. P 65,000 D 6. Patter Corporation issues 500,000 shares of its own P10 par common stock for the net assets of Simpson Corporation in a merger consummated on July 1, 2011. On this date, Patter stock is quoted at P20 per share. Summary balance sheet data for the two companies at July 1, 2011, just before combination, are as follows: Patter Simpson Current assets P18,000,000 P1,500,000 Plant assets 22,000,000 6,500,000 Total assets P40,000,000 P8,000,000 Liabilities Common stock- P10 par Additional paid-in capital Retained earnings Total equities

12,000,000 20,000,000 3,000,000 5,000,000 P40,000,000

2,000,000 3,000,000 1,000,000 2,000,000 P8,000,000

Calculate the retained earnings Patter Corporation immediately after the combination: a. P5,000,000 c. P7,000,000 b. P6,000,000 d. P8,000,000 A 7. On January 1, 2011, Pank Corporation and Spank Corporation and their condensed balance sheet are as follows: Pank Corp. Spank Corp. Current Assets P 70,000 P 20,000 Non-current Assets 90,000 40,000 Total Assets P160,000 P60,000 Current Liabilities P30,000 P10,000 Long-term Debt 50,000 Stockholder’s Equity 80,000 50,000 Total Liabilities and Equities P160,000 P60,000 On January 2, 2011, Pank Corporation borrowed P60,000 and used the proceeds to obtain 80% of the outstanding common shares of Spank Corporation. The acquisition price was considered proportionate to Spank’s fair value. The P60,000 debt is payable in 10 equal annual principal payments, plus interest, beginning December 31, 20111. The excess fair value of the investment over the underlying book value of the acquired net assets is allocated to inventory (60%) and to goodwill (40%). On the consolidated statement of financial position as of January 2, 2011, what should be the amount of the following? The amount of goodwill using proportionate basis (partial): a. P 0 b. P8,000 c. P10,000

c. P20,000 B 8. Using the same information above, the amount of goodwill using full fair value (full/gross-up ) basis: a. P 0 b. P8,000 c. P10,000 c. P20,000 C 9. Using the same information above, the amount of currents assets should be a. P105,000 b. P102,000 c. P100,000 d. P 90,000 A 10. Using the same information above, the amount of non-current assets using proportionate basis (partial) in computing goodwill should be: a. P130,000 b. P134,000 c. P138,000 d. P140,000 C 11. Using the same information above, the amount of non-current assets using full fair value basis in computing goodwill should be: a. P130,000 b. P134,000 c. P138,000 d. P140,000 D 12. Using the same information above, the amount of current liabilities should be a. P50,000 b. 46,000 c. P40,000 d. P30,000 B 13. Using the same information above, the amount of non-current liabilities should be: a. P50,000 b. 46,000 c. P40,000 d. P30,000 B 14. Using the same information above, the amount of stockholders’ equity using proportionate (partial goodwill) basis to determine non-controlling interest should be: a. P80,000 b. P93,000 c. P95,000 d. P130,000 B

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15. Using the same information above, the amount of stockholders’ equity using full fair value basis to determine non-controlling interest should be: a. P80,000 b. P93,000 c. P95,000 d. P130,000 C 16. On January 1, 2011, Ramon Corporation acquired 75 percent of Tester Company's voting common stock for P300,000. At the time of the combination, Tester reported common stock outstanding of P200,000 and retained earnings of P150,000, and the fair value of the noncontrolling interest was P100,000. The book value of Tester's net assets approximated market value except for patents that had a market value of P50,000 more than their book value. The patents had a remaining economic life of ten years at the date of the business combination. Tester reported net income of P40,000 and paid dividends of P10,000 during 2011. Based on the preceding information, what balance will Ramon report as its investment in Tester at December 31, 2011, assuming Ramon uses the equity method in accounting for its investment? a. P318,750 b. P317,500 c. P330,000 d. P326,250 A 17. Based on the preceding information, all of the following are eliminating entries needed to prepare a full set of consolidated financial statements at December 31, 2011, except: a. Income from Subsidiary 26,250 Dividends Declared 7,500 Investment in Tester Company Stock b. Income to Noncontrolling Interest 10,000 Dividends declared 2,500 Noncontrolling Interest 6,250 c. Common Stock – Tester Company 200,000 Retained Earnings, January 1 150,000 Differential 50,000 Investment in Tester Company Stock 300,000 Noncontrolling Interest 100,000 d. Patents 50,000 Differential 50,000 B 18. On January 1, 2011, Bristol Company acquired 80 percent of Animation Company's common stock for P280,000 cash. At that date, Animation reported common stock outstanding of P200,000 and retained earnings of P100,000, and the fair value of the noncontrolling interest was P70,000. The book values and fair values of Animation's assets and liabilities were equal, except for other intangible assets which had a fair value P50,000 greater than book value and an 8-year remaining life. Animation reported the following data for 2011 and 2012: Animation Corporation Comprehensive Dividends Paid Year Net Income Income 2011 P25,000 P30,000 P5,000 2012 P35,000 P45,000 P10,000 Bristol reported net income of P100,000 and paid dividends of P30,000 for both the years. Based on the preceding information, what is the amount of consolidated comprehensive income reported for 2011? a. P125,000 b. P123,750 c. P118,750 d. P130,000 B 19. Based on the preceding information, what is the amount of consolidated comprehensive income reported for 2012? a. P145,000 b. P135,000 c. P138,750 d. P128,750 C 20. Based on the preceding information, what is the amount of comprehensive income attributable to the controlling interest for 2011? a. P123,750 b. P118,750 c. P119,000 d. P104,000 C 21. Based on the preceding information, what is the amount of comprehensive income attributable to the controlling interest for 2012? a. P138,750 b. P131,000 c. P128,750 d. P135,000 B 22. Parent Corporation purchased land from S1 Corporation for P220,000 on December 26, 2012. This purchase followed a series of transactions between P-controlled subsidiaries. On February 15, 2012, S3 Corporation purchased the land from a nonaffiliate for P160,000. It sold the land to S2 Company for P145,000 on October 19, 2012, and S2 sold the land to S1 for P197,000 on November 27, 2012. Parent has control of the following companies: Subsidiary S3 S2 S1

Level of Ownership 80 percent 70 percent 90 percent

2012 Net Income P100,000 70,000 95,000

Parent reported income from its separate operations of P200,000 for 2012.

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Based on the preceding information, at what amount should the land be reported in the consolidated balance sheet as of December 31, 2012? a. P145,000 b. P220,000 c. P197,000 d. P160,000 D 23. Based on the preceding information, what amount of gain or loss on sale of land should be reported in the consolidated income statement for 2012? a. P60,000 b. P0 c. P75,000 d. P23,000 B 24. Based on the preceding information, what should be the amount of income assigned to the controlling shareholders in the consolidated income statement for 2012? a. P369,400 b. P405,000 c. P465,000 d. P60,000 A 25. Big Corporation receives management consulting services from its 92 percent owned subsidiary, Small Inc. During 2011, Big paid Small P125,432 for its services. For the year 2012, Small billed Big P140,000 for such services and collected all but P7,900 by year-end. Small's labor cost and other associated costs for the employees providing services to Big totaled P86,000 in 2011 and P121,000 in 2012. Big reported P2,567,000 of income from its own separate operations for 2012, and Small reported net income of P695,000. Based on the preceding information, what amount of consolidated net income should be reported in 2012? a. P3,262,000 b. P4,050,000 c. P3,254,100 d. P3,122,000 A 26. Based on the preceding information, what amount of income should be assigned to the noncontrolling shareholders in the consolidated income statement for 2012? a. P47,700 b. P44,400 c. P55,600 d. P60,000 C ****B 27. Based on the preceding information, what amount of receivable/payable should be eliminated in the 2012 consolidated financial statements? a. P125,432 b. P7,900 c. P5,560 d. P140,000 B 28. Sub Company sells all its output at 20 percent above cost to Par Corporation. Par purchases all its inventory from Sub. The incomes reported by the companies over the past three years are as follows: Sub Company’s Par Corporation’s Year Net Income Operating Income 2010 150,000 225,000 2011 135,000 360,000 2012 240,000 450,000 Sub Company sold inventory for P300,000, P262,500 and P337,500 in the years 2010, 2011, and 2012 respectively. Par Company reported ending inventory of P105,000, P157,500 and P180,000 for 2010, 2011, and 2012 respectively. Par acquired 70 percent of the ownership of Sub on January 1, 2010, at underlying book value. The fair value of the noncontrolling interest at the date of acquisition was equal to 30 percent of the book value of Sub Company. Based on the information given above, what will be the consolidated net income for 2010? a. P357,500 b. P375,000 c. P490,000 d. P317,750 A 29. Based on the information given above, what will be the consolidated net income for 2011? a. P495,000 b. P317,750 c. P486,250 d. P690,000 C 30. Based on the information given above, what will be the income assigned to controlling interest for 2011? a. P448,375 b. P495,000 c. P486,250 d. P615,375 A 31. Based on the information given above, what will be the income to noncontrolling interest for 2012? a. P39,750 b. P37,875 c. P71,275 d. P70,875 D 32. Based on the information given above, what will be the income to controlling interest for 2012? a. P615,375 b. P686,250 c. P690,000 d. P694,000 A 33. The Lips Company acquired an 80% interest in The Pouting Company when Pouting's equity comprised share capital of P100,000 and retained earnings of P500,000. Pouting's current statement of financial position shows share capital of P100,000, a revaluation reserve of P400,000 and retained earnings of P1,400,000. Under IFRS 3 Consolidated financial statements, what figure in respect of Pouting's retained earnings should be included in the consolidated statement of financial position? a. P720,000 b. P1,440,000 c. P1,040,000 d. P1,520,000 A 34. The Lapping Company acquired a 60% interest in Dark Room Company when Dark Room's equity comprised share capital of P100,000 and retained earnings of P150,000. Dark Room's current statement of financial position shows share capital of P100,000, a revaluation reserve of P75,000 and retained earnings of P300,000. Under IFRS 3 Consolidated financial statements, what figure in respect

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of the non-controlling interest should be included in Lappings's consolidated statement of financial position? a. P150,000 b. P160,000 c. P190,000 d. P90,000 C 35. The Bakun Company holds a 70% interest in The Buguias Company. At the current year end Bakun holds inventory purchased from Buguias for P270,000 at cost plus 20%. The group's consolidated statement of financial position has been drafted without any adjustments in relation to this holding of inventory. Under IFRS 3 Consolidated financial statements, what adjustments should be made to the draft consolidated statement of financial position figures for non-controlling interest and retained earnings? Non-controlling interest Retained earnings a. No change Reduce by P45,000 b. No change Reduce by P54,000 c. Reduce by P16,200 Reduce by P37,800 d. Reduce by P13,500 Reduce by P31,500 D 36. The Seedsnipe Company owns 65% of The Gennis Company. On the last day of the accounting period Gennis sold to Seedsnipe a non-current asset for P200,000. The asset originally cost P500,000 and at the end of the reporting period its carrying amount in Gennis's books was P160,000. The group's consolidated statement of financial position has been drafted without any adjustments in relation to this non-current asset. Under IFRS 3 Consolidated financial statements, what adjustments should be made to the consolidated statement of financial position figures for non-current assets and retained earnings? Non-current assets Retained earnings Non-controlling interest a. Increase by P300,000 Increase by P195,000 Reduce by P40,000 b. Reduce by P40,000 Reduce by P26,000 Reduce by P14,000 c. Reduce by P40,000 Reduce by P40,000 Reduce by P14,000 d. Increase by P300,000 Increase by P300,000 Reduce by P26,000 B 37. The Virdi Company owns 65% of The Mintaka Company. On 31 December 2011, the last day of the accounting period, Virdi sold to Mintaka a noncurrent asset for P1,000. The asset's original cost was P2,500 and on 31 December 2011 its carrying amount in Virdi's books was P800. The group's consolidated statement of financial position has been drafted without any adjustments in relation to this non-current asset. Under IFRS 3 Consolidated financial statements, what adjustments should be made to the consolidated statement of financial position figures for non-current assets and noncontrolling interest? Non-current assets Non-controlling interest a. Increase by P1,500 Increase by P525 b. Reduce by P200 No change c. Reduce by P200 Reduce by P70 d. Increase by P1,500 No change B 38. The Rogers Company acquired equipment on 1 January 2007 at a cost of P800,000, depreciating it over 8 years with a nil residual value. On 1 January 2010 The Mulberry Company acquired 100% of Rogers and estimated the fair value of the equipment at P460,000, with a remaining life of 5 years. This fair value was not incorporated into Rogers's books and the depreciation expense continued to be calculated by reference to original cost. Under IFRS 3 Consolidated financial statements, what adjustments should be made to the depreciation expense for the year and the statement of financial position carrying amount in preparing the consolidated financial statements for the year ended 31 December 2011? Depreciation expense Carrying amount a. Increase by P8,000 Increase by P24,000 b. Increase by P8,000 Decrease by P24,000 c. Decrease by P8,000 Increase by P24,000 d. Decrease by P8,000 Decrease by P24,000 D 39. P Company owns controlling interests in S and T Corporations, having acquired an 80 percent interest in S in 2011 and a 90 percent interest in T on January 1, 2012. P’s investments in S and T were at book value equal to fair value. Inventories of the affiliated companies at December 31, 2012 and December 31, 2013 were as follows: December 31, 2012 December 31, 2013 P inventories P60,000 P54,000 S inventories 38,750 31,250 T inventories 24,000 36,000 P sells to S at a 25 percent mark-up based on cost, and T sells to P at a markup of 20 percent. P’s beginning and ending inventories for 2013 consisted of 40% and 50%, respectively, of goods acquired from T. All of S inventories consisted of merchandise acquired from P. The inventory that should appear in the December 31, 2013 consolidated balance sheet should amount to: a. P109,600 b. P106,000 c. P110,500 d. P121,250 A

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40. Soar High Eagle Corporation (SHEC) and Mediocre Maya Co. (MMC) have announced terms of an exchange agreement under which, SHEC will pay P60,000 cash and will issue 8,000 shares of its P10 par value common stock to acquire all the assets of MMC. SHEC share currently trading at P50, and MMC P5 par value shares are trading at P18 each. Book value and fair value balance sheet data on January 1, 2006 prior to acquisition are as follows: SHEC Company MMC Company Book Value Fair Value Book Value Fair Value Cash and Receivable P150,000 P150,000 P40,000 P40,000 Land 100,000 170,000 50,000 85,000 Building & Equipment, net 300,000 400,000 160,000 230,000 TOTAL ASSETS P550,000 P720,000 P250,000 P355,000 Common stock Additional paid in capital Retained earnings TOTAL EQUITIES

P200,000 20,000 330,000 P550,000

In addition, SHEC incurred the following costs:  Legal fees to arranged the business combination  Other professional fees  Cost of SEC registration & other stock issuance costs  Indirect costs

P100,000 10,000 140,000 P250,000

P 5,000 6,000 12,000 17,000

Determine the following adjusted amounts to be reported on the SCHEC’s balance sheet after the acquisition: Cash and Receivables Goodwill APIC Retained earnings a. P90,000 P221,000 P328,000 P313,000 b. P90,000 P110,000 P328,000 P307,000 c. P90,000 P116,000 P328,000 P313,000 d. P150,000 P116,000 P328,000 P313,000 C

41. Soccer Ball Co. purchase Tennis Ball Co. Their condensed balance sheets before combination show: Soccer Ball Co. ASSETS Liabilities Capital stock, P100 par Additional paid in capital Retained earnings/(deficit) LIABILITIES &SHE

P7,000,000 4,987,500 2,625,000 (612,500) P7,000,000

Tennis Ball Co. Book Value Fair Value P875,000 P950,000 307,000 437,500 218,000 (87,500) P875,000

Soccer Ball issued its own debt and equity securities as a consideration for the net identifiable assets of Tennis Ball Co. Soccer Ball incurred P 25,000 in issuing its P300,000 par bonds and P 30,000 in issuing its P250,000 par shares of stock. Soccer Ball’s bond is currently selling at 97; while its share of stock is at P120. How much is the combined total liabilities? What is the amount of goodwill/(income from acquisition) to be recognized by Soccer Ball Co.? a. P5,269,500 ; P52,000 c. P5,560,500 ; P77,000 b. P5,560,500 ; P52,000 d. P5,269,500 ; P77,000 B 42. On January 1, 2008, P Company purchased 32,000 shares of the 40,000 outstanding shares of S Company at a cost of P1,000,000, with an excess of P40,000 over the book value of S Company’s net assets. Such excess is attributed to goodwill.

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For the year 2008, P Company reported a net income of P500,000 and paid dividends of P200,000. While S Company reported a net income of P150,000 and paid dividends to P Company amounting to P40,000. Goodwill was not impaired in 2008. P Company uses the cost method to account for its investment in S Company. Compute for the following for 2008: Minority interest in net income; Minority interest in net assets; Consolidated net income a. P30,000 ; P260,000 ; P580,000 b. P30,000 ; P220,000 ; P580,000 c. P30,000 ; P212,000 ; P580,000 d. P30,000 ; P262,000 ; P588,000 A 43. Pam Company purchased 75% of the capital stock of Sam Company on January 1, 2004 at P400,000 more than the 75% of the book value of its net assets. The excess was allocated to equipment in the amount of P150,000 and to goodwill for the rest of the balance. The equipment has an estimated useful life of 10 years and goodwill was not impaired. For four years, Sam Company reported cumulative earnings of P1,800,000 and paid P520,000 in dividends. On December 31, 2007, minority interest in net assets of Sam Company amounts to P750,000. How much is the acquisition cost/ price paid for the investment in Sam Company? a. P2,500,000 b. P1,690,000 c. P1,540,000 d. P1,600,000 D 44. On January 1, 2008, Mickey Corporation acquired 90% of the outstanding ordinary shares of Minnie Corporation. Minnie Mickey Book Value Fair Value Assets Cash P50,000 P25,000 P25,000 Receivables 95,000 45,000 45,000 Inventories 90,000 40,000 45,000 Land 200,000 90,000 100,000 Building - net 190,000 95,000 90,000 Investment in Minnie 190,000 TOTAL P815,000 P295,000 P305,000 Liabilities and Stockholders' Equity Accounts payable Other liabilities Ordinary shares, P10 par Retained earnings TOTAL

P100,000 30,000 600,000 85,000 P815,000

P90,000 60,000 130,000 15,000 P295,000

90,000 50,000

How much is the total assets on January 1, 2008? ; How much is the total liabilities and stockholders equity on January 1, 2008? a. P955,000 ; P955,000 c. P971,500 ; P971,500 b. P969,500 ; P969,500 d. P953,500 ; P953,500 C 45. May Corp. owns 85% of Day Corp’s ordinary shares. On May 1, 2007, Day Corp. sold a machine to May Corp. for P75,000. The carrying amount of the machine is P55,000 and has a remaining life of 10 years. Due to this intercompany transaction, how much is the net adjustment (increase/decrease) to the consolidated net income for 2007? a. P18,667 decrease c. P15,867 decrease b. P15,300 decrease d. P1,133 decrease C 46. Pat Company acquired inventories on June 12, 2007, from its 75% owned subsidiary, Sat Company. The inventories were sold for 86,000 including the 20% markup on cost. Out of these inventories, 60% were Page 20 of 21

sold to outsiders. During the year, Pat Co. reported net income of P185,000 and Sat Co. reported net income of P125,000. Based on the above transaction, how much is the realized profit to be allocated to minority interest in 2008? a. P5,733 b. P2,867 c. P2,150 d. P1,433 D

47. On January 1, 2006, PJ Company purchased 80% of the outstanding shares of SC Company at a cost of P720,000. On that date, SC had P400,000 of capital stock and P500,000 of retained earnings while PJ Company had capital stock of P1,000,000 and retained earnings for P600,000. All the assets and liabilities of SC Company have book values equal to their respective market values. For 2006 PJ Company reported net income of P320,000 and paid dividends of P150,000. For 2006, SC Company reported net income of P85,000 and paid dividends of P40,000. On January 1, 2006, PJ Company sold equipment to SC Company for P75,000. The book value of the equipment on that date was P100,000. The equipment is expected to have a useful life of five years from the date of sale. Also during that year, SC Company sold merchandise to PJ Company amounting to P80,000 which includes a profit of P20,000. 70% of these merchandise were sold by PJ to outsiders. Consolidated stockholders equity for 2006 a. P91,535 b. P90,860

c. P92,175

d. P89,900

A

"Whatever the mind conceives, the body can achieve" Napolleon Hill "Man becomes what he think about" Morris Goodman “We are what we think, all that we are arises with our thoughts, with our thoughts, we make our world.” BuddhaA goal properly set is halfway reached. "Kung mangangarap ka, paka-taasan mo na. Langit ang subukan mong abutin. Para kung ikaw man ay lumagapak, hindi ka kaagad sa lupa pupulutin. Sa mga ulap muna ang iyong bagsak"

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