ADVANCED FINANCIAL ACCOUNTING AND REPORTING

Consolidated Financial Statements (PFRS 10)

Consolidated Financial Statements not recorded on the books of either the parent or
These are financial statements of an entity the subsidiary company.
with multiple divisions or subsidiaries.
Overview of Eliminating Entries
Requirement to Prepare Consolidated 1. Eliminating entry #1 - To eliminate the
Financial Statements investment account from the parent
A parent is required to present company’s statement of financial position
consolidated financial statements, except if: against the stockholders’ equity accounts
1. It meets all the following conditions: in the statement of financial position of the
• It is a subsidiary of another entity and subsidiary.
all its other owners, including those not 2. Eliminating entry #2 - To allocate excess by
otherwise entitled to vote, have been adjusting the net assets to their fair values.
informed about, and do not object to, 3. Eliminating entry #3 - To eliminate the
the parent not presenting consolidated Dividend Income account and minority
financial statements share of dividends against the dividend
• Its debt or equity instruments are not declared by the subsidiary.
traded in a public market 4. Eliminating entry #4 - To assign to the non-
• It did not, nor is in the process of filing, controlling stockholders their share of the
financial statements for the purpose of increase in the subsidiary’s adjusted
issuing instruments to the public undistributed earnings that occurred
• Its ultimate or any intermediate parent between the acquisition date and the
produces IFRS compliant consolidated beginning of the current period.
financial statements available for 5. Eliminating entry #5 - To amortize the
• public use. allocated excess to identifiable assets.
2. It is a post or long term-employment benefit 6. Eliminating entry #6 - To eliminate the
plan to which IAS 19 Employee Benefits intercompany sale of inventory.
applies 7. Eliminating entry #7 - To eliminate the
3. It meets the criteria of an investment entity unrealized inventory profit.
8. Eliminating entry #8 - To eliminate the
Control Model realized inventory profit.
An investor determines whether it is a 9. Eliminating entry #9 - To eliminate the
parent by assessing whether it controls the unrealized gain on intercompany sale of
investee. An investor is required continuously to fixed asset
reassess whether it controls an investee. An 10. Eliminating entry #10 - To eliminate excess
investor controls an investee if it has all of the depreciation
following: 11. Eliminating entry #11 - To recognize the
1. Power over the investee NCI in the subsidiary’s net income for the
2. Exposure, or rights, to variable returns from year.
its involvement with the investee
3. The ability to use its power, to affect the Note:
amount of the investor’s returns 1. Eliminating entry nos. 1 and 2 only for -
consolidated statement of financial position
Note: Generally, statements are to be at acquisition date
consolidated when a parent company owns over 2. Eliminating entry no. 4 exists only for -
50% of the voting ordinary shares of another consolidated financial statements two
company thereby having controlling interest. reporting dates after the date of acquisition
and beyond
Eliminating Entries
These are journal entries made on the Consolidated Statement of Financial Position
consolidation working papers to effect at Acquisition Date
intercompany adjustments and eliminations on the This financial statement is unique because
consolidated financial statements. These appear it is the first consolidated financial statement that
only on the consolidation working papers and are can be prepared. At the acquisition date, no other

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 ADVANCED FINANCIAL ACCOUNTING AND REPORTING
Consolidated Financial Statements (PFRS 10)

transactions have occurred besides the business 6. F = E - D

combination. 7. G = A - D
8. H = B - E
Measurement of Non-Controlling Interest 9. I = C - F
The following are the options provided by 10. J or Allocation of excess to adjust the net
the Standard in measuring the non-controlling assets to their fair value = Fair value of
interest, in the order of priority: identifiable account to be adjusted - Book
1. At fair value (usually given); or value of identifiable account
2. At the non-controlling interest’s 11. K = G - J
proportionate share of the acquiree’s
identifiable net assets, which is computed Eliminating Entry No. 1
as follows: The purpose of this eliminating entry is to
= (Consideration given / eliminate the reciprocal accounts found in the
Percentage ownership of parent over books of the acquirer (Investment in Subsidiary)
subsidiary) * (1 - Percentage ownership of and acquiree (equity accounts). Also, it allows for
parent over subsidiary the establishment of the initial balance of the Non-
Controlling Interest account. Of course, if the
General Formula for Constructing Eliminating acquiree is a wholly-owned subsidiary, there will
Entry Nos. 1 and 2 be no NCI.
Entry: Dr. Share capital - acquiree, Share
premium - acquiree, Retained earnings - acquiree;
Fair Parent NCI Cr. Investment in subsidiary (E), Non-controlling
Value >50% <50% interest (F)
Fair value of A B C
Eliminating Entry No. 2
subsidiary
The purpose of this eliminating entry is to
- Book value of D E F allocate the excess of the fair value of the
interest acquired subsidiary over the book value of interest acquired
to identifiable accounts whose fair values exceed
= Excess G H I the corresponding book values. Also, it allows for
the establishment of the Goodwill or Gain from
- Adjustment of J Bargain Purchase account.
identifiable Entry: Dr. Identifiable accounts (J),
accounts Goodwill (balancing figure or K); Cr. Investment in
(e.g., Inventory, subsidiary (H), Non-controlling interest (I), Gain
Land, Building, from bargain purchase (balancing figure or K)
etc.)
Consolidated Financial Statements -
= Goodwill (Gain K Subsequent to Date of Acquisition
from bargain These statements may be affected by the
purchase) other eliminating entries aside from nos. 1 and 2
since transactions have already been entered into
between the date of acquisition and such date after
the acquisition.
1. A = Consideration given / Percentage
Note: Whenever a parent consolidates
ownership of parent over subsidiary
statements, it has to use a different consolidation
2. B = Consideration given
working paper and not just continue the previous
3. C = Fair value of NCI or NCI’s proportionate
one. Therefore, some entries will have to be
share of the acquiree’s identifiable net
repeated in order to effect proper consolidation.
assets
4. D = Acquiree’s: Share capital + Share
premium + Retained earnings + Other Eliminating Entry No. 3
equity accounts The purpose of this eliminating entry is to
5. E = D * Percentage ownership of parent eliminate the effect of distribution of dividend by
over subsidiary the acquiree since under the consolidated financial

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 ADVANCED FINANCIAL ACCOUNTING AND REPORTING
Consolidated Financial Statements (PFRS 10)

statements, the parent and subsidiary are Upstream Intercompany Sales

considered as one entity. These are those sales made from
Entry: Dr. Dividend income (acquirer), Non- subsidiaries to the parent company.
controlling interest (balancing figure); Cr.
Dividends declared - acquiree Unrealized Gross Profit
It exists in the ending inventory of the
Eliminating Entry No. 4 consolidated entity whenever there is an
This entry is only made if after the intercompany sale of inventory during the current
acquisition date, at least one reporting period has period but the inventory was left unsold in the
already passed before the current reporting period. ending inventory of the buyer. This gross profit will
Its purpose is quite similar to eliminating entry no. only be realized once the involved inventory is
11. The only difference is that in this entry, the sold.
earnings being referred to are those from prior
periods. Intercompany Sale Transaction Analysis
Formula:
Retained earnings - acquiree, beginning of
current period Selling Cost Gross
- Retained earnings - acquiree, date of Price Profit
acquisition
Beginning A B C
= Increase in earnings - prior year
inventory
- Amortization of allocated excess in prior
years + Sales D E F
= Adjusted undistributed earnings
* Percentage ownership of NCI over - Ending G H I
subsidiary inventory
= Prior earnings assignable to NCI
= Cost of goods J K L
Entry: Dr. Retained earnings - acquiree sold
(prior earnings assignable to NCI); Cr. NCI

Eliminating Entry No. 5

Since the identifiable net assets are 1. A = Intercompany selling price of beginning
already adjusted to fair value, it is just right to inventory
adjust their depreciation, amortization, effects on 2. B = Cost of beginning inventory before
cost of goods sold, etc. because in such intercompany sale
transactions, the acquiree is still using the book 3. C = A - B = A * Intercompany gross profit
values. rate = Gross profit realized during the
Entries: current period considering FIFO method is
1. Inventory: Excess is amortized as the used
inventory items are sold - Dr. Cost of goods 4. D = Intercompany sales during the current
sold; Cr. Inventory period
2. Depreciable PPE: Excess is amortized as 5. E = Cost of inventory (subject of
the property is depreciated - Dr. Operating intercompany sale) from outsiders
expense; Cr. PPE (net) 6. F = D - E = F * Intercompany gross profit
3. Any PPE (depreciable or non-depreciable): rate
Excess is amortized when the asset is sold 7. G = Intercompany selling price of ending
or disposed - Dr. Gain on sale of PPE; Cr. inventory
PPE 8. H = Cost of ending inventory before
intercompany sale
9. I = G - H = G * Intercompany gross profit
Downstream Intercompany Sales
rate = Unrealized gross profit at the end of
These are those made from a parent
the reporting period
company to its subsidiaries.
10. J = A + D - G
11. K = B + E - H
12. L = C + F - I

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 ADVANCED FINANCIAL ACCOUNTING AND REPORTING
Consolidated Financial Statements (PFRS 10)

Eliminating Entry No. 6 Entry: Dr. PPE (balancing figure), Gain on

Since, the parent and the subsidiary are sale of PPE (unrealized); Cr. Accumulated
treated as one under the consolidated financial depreciation (balance that would have been show
statements, the transactions of the consolidated had the PPE not been sold)
entity with itself will have to be eliminated. The
entry will be the same whether there has been a Eliminating Entry No. 10
downstream or an upstream intercompany sale. For example, the PPE was sold by the
Entry: Dr. Sales (D); Cr. Cost of goods sold Parent to its subsidiary at a gain. The subsidiary is
now depreciating the PPE based on the cost when
Eliminating Entry No. 7 the latter was sold by the parent to the former
For example, the parent acquired a certain which is higher than the original historical cost of
amount of inventory from the subsidiary. The the PPE. Therefore, there is excess depreciation
subsidiary recognizes gross profit in its books that will have to be eliminated,
arising from that sale; but the inventory is still in the Entry: Dr. Accumulated depreciation
ownership of the consolidated entity at the end of (excess depreciation); Cr. Depreciation
the reporting period. Therefore, such gross profit is
still unrealized and will have to be eliminated. Eliminating Entry No. 11
Entry: Dr. Cost of goods sold (I); Cr. Its purpose is to recognize the share of the
Inventory non-controlling interest in the comprehensive
income of the acquiree.
Eliminating Entry No. 8 Formula:
Continuing the example in eliminating entry Comprehensive income from own
no. 7, the parent sold the involved inventory to operations - acquiree
outsiders during the second year. It recognized - Amortization of excess
gross profit on such sale based on: + Realized intercompany profit in the
1. The selling price to the external parties; beginning inventory from upstream
and sale
2. The cost when the inventory was sold to it - Unrealized profit in the ending inventory
by the subsidiary (intercompany sale). from upstream sale
- Unrealized gain in the upstream sale of
The difference between the original cost of PPE
the inventory and the intercompany selling price is + Excess depreciation on PPE acquired
not yet recognized as gross profit. Therefore, an through a downstream sale
eliminating entry has to be made for the realized = Realized comprehensive income from own
gross profit. operations - acquiree
Entry: * Non-controlling interest’s percentage
1. Downstream sale - Dr. Retained earnings, ownership over the subsidiary
Jan. 1 - acquirer (C); Cr. Cost of goods sold = Realized comprehensive income
2. Upstream sale - Dr. Retained earnings, attributable to NCI
Jan. 1 - acquirer (C * percentage ownership
of parent over subsidiary), Non-controlling Entry: Dr. NCI in CI of subsidiary; Cr. Non-
interest (balancing figure); Cr. Cost of controlling interest
goods sold (C)
Consolidated Comprehensive Income
Eliminating Entry No. 9 Attributable to the Acquirer
This is with regard to the intercompany sale Comprehensive income from own
of PPE. Since the parent and the subsidiary are operations - acquirer
considered as one under the consolidated financial - Dividend income - acquirer.
statements, any gain or loss they earn or incur from + Realized intercompany profit in the
intercompany sale of PPE will have to be beginning inventory from
eliminated. Such gain or loss is considered downstream sale
unrealized until the said PPE is sold to an external - Unrealized profit in the ending inventory
party or as the asset is being depreciated. from downstream sale
- Unrealized gain in the downstream sale of

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 ADVANCED FINANCIAL ACCOUNTING AND REPORTING
Consolidated Financial Statements (PFRS 10)

PPE
+ Excess depreciation on PPE acquired
through an upstream sale
= Realized comprehensive income from own
operations - acquirer
+ Realized comprehensive income from own
operations - acquiree
- Non-controlling interest’s percentage
ownership over the subsidiary
= Consolidated comprehensive income
attributable to the acquirer

Consolidated Retained Earnings

Retained earnings, reporting date -
acquirer
+ Acquirer’s share in the adjusted
undistributed earnings of the
acquiree
= Consolidated retained earnings, reporting
date

or

Retained earnings, beginning of reporting

period
+ Consolidated comprehensive income
attributable to the acquirer
- Dividends paid - acquirer
= Consolidated retained earnings, reporting
date

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