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Chapter 16

Consolidation: Wholly owned

subsidiaries

Prepared by
Emma Holmes

The consolidation process

Before consolidating, it may be necessary to adjust

subsidiary’s financial statements where:

1. The subsidiary’s balance date is different to the

parent’s. In such cases the subsidiary is required to
prepare adjusted financial statements as at the parent’s
reporting date. Eg- 30 June vs. 31 December
2. The subsidiary’s accounting policies are different to
the parent’s. In such cases the subsidiary is required to
prepare adjusted accounts to ensure accounting policies
consistent with the parent.
Eg- cost vs. revaluation methods of accounting for
non-current assets

The consolidation process

Consolidation involves adding together the financial

statements of the parent and subsidiaries and making a
number of adjustments:
• Business combination valuation entries – required to
adjust the carrying amounts of the subsidiary’s assets
and liabilities to fair value
• Pre-acquisitions entries – required to eliminate the
carrying amount of the parents investment in each
subsidiary against the pre-acquisition equity of that
subsidiary
• Transactions between entities within the group
subsequent to acquisition date (chapter 17)

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Consolidation worksheets

Consolidation journals are posted into the consolidation

worksheet in “adjustment” columns as follows:

Extract only Parent Subsidiary

Add down for

sub-totals

-All consol. journals recorded in these DR/CR columns

- Where there are a large number of journals it is common to number them 1,2,3 etc.
- Purpose- to remove the parent’s investment in the subsidiary and the effect of all interentity
transactions so that the final column shows an “external view”

Consolidation worksheets

• Consolidation journal adjustments are ONLY prepared

for the purpose of consolidation

• They are posted onto the consolidation worksheet only-

they are NOT recorded in the books of the parent or
the subsidiary

• As a result, some consolidation adjustments are

repeated every time consolidated accounts are
prepared

Acquisition analysis

• An acquisition analysis compares the cost of acquisition

with the fair value of the identifiable net assets and
contingent liabilities (FVINA) that exist at acquisition to
NOT the determine whether there is:
book
value
• Goodwill on acquisition (where cost > FVINA)
• Bargain purchase (where cost < FVINA)
• Recall that goodwill is an unidentifiable intangible asset
that is calculated as a residual value
• Also recall that net assets = assets – liabilities =
shareholders equity

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Acquisition analysis

• The FVINA include all identifiable asset and liabilities of

the subsidiary as well as the fair value of any contingent
liabilities the acquiree may have.

• Recall that contingent liabilities are not recognised in

subsidiaries balance sheet- rather they are recorded by
way of note disclosure only. AASB3 requires them to be
recognised on the acquisition of another business

• We commonly determine the FVINA with reference to

the equity balances of the subsidiary, rather than the
individual asset and liability balances

Example – background information

Hitech Ltd acquired all of the issued share capital of

Lotech Ltd on 30 June 2011 for a cash consideration of
$400,000
At that time the net assets of Lotech Ltd were
represented as follows:
$
Share capital 300,000
Retained earnings 50,000
Book value of identifiable
Net assets 350,000 net assets (BVINA)

Example – background information

When Hitech acquired its investment in Lotech the following

information applied:

 Land held by Lotech was undervalued by $10,000

 A building held by Lotech was undervalued by $45,000.
The building had originally cost $100,000 2 years ago
and was being depreciated at 10% per year
 A contingent liability relating to an unsettled legal claim
with a fair value of $3,000 was recorded in the notes to
Lotech’s financial statements

The tax rate is 30%

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Acquisition analysis - no previously

held equity interest
$
Cost of acquisition 400,000 1 - Per slide 8

Book value of net assets

- Share capital 300,000

- Retained earnings 50,000 Per slide 8

Total book value of net assets BVINA A 350,000

Fair value adjustments

- After tax increase in land 7,000 10,000 x (1-30%) = 7,000
Per
- After tax increase in building 31,500 45,000 x (1-30%) = 31,500
slide 9
- After tax recognition of provision for legal claim (2,100) (3,000) x (1-30%) = (2,100)

Total fair value adjustments B 36,400

FVINA A+B 386,400

-
X %age acquired 100% 386,400 2
If +ve- goodwill
Goodwill/(bargain purchase) on acquisition 1-2 13,600 If –ve- bargain purchase

Parent has previously held equity

interest
• Where control is achieved in stages the previously held
equity instruments in the acquiree must be adjusted to
fair value prior to performing the acquisition analysis.

• This will require additional entries to be made in the

parents books.

• Consolidation entries will remain unchanged.

• Example: Hitech acquired 85% of Lotech on 30 June

2005 and the remaining 15% on 30 June 2011.

Worksheet entries at acquisition date -

Business combination valuation entries
• If the BV of subsidiary assets and liabilities = FV, or if a
contingent liability exists, it is necessary to make
“business combination valuation” adjustments. These
adjustments:
• increase or decrease subsidiary’s recorded assets
and liabilities book values to fair value;
• recognise previously unrecognised assets (eg
internally generated intangibles); or
• recognise subsidiary’s contingent liabilities as
liabilities at fair values
• Business Combination Valuation Reserve (BCVR)
account is used to record these adjustments. The BCVR
is similar to the Asset Revaluation Surplus (ARS) account

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Worksheet entries at acquisition date -

Business combination valuation entries
• While it is possible for these adjustments to be made
directly in the books of the subsidiary, it is likely and
common for these adjustments to be made on
consolidation
• In some cases, other accounting standards prevent the
adjustment from being made in the subsidiaries books.
– AASB 102 requires all inventory to be recorded at the
lower of cost or NRV therefore where the FV of
inventory is higher than the cost, such an adjustment
may not be made in the subsidiaries books

– AASB 138 does not allow the subsidiary to recognise

internally generated goodwill.

Worksheet entries at acquisition date -

Business combination valuation entries

• Where the BCVR entry is done in the ARS account

in the subsidiary’s books it is recorded in the G/L
and therefore automatically carries forward to future
periods once entered
BUT
Where the entry is done in the BCVR on
consolidation (ie on the worksheet) it must be
manually carried forward to future periods

BCVR adjustments at acquisition date

Land
• Land is undervalued by $10,000
• Accordingly, the business combination valuation
adjustment required on consolidation at 30 June 2011
(the date of acquisition) is:

DR Land 10,000
30%
CR DTL 3,000
70%
CR BCVR 7,000

This entry will be posted onto the consolidation worksheet- refer slide 20 (Ref 1)

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BCVR adjustments at acquisition date

Buildings
• Buildings must be increased by $45,000.
• The buildings in the statement of financial position need
to change as follows
In sub’s books On consol.

AT PRESENT REQUIRED
Buildings at cost 100,000 125,000
Accum. depreciation (20,000) 0
Book value 80,000 125,000
of $45,000
10% depreciation p.a for 2 years

The FV of the asset is considered to be the cost of the asset to the group

BCVR adjustments at acquisition date

Buildings
• The business combination valuation adjustments
required (on consolidation) at 30 June 2011 (the date of
acquisition) are:
DR Accum depreciation 20,000
CR Buildings 20,000
DR Buildings 45,000
CR DTL 30% 13,500
CR BCVR 70% 31,500
A SINGLE JOURNAL CAN BE PREPARED AS FOLLOWS:
DR Buildings 25,000
DR Accum depn 20,000
CR DTL 13,500
CR BCVR 31,500

Both of these journals will be posted onto the consolidation worksheet- refer slide 20 (Ref 2)

BCVR adjustments at acquisition date

Contingent Liability
• Recognising a contingent liability for the first time will
result in a liability that has a carrying amount but no
tax base. Such adjustments result in a Deferred Tax
Asset (DTA)
• The business combination valuation adjustment
required on consolidation at 30 June 2011 (the date
of acquisition) in relation to the contingent liability is:

DR BCVR 2,100 70%

DR DTA 900 30%

CR Provision for legal claim 3,000

This entry will also be posted onto the consolidation worksheet- refer slide 20 (Ref 3)

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BCVR adjustments at acquisition date

Goodwill
• Goodwill arising on the acquisition is $13,600.
• The business combination valuation adjustment
required on consolidation at 30 June 2011 (the date of
acquisition) in relation to the goodwill is as follows:

DR Goodwill 13,600
CR BCVR 13,600

• There is not tax effect arising on the recognition of

goodwill as goodwill gives rise to an excluded
tempreary difference
This entry will also be posted onto the consolidation worksheet- refer slide 20 (Ref 4)

BCVR adjustments at acquisition date

The consolidation journals will be posted onto the consolidation

worksheet at 30 June 2011 (the date of acquisition) as follows:

4 Note
consolidated
balances

1, 2, 3, 4

Goodwill, provision and BCVR exist on consolidation only (NIL balance in parent & sub’s books).

Pre-acquisition entry at acquisition date

• Equity balances that existed in the subsidiary prior to

acquisition date are referred to as pre-acquisition equity.
All movements after the date of acquisition are referred
to as post-acquisition
• You cannot have an investment in yourself, nor can you
have equity in yourself. From a consolidated viewpoint,
these items should not exist i.e. they must be eliminated
to avoid double counting
• By acquiring 100% of the share capital of Lotech,
Hitech effectively gained control of all of the individual
assets and liabilities of Lotech. It is these balances that
should be reflected in the consolidated statement of
financial position

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Pre-acquisition entry at acquisition date

• The pre-acquisition entry eliminates the asset “Investment

in subsidiary” (in the parent’s books) against the pre-
acquisition equity (in the subsidiary’s books)

• The pre-acquisition entry required in our example is:

DR Share capital 300,000
DR Retained earnings 50,000
DR BCVR 50,000
CR Investment in Lotech 400,000

These figures are taken from the acquisition analysis (refer back to slide 10)

Pre-acquisition entry at acquisition date

Note
values

In the equity section of the statement of financial position the sub’s balances have been eliminated in full-
group balances = parent’s balances

Acquisition analysis – other issues

• Note also the impact of the following on the acquisition

analysis (covered in textbook but not lecture notes):

• Where subsidiary has recorded goodwill at

acquisition date (p. 770)

• Where subsidiary has recorded dividends at

acquisition date (p.771) Referred to as cum. divs

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Gain on bargain purchase

• A gain on bargain purchase is rare and AASB 10

recommends re-assessment and confirmation of net
asset fair values before such a gain is recognised
• Assume Hitech paid $360,000 for Lotech.
(Acquisition analysis on following page)

• Pre-acquisition entry at 30 June 2011 is:

DR Share capital 300,000

DR Retained earnings 50,000
DR BCVR 36,400
CR Investment 360,000
CR Gain on bargain purchase (P&L) 26,400

Gain on bargain purchase

$
Cost of acquisition 360,000
Book value of net assets
- Share capital 300,000
- Retained earnings 50,000
Total book value of net assets 350,000
Fair value (BCVR) adjustments
- After tax increase in land 7,000
No change
- After tax increase in building 31,500
- After tax recognition of provision for legal claim (2,100)
Total fair value adjustments 36,400
FVINA 386,400
X %age acquired 100% 386,400
Gain on bargain purchase on acquisition (26,400)

- ve therefore gain - cost < FVINA

Worksheet entries subsequent to

acquisition date

• So far, we have considered the consolidation journals

required if a consolidation was being prepared on the
acquisition date

• How do these journals change if a consolidation is being

prepared on a later date?

• The business combination valuation adjustment entries

may differ due to transactions and events occurring since
acquisition

• The pre-acquisition entry may also be affected by a

number of events

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Worksheet entries subsequent to

acquisition date – BCVR - land
• What if, during the year ended 30 June 2013 the land was
sold for $250,000?

• On sale, Lotech Ltd recognised the following journal

DR Cash 250,000
CR Gain on Sale 50,000
CR Land 200,000

• From a group viewpoint, the Gain on sale was $40,000

(not $50,000) as the carrying value of the land on
consolidation was $210,000
Lotech consol. Therefore need to decrease gain on sale on
Proceeds 250 250 consolidation by $10,000. Requires DR to
Book value (200) (210) debit to gain in sale account.
Profit on sale 50 40

Worksheet entries subsequent to

acquisition date – BCVR - land

Until land is sold (30 June 2011 & 30 June 2012)

DR Land B/S 10,000
CR DTL B/S 3,000
CR BCVR 7,000
In the year the land is sold (30 June 2013)
DR Gain on sale P/L 10,000 TT
CR ITE P/L 3,000 ITE

CR Transfer from BCVR (R/E) 7,000

In future years (2014 >)
• No BCVR entry required (no effect on retained earnings)
• However, an adjustment is required to the pre-acquisition
entry (refer slide 39)
Inventory adjustments are accounted for in a similar way to land- refer page 777 of text

Worksheet entries subsequent to

acquisition date – BCVR - buildings

• A consequential depreciation adjustment is required in

relation to depreciable assets that are revalued to fair
value on acquisition of a subsidiary
• Required as the subsidiary is continuing to depreciate the
asset based on its cost, which is lower than the fair value
• From a consolidated perspective, the depreciation charge
is understated
• In relation to the buildings, the adjustment is calculated as
shown on the following slide

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Worksheet entries subsequent to

acquisition date – BCVR - buildings

Lotech Group Difference

Carrying amount at date 80,000 125,000 45,000

of acquisition
Remaining useful life 8 years 8 years 8 years
Annual depreciation 10,000 15,625 5,625

5,625pa additional depreciation

expense required on consolidation

Worksheet entries subsequent to

acquisition date – BCVR - buildings

• On 30 June 2012 (1 year after acquisition) the original

entry on slide 17 PLUS the following entries are
required:
DR Depreciation expense 5,625 TT

CR Accum depreciation 5,625

• Over the next eight years we are also required to

progressively reverse the DTL created with the original
valuation adjustment. The following journal must also
be processed on consolidation
DR DTL 1,687.5
CR ITE 1,687.5 ITE

Worksheet entries subsequent to

acquisition date – BCVR - buildings

• On 30 June 2013 (two years after acquisition) the

original entry on slide 17 PLUS the following entries
are required:
DR Depreciation expense 5,625 2013 expense
DR Retained earnings 5,625 2012 expense
CR Accum depreciation 11,250 2012 + 2013

DR DTL 3,375 2012 + 2013

CR ITE 1,687.5 2013 adj

CR Retained earnings 1,687.5 2012 adj

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Worksheet entries subsequent to

acquisition date – BCVR - contingent
liability
• On 1 January 2012 the legal claim was settled for $2,000.

• On settlement, Lotech Ltd will recognise the following

journal
DR Expense - legal fees 2,000
CR Cash 2,000
• As the liability no longer exists, it should not continue to
be carried forward on consolidation. The business
combination valuation adjustment must recognise the
settlement and any gain/(loss) on settlement.

Liability recognised 3,000

Cost to settle 2,000
Gain on settlement 1,000 - overprovision

Worksheet entries subsequent to

acquisition date – BCVR - contingent
liability
Until settlement (30 June 2011)
DR BCVR 2,100
DR DTA B/S 900
CR Provision for legal claim B/S 3,000
In the year the liability is settled (30 June 2012)
DR Transfer from BCVR 2,100
DR ITE P/L 900 Remove expense
in sub’s books
CR Expense – legal fees P/L 2,000
CR Gain on settlement P/L 1,000 Overprovision

In future years (2013 >)

• No BCVR entry required (no effect on retained earnings)
• However, an adjustment is required to the pre-acquisition
entry (refer slide 39)

Worksheet entries subsequent to

acquisition date – BCVR – goodwill
impairment
• On acquisition the balance of goodwill was $13,600
• On 30 June 2012, goodwill is assessed to have a
recoverable value of $13,000. The goodwill is
considered to be impaired. It is therefore necessary to
reduce the value of goodwill
• This would be done by preparing the journal on slide 19
PLUS the following journal at 30 June 2012:
DR Impairment expense 600 P/L
CR Goodwill – accum impairment losses 600 B/S
• In future years the following entry would be required:
DR Retained earnings 600
CR Goodwill – accum. Impairment losses 600

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Changes to pre-acquisition entry

• The pre-acquisition entry is required every time a

consolidation is completed and does not change,
except under the following circumstances

• When a bonus share dividend is paid from pre-

acquisition equity;
• Transfers between pre-acquisition retained earnings
and reserves (including BCVR, general reserve)

Changes to pre-acquisition entry –

transfers of pre acquisition reserves

• When a transfer of pre-acquisition reserves is made

subsequent to acquisition a change is required to the
pre-acquisition elimination entry

• Consider the sale of the land in the example which was

subject to a fair value adjustment

• The journals on the following slide show how the sale of

the land would have affected the pre-acquisition entry

• Note that other types of reserve transfers (eg general

reserves) are dealt with in the same way as BCVR
transfers

Changes to pre-acquisition entry –

transfers of pre-acquisition reserves

In the year the land is sold (30 June 2013)

DR Share capital 300,000

DR Retained earnings 50,000
DR BCVR 50,000
CR Investment 400,000
DR Transfer from BCVR(R/E) 7,000
CR BCVR 7,000
In future years (2014 onwards)
DR Share capital 300,000 50,000 + 7,000
DR Retained earnings 57,000 50,000 – 7,000

DR BCVR 43,000
CR Investment 400,000

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Other issues

• Also covered in chapter 16

– 16.6 Revaluations in the records of the

subsidiary at acquisition date
– 16.7 Disclosures
– 16.8 Reverse acquisitions

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