Business Combination

1
Class 01 : GW, FV Adjustments, Acq & RD Acc, Contingencies

Why Consolidation Done ?

Consolidated position and Performance

Acquired 55%
Shareholding
Control Obtained
Paracha Limited Gohar Limited
Not a single decision can be made without Paracha Limited

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 Table of Content
Basic consolidation
- Balance Sheet
- Profit & Loss

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Consolidation Presentation of a GROUP as a single entity

Parent Subsidiary

Control
50% + shares are held by the entity

WHY ?
Because no ordinary resolution can be passed without more tha 50% majority

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 Control

Ownership
Control = 100%
55%
Because no asset or liability can be acquired
or disposed off without owner’s approval

Acq se RD tk ki sari assets/liab/income/exp consolid hongi

Control
Consolidation = 100%
100%
NCI’s Share will be calculated separately

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 Consolidation at Acquisition Date
Alternatively
At Acquisition Date
XYZ Co. (Parent) ABC Co. (Subsudiary)
Share capital 1,000
PPE 5,000 PPE 7,000
Retained earnings 1,000
Investments 7,000 Inventory 1,000
Book Value 2,000
12,000 8,000
FV Adjustment 3,000
FV of Net Assets 5,000
Share capital 2,000 Share capital (Rs.10/share) 1,000
Retained earnings 2,000 Retained earnings 1,000
Liabilities 8,000 Liabilities 6,000 = 100 shares * Rs. 70 per share
10
12,000 8,000
= Rs. 7,000
NOTE: Fair value of PPE is Rs.10,000 at the date of acquisition.
Share price of one share at acquisition of ABC Co. is Rs.70 per share
X

At Acquisition Date At Acquisition Date

Assets 8,000 PPE = 7,000 +3,000 Assets 11,000
Inventory = 1,000
Liabilities (6,000) Liabilities (6,000)
2,000 5,000

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 Consolidation at Acquisition Date
Alternatively
At Acquisition Date
XYZ Co. (Parent) ABC Co. (Subsudiary)
Share capital 1,000
PPE 5,000 PPE 7,000
Retained earnings 1,000
Investments 7,000 Inventory 1,000
Book Value 2,000
12,000 8,000
FV Adjustment 3,000
FV of Net Assets 5,000
Share capital 2,000 Share capital (Rs.10/share) 1,000
Retained earnings 2,000 Retained earnings 1,000 Goodwill
Liabilities 8,000 Liabilities 6,000 Consideration 7,000
12,000 8,000 Net Assets (5,000)
NOTE: Fair value of PPE is Rs.10,000 at the date of acquisition. Goodwill 2,000
Share price of one share at acquisition of ABC Co. is Rs.70 per share
X

In Separate Books Parent

Net assets = Rs.5,000
Investment 7,000
Good will = Rs.2,000
Cash 7,000

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 Consolidation at Acquisition Date
XYZ Co. (Parent) ABC Co. (Subsudiary) Consolidated FS
PPE 5,000 PPE 7,000 PPE 12,000
Investments 7,000 Inventory 1,000 Investments 7,000
12,000 8,000 Inventory 1,000
20,000
Share capital 2,000 Share capital 1,000 Share capital 3,000
Retained earnings 2,000 Retained earnings 1,000 Retained earnings 3,000
Liabilities 8,000 Liabilities 6,000 Liabilities 14,000
12,000 8,000 20,000
NOTE: Fair value of PPE is Rs.10,000 at the date of acquisition.
Share price of one share at acquisition of ABC Co. is Rs.70 per share
X
At Acquisition Date Goodwill
Share capital 1,000 Consideration 7,000
Retained earnings 1,000
Net Assets (5,000)
Book Value 2,000
FV Adjustment 3,000 Goodwill 2,000
FV of Net Assets 5,000

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 Goodwill or Bargain Purchase Gain/Negative GW

Investment in subsid, subsid ki capital or RE eliminate hojati hai consol FS se

Consolidation at Acquisition Date
Consolidated FS Consolidated FS
PPE 12,000 PPE 15,000
Investment 7,000 Goodwill 2,000
Inventory 1,000 Inventory 1,000
20,000 18,000

Share capital 3,000 Share capital 2,000

Retained earnings 3,000 Retained earnings 2,000
Liabilities 14,000 Liabilities 14,000
20,000 18,000

In Consolidated Books In case of BPG

PPE 3,000 PPE xx
Goodwill 2,000 Sh Cap xx
RE xx
Share capital 1,000 Investment xx
Retained earnings 1,000 BPG (GR(Other Inc)) xx
Investment 7,000

1. Investment in subsid & capital of subsid shall be eliminated in consol:

Investment coz is inv k bdly hum subsid k net assets consolidate kr rhe hain, agr inv bhi
dikhayenge or NA bhi to duplication hojayegi coz invv represent share of NA/equity in subsid, in
other words, subsid k NA hmne 7K mn liye, agr NA consolid kr rhe tb 7K dikhany ki need ni hai.
Plus RE is liye eliminate hogi q k wo parent k liye income nahi hai wo cost thi us subsid ko acquire
krne k liye, humne pay kiya usk liye, han post acquisition profit PAP will be income for us

2. Ye goodwill jo humne consol BS mn record ki ye subsid ki hai mgr usk liye cost can't e reliably
measurable to wo separate books mn record nai krta, or humne is GW k liye pay kiya to for us,
cost is reliably measurale so we record it in consol books.(not in our separate books)

3. Jab NA of subs k liye kam pay kre parent tb BPG ata hai or wo GR(SOFP) ya Other Income
(SOCI) mn record hota hai

sab se pehle at acquisition date asset ki book value kya hai awr unki FV kya hai, usko FV par
lejayenge awr isko fv adjusment kehte hai, uske baad dekhenge ke ham ne kahi zyada to
pay nahi kiye agar kiye ha to ooper wali amount goodwill hogi

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Consolidation at Acquisition Date
Consolidated FS Subsidiary
PPE 15,000 10,000
Goodwill 2,000 2,000
Inventory 1,000 1,000
18,000 13,000
Share capital 2,000
Retained earnings 2,000
Liabilities 14,000 (6,000)
18,000 7,000

In Consolidated Books
PPE 3,000
Goodwill 2,000
Share capital 1,000
Retained earnings 1,000
Investment 7,000

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FV Adjustment including incremental dep

Concept of Reporting Date Solution

Net Assets of Subsidiary At Acq. At RD
Saad Limited Rehan Limited
Share capital 500 500
31-Dec-17 31-Dec-17
Retained earnings 800 2,000
Land 1,000 800
Book value 1,300 2,500
Building 2,000 2,250
FV Adjustment 500 450
Investments 3,500 0
FV of net assets 1,800 2,950
Other assets 3,000 2,500
9,500 5,550 1,150
Goodwill Group Resreves
Share capital 2,200 500 Consideration 3,500 Parent Retained earnings 4,000
Retained earnings 4,000 2,000 Net Assets (1,800) Post acquisition profit of
Liabilities 3,300 3,050 1,150
1,700 subsidiary
9,500 5,550 5,150
Saad Limited acquired 100% shares of Rehan limited on
Balance Sheet as at 31 Dec 2017
1st January 2017. On the date of acquisition all assets
were equal to their fair value except a Building whose Land 1,800 Share capital 2,200
fair value is Rs. 3,000 against a carrying amount of Rs. Building 4,700 Group reserves 5,150
2,500 (remaining useful life of building is 10 years). Other assets 5,500 Liabilities 6,350
Retained earnings at the date of acquisition was Rs. 800. Goodwill 1,700
There is no change in share capital since the date of 13,700 13,700
acquisition.

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 Concept of Contingent Liability Case 1: Contingent Liability Not Settled at Reporting Date

Parent Subsidiary Case filed on subsidiary

Profit of subsidiary
Disclosed in contingencies Rs.800
Net Assets of Subsidiary At Acq. At RD
Share capital 1,000 3,500 1,000
Profit 3,500
Retained earnings 3,000 6,500
Incremental depreciation (50)
4,000 7,500
3,450
FV Adjustment - Plant 500 450
Contingent liability (800) (800) Only if not settled
FV of net assets 3,700 7,150

Goodwill By deducting/recording Rs.800 of contingent liability here we are not

Consideration 4,500 recording expense. Instead we are increasing/paying for goodwill (1)
Net assets (3,700)
800

1. Subsid ki contingent liab hai agr wo hum Consol FS mn FV pe record krte hain (qk
wo balli humpe aa skti hai) usko subsid ka expense smjh kar nahi balke ye smjh kar k
humne business k liye GW zada pay ki i.e. coz jab NA of subsid kam honge is FV of
Contingent Liab se to goodwill hi increase hogi is liye ye expense record nahi hota
balke GW increase hoti hai. Entry in consol books will be:
Goodwill 800
Liability 800

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 Concept of Contingent Liability Case 2: Contingent Liability Settled by Subsidiary by Same Amount

Parent Subsidiary Case filed on subsidiary

Profit of subsidiary
Disclosed in contingencies Rs.800
Net Assets of Subsidiary At Acq. At RD GR
Share capital 1,000 2,700 1,000 Profit 2,700
Incremental depreciation (50)
Retained earnings 3,000 5,700
Gain reversal ko subs exp 800
4,000 6,700
FV Adjustment - Plant 500 450 3,450
Contingent liability (800) --
In Consolidated Books
FV of net assets 3,700 7,150
Goodwill 800 At Acquisition
subsid In Separate Books
Liability 800
Expense 800
(1.) Liability 800 On Settlement
(a) Cash 800
Cash 800

1. Consol books humne GW increase ki by recording cont liab at FV n decreasing NA of subsid, humne usko
kbhi expense of subsid nhi smjha, we increased GW only(see previous slide), hence ab jab RD tak subsid ne
usko expense record krliya(a) to hum subsid ki post acq acc reverse krenge jo humari ki hui acc se relate krti
hai or apne hisab se leke chalenge q k parent ne phle din hi kaha tha k ye cont liab expense nahi hai balke
hum technically GW k liye zada pay kr rhe, or humne isko GW mein record krliya hence group k liye ye koi
expense nahi hai
Ab RD pe zero likhne se acq se RD tak net change araha 0-(-800) =800 ka, yani +800 ka gain record ho rha,
ye us subsid k expense ko neutralise krdega

Is reversal ki yhi waja hai k is liab ko humne as GW record krliya tha ab subsid alag books mn jo bhi kre lekn
group mein ye expense nahi ana chahiye.
Ye gain wali entry consol books mn nai hoti ye sirf ye smjhany k liye thi k subsid ka exp reverse hojata hai

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 Concept of Contingent Liability Case 3: Contingent Liability Settled by Subsidiary at Higher Amount
By Rs.1,200
Parent Subsidiary Case filed on subsidiary

Profit of subsidiary
Disclosed in contingencies Rs.800
Net Assets of Subsidiary At Acq. At RD
Share capital 1,000 2,300 1,000 Profit 2,300
Incremental depreciation (50)
Retained earnings 3,000 5,300
Gain reversal ko subs exp 800
4,000 6,300
FV Adjustment - Plant 500 450 3,050
Contingent liability (800) --
In Consolidated Books
FV of net assets 3,700 6,750
Expense 400
In Separate Books Subsidiary On settlement
Liability 800
Expense 1200
Cash 1200 Cash 1,200

1. Same as last slide treatment for 800 liab, jisko humne acq pe GW mn record kiya tha, usko group an an
expense nahi manta, haan further is amount se above jo liab settle hogi wo group ne to GW mn nahi dali hui
because of not anticipation, hence wo exp group zarur manega i.e. 400 ka further yhan pe.
Simply 0 at RD se 800 reverse, or pichy NA mn 400 ka expense reh jayega

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 Concept of Contingent Liability Case 4: Contingent Liability Settled by Subsidiary at Lower Amount
By Rs.600
Parent Subsidiary Case filed on subsidiary

Profit of subsidiary
Disclosed in contingencies Rs.800
Net Assets of Subsidiary At Acq. At RD
Share capital 1,000 2,300 1,000 Profit 2,900
Incremental depreciation (50)
Retained earnings 3,000 5,900
Gain reversal ko subs exp 800
4,000 6,900
FV Adjustment - Plant 500 450 3,650
Contingent liability (800) --
In Consolidated Books
FV of net assets 3,700 7,350
In Separate Books Liability 800 Upon settlement
Expense 600 Cash 600

Cash 600 Gain 200

Subsid ka exp reverse hogya 800 ka, humne jo liab group k hisab se record ki thi wo settle krdi, less settle hui
to remaining group k liye gain hogya

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Homework

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Class 01: Concept of NCI, Full & Partial Goodwill

Concept of NCI
Company k wo malik jo company ko control nahi krte
Subsidiary
80%
Parent

80% of Profits

20%
NCI 20%

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Babu Bhai Limited acquired 22,500 shares of Raajoo limited on During the year Raajoo limited earned a profit of Rs.150,000
Rs. 150,000. 150,000
1st Jan 2017. Balance sheet as at 31 Dec 2017 are as follows: There is no change in share capital since the date of acquisition.
Further, contingency relating to outcome of legal case is disclosed
Babu Bhai LTD Raajoo LTD Rs. 74,500. However, entire claim was settled during December.
Property, plant and equipment 1,358,500 716,350 Details of PPE are as under:
Investments 1,450,000 400,000 Carrying FV in excess of its Remaining life
Receivable 48,000 24,000 Asset amount NBV (at the date at the date of
Other assets 25,000 12,500 At Year end of acquisition) acquisition
2,881,500 1,152,850 Land 175,000 43,750 N/A
Building 125,000 31,250 5 years
Share capital (of Rs. 10 each) 750,000 375,000 Equipment 416,350 116,350 5 years
Retained earnings 1,200,000 600,000
Current Liabilities 120,000 60,000 Goodwill Assumed partial GW
Long term liabilities 811,500 117,850 Consideration 1,450,000
2,881,500 1,152,850 Net assets at acquisition (60%) (565,110)
884,890
NCI
Net Assets of Subsidiary At Acq. workback At RD NCI At acquisition 40% of NA 376,740
Share capital 375,000 150,000 375,000
Retained earnings 450,000 600,000 NCI post acquisition 40% of profit 77,992
Land 43,750 43,750 454,732
Building 31,250 *4/5 = 25,000 60% 40% Group Reserves
Equipment 116,350 *4/5 = 93,080 Parent NCI R/E of Parent 1,200,000
Contingent liability (74,500) -- Post acquisition earnings 116,988
941,850 1,136,830 194,980 1,316,988

ham ne unki accounting krni hai jo subsidiary ne nahi ki

contingent liability ko subsidiary ne liability record ki hai lekin wo parent ne as goodwill record ki hai

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 Babu Bhai LTD Raajoo LTD
Property, plant and equipment 1,358,500 716,350
Investments
Receivable
1,450,000
48,000
400,000
24,000
Consolidated Balance Sheet
Other assets 25,000 12,500
2,881,500 1,152,850 Property, plant and equipment 2,236,680
Investments 400,000
Share capital (of Rs. 10 each) 750,000 375,000 Goodwill 884,890
Retained earnings 1,200,000 600,000 Receivables 72,000
Current Liabilities 120,000 60,000 Other Assets 37,500
Long term liabilities 811,500 117,850 3,631,070
2,881,500 1,152,850

At RD Share capital 750,000

Land 43,750 Group reserves 1,316,988
Building 25,000 NCI 454,732
Equipment 93,080 Long term liabilities 929,350
Contingent liability -- Current liabilities 180,000
Goodwill 884,890 3,631,070
NCI 454,732
Group Reserves 1,316,988

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 Concept of Goodwill

It’s a matter of accounting policy whether to record goodwill of NCI or not

Partial Goodwill Full Goodwill

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 Concept of Goodwill

Partial Goodwill Full Goodwill

Consideration of Parent xxx Consideration of Parent xxx

Share of Net assets (xxx) 1. Fair value of NCI xxx
Goodwill xxx Fair value of business xxx
Net assets of Company (xxx)
Consid sirf P ki likh rhe to xxx
Goodwill
NA bhi apna hissa hi layenge

1. Full GW k liye it is assumed as if P & NCI made investment together on same date(takay FV of business usi din ki nikle
uniform), isi liye hum NCI ki FV rakhte hain yhan P ki Acq date ki. Agr hum yhan NCI ka original cost rakhen tb is acq date
pe distorted GW ayegi jo sahi nhi hogi

A. Full GW tb ati jab NCI FV pe measure hota hai or partial tb jab NCI proportionate share of NA pe value hota hai as in
previous slide. Actually, agr humne NCI ko FV pe rkhna hai tb uski GW bhi record hogi, or uski GW record krne k liye full
GW nikalni parhegi

B. Full GW se wo sari GW nikal ati hai jo subsid se pertainent hai i.e. that of P & NCI both, partial GW se sirf wo GW nikal
ati hai jisk liye P ne pay kiya hai

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Logic of full & partial goodwill

Concept of Goodwill
Share capital of Rs.10 each of subsidiary at acquisition 100,000 ÷ 10 = 10,000 x 80% * Rs.25 = 200,000
Retained earnings of subsidiary at acquisition 100,000
Price per share of subsidiary at acquisition 25 Net Assets of Subsidiary At Acq.
Shares acquired 80% Share capital 100,000
Retained earnings 100,000
Net Assets 200,000

Partial Goodwill Full Goodwill

Consideration of Parent 200,000 Consideration of Parent 200,000

Share of Net assets (160,000) Fair value of NCI (2,000*25) 50,000
Goodwill 40,000 Fair value of business 250,000
Net assets of Company (200,000)
FV of NCI 50,000 Goodwill 50,000
Share of NCI (40,000)
Goodwill of NCI 10,000

NCI: NCI: 40,000 share of NA 20%*200k

Share of NA i.e. 20% of NA FV of NA i.e. 50,000
10K is its GW

Ab nichy equity mn ye NCI agr FV pe ayega to upar

humen GW bhi full hi record krni parhegi jisk andr P or
NCI dono ki GW aye warna GW NCI ki value mn nichy
record hojayegi or assets mn nahi hogi jis se bal sheet
nahi tally hogi
Or, agr full GW record krni hai to phir nichy bal sheet
mn equity mn NCI ko FV pe rkhna parhega warna tally
nahi hoga i.e. urdu zuban mn double entry effect

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Class 03

1. Intangibles

Concept of Intangibles

On The Books Off The Books

eg GW
Not Having Fair Having Fair Value + Having Fair Value +
Having Fair Value
Value Definite Life Indefinite Life
eg customer list

Treatment Treatment

1. Compare with
carrying amount
Derecognize Record + Amortize Recognize
2. Record excess +
amortize 1.

1. Derecog krenge tb pta chalega k hum ye wala paisa GW k liye pay kr rhe is intangible k liye nhi coz iski FV
zero hai
2. GW ki life indefinite (undeterminable) hoti hai is liye ye amortise nahi hoti, mgr impair zarur hoti hai
3. Off the books mn brand name,customer list, GW etc ajati hain jinki cost subsid reliably measure nahi kr
skta magar unki FV zarur hoti hi hai jab us business ki valuation hoti hai, mgr chunke asset as per IAS 38/16
etc initially cost pe record hota hai is liye ye record nahi hote despite having a FV

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 Concept of Intangibles
Fair Value Off The Books
Property, plant and equipment 5,000 8,000 Customer list 1,500
Software 2,000 2,500 Brand 800
License 1,000 - Goodwill ?
8,000
Net Assets of Subsidiary At Acq.
Share capital 1,000 Share capital 1,000
Retained earnings 4,000 Retained earnings 4,000
Liabilities 3,000 PPE 3,000
8,000 Software 500
License (1,000)
Customer list 1,500
Brand 800
9,800
Goodwill
Consolidation 10,200
Net Assets (9,800)
400

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2. Merger & Acquisition

Concept of Merger and Acquisition

Company
Company A Company B The two companies operate separately.
AB Parent only does consolidation.

Two companies becomes a single

company one is dissolved

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 Concept of Merger and Acquisition
Merge
XYZ A B
PPE 35,000 PPE 20,000 PPE 6,000
Investments 32,000 Cash 18,000 Inventory 7,000
67,000 38,000 13,000

Share capital 10,000 Share capital 5,000 Share capital 2,000

R/E 50,000 R/E 25,000 R/E 10,000
Liability 7,000 Liability 8,000 Liability 1,000
67,000 38,000 13,000

Net Assets of B A+B

Entry PPE 26,000
Share capital 11,000
Cash 3,000
Goodwill 3,000 Retained earnings (6,000)
Goodwill 3,000
5,000
PPE 6,000 Inventory 7,000
Goodwill 39,000
Inventory 7,000 Share capital 5,000
Consideration 11,000
Liability 1,000 Net assets (6,000) R/E 25,000
5,000 Liability 9,000
Cash 15,000 39,000

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 Concept of Merger and Acquisition
XYZ A B
PPE 35,000 PPE 20,000 PPE 6,000
Investments 32,000 Cash 18,000 Inventory 7,000
67,000 38,000 13,000

Share capital 10,000 Share capital 5,000 Share capital 2,000

R/E 50,000 R/E 25,000 R/E 10,000
Acquisition

Liability 7,000 Liability 8,000 Liability 1,000

67,000 38,000 13,000
A+B Net Assets of A + B
PPE 26,000 Entry
Share capital 5,000
Cash 3,000
Retained earnings 25,000 Investment 32,000
Goodwill 3,000
Inventory 7,000 Goodwill (3,000)
39,000 27,000 Cash 32,000
Share capital 5,000
Goodwill
R/E 25,000 Consideration 32,000
Liability 9,000 Net assets (27,000)
39,000 5,000

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 3. Intragroup adjustments

Intra-Group Adjustments Receivable & Payable Between Parent & Subsidiary

Sales
Parent Subsidiary
Rs.150,000

A/c Receivable 150,000 Inventory 150,000

Sales 150,000 A/C Payable 150,000

A/c Receivable 250,000

A/c Payable 350,000

Parent + Subsidiary
Consolidated Balance Sheet Adjustment Adjusted Consolidated Balance Sheet

A/c Receivable 250,000 A/c Receivable 100,000

A/C Payable 150,000

A/c Payable 350,000 A/c Receivable 150,000 A/c Payable 200,000

Group apne ap se hi receivable/payable nahi dikha skta coz subsid/P dono group mn hi hain

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 Intra-Group Adjustments Intra-Group Sales / Purchase & Their Impact on Profit

Case 1: 100% inventory sold out of the group

Group from group
Ultimate Parent Subsidiary Ultimate Group
= Rs.100 = Rs.200
Cost Sales 150 Sales 200 Sales Sales 200
for group Cogs (100) Cogs (150) Cogs (100)
50 100 50 100
No adjustment in profit. Only receivable and payable is eliminated
Parent Subsidiary
Stock 100 Stock 150
Cash 100 A/c Payable 150
A/c Receivable 150 Cash 200
Sales 150 Sales 200
COGS 100 COGS 150
Stock 100 Stock 150

1. IGAs tb ati hai jab ya to receivable/payable ho subsid k sth, or ya unrealised profit ho group
mein.
2. Unrealised profit tb arise hota hai jab group k andr sale/purchase ho and all or some part of it
remains unsold inside the group, is waja se kuch ya sara profit group mn rehta hai or group
apne ap se hi profit nahi dikha skta, to hum profit ko eliminate krte hain phir.
3. If all stock sold outside the group then sum of profits of P n S & total group profit is same, no
adjustment for profit.

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 Intra-Group Adjustments Intra-Group Sales / Purchase & Their Impact on Profit & Stock

Case 2: 40% inventory sold out of the group

Group
Ultimate Parent Subsidiary Ultimate Group
= Rs.100 = Rs.95
Cost Sales 150 Sales 95 Sales Sales 95
Cogs (100) Cogs (60)40% Cogs (40)
50 85 35 55
x 60% Overstatement of Profit Rs.30
1. = Rs.30
Unadjusted Balance Sheet Adjustment Adjusted Consolidated Balance Sheet
Parent Subs.
A/C Payable 150
A/c Receivable 150 A/c Receivable --
Stock 90 A/c Receivable 150 Stock 2. 60

A/c Payable 150 Group Reserves 30 A/c Payable --

Stock 30

1. Unrealised profit = URP * unsold stock %age

2. Stock ki cost for subsid 150 hai jis mn parent ki side wala 50 ka URP tha, mgr ab 40% inv sold
out of the group to pichy 50*60% ka URP stock mn bhi laga hua hai, to stock ko 30 se km kiya
warna URP iski value overstate krega group k liye
3. Entry would be
Group Reserves 30
Inventory 30

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Intra-Group Adjustments Intra-Group Sales / Purchase & Their Impact on Profit

Case 2: 40% inventory sold out of the group

Group
Ultimate Parent Subsidiary Ultimate Group
= Rs.100 = Rs.95
Cost Sales 150 Sales 95 Sales Sales 95
Cogs (100) Cogs (60) Cogs (40)
50 85 35 55
x 60% Overstatement of Profit Rs.30
= Rs.30

Representation in Consolidated Books

Net Assets of Subsidiary At Acq. At RD Group Reserves

Retained earnings 00 35 Retained earnings 50 parent profit
Post acquisition profit = 35 Post acquisition earnings 35 share of PAP
Unrealized profit ** (30) Eliminate URP
55

GR 30
Inventory 30

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Intra-Group Adjustments Intra-Group Sales / Purchase & Their Impact on Profit

Case 2: Difference Between Receivables & Payables – Cash in Transit

Group Entry in subsidiary books

Parent Subsidiary Stock 250

Sales 250 Sales -- A/c Payable 250
Cogs (100) Cogs -- Subsidiary paid Rs.70 to parent
150 -- A/c Payable 70 Not received by parent till
Cash 70 year end

Unadjusted Balance Sheet Adjustment Adjusted Consolidated Balance Sheet

Parent Subs. A/c Payable 180 A/c Receivable --
A/c Receivable 250 Cash in transit 70
Stock 250 Cash in transit 70
Stock 100
A/c Receivable 250
A/c Payable 180 A/c Payable --
Group reserves 150
Stock 150

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Intra-Group Adjustments Intra-Group Sales / Purchase & Their Impact on Profit

Case 2: Difference Between Receivables & Payables – Stock in Transit

Group 31 Dec Group
Parent Subsidiary Parent Subsidiary
Sales 150
150 Sales 250 Sales 120 Sales --
Cogs (100) Cogs (150)
(150) Cogs (50) Cogs --
50 100 70 --

Stock sold to subsidiary but not received till year end

Unadjusted Balance Sheet Adjustment Adjusted Consolidated Balance Sheet

Parent Subs. A/c Payable 150
A/c Receivable 270 A/c Receivable --
Stock -- Stock in transit 120 Stock in transit 50
A/c Receivable 270
A/c Payable 150 A/c Payable --
Group reserves 70
Stock 70

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 Intra-Group Adjustments Adjustment of Dividend

80 % ownership
Parent Subsidiary
Announced dividend of Rs.100,000

Dividend receivable 80,000 Retained earnings 100,000

Dividend income 80,000 Dividend payable 100,000

Unadjusted Balance Sheet Adjustment Adjusted Consolidated Balance Sheet

Parent Subs.
Dividend pay. 80,000
Dividend rec. 80,000 Dividend rec. --
Dividend rec. 80,000

Dividend pay. 100,000 Dividend pay. 20,000

Point A Subsidiary k dividend declare karne se NCI ka paisa realize ho jata hai (next slide)

1. Dividend is not an expense but appropriation of profit i.e. RE se direct deduct hota hai
2. Grp apne ap se hi div pay/rec nhi dikha skta inside the grp, hence jb div declared but unpaid ho to uska
rec/pay eliminate krdenge, leken outside grp wala div payable chor denge jo payable to NCI hoga e.g. 20K
in this case

34
 Intra-Group Adjustments Adjustment of Dividend - Impact on income

During the year

Net Assets of Subsidiary At Acq. At RD Profit 500,000
Share capital 1,000,000 1,000,000 Dividend (100,000)
Retained earnings 2,000,000 2,400,000 400,000
3,000,000 3,400,000
500,000 * 80% = 400,000
Post acquisition profit = 400,000 (1)
(100,000 * 80%) = (80,000)
Parent - PAP 320,000
Parent (80%) NCI (20%)

320,000 80,000

Group Reserves NCI

Retained earnings 80,000 At Acquisition 600,000
Post acq. profit 320,000 Post Acquisition 80,000
400,000 680,000

assuming only dividend as P's income

1. Div ka profits pe koi effect nhi hoga!!!

Explain?
P is div ko as an income record krta hai, jbk subsid se any walay PAP mn P k hissy ka div
negative mn presented hai minus ho chuka hota hai us se (1.), so jb hum GR mn P ki RE
dikhaty hain us mein div inc hai +80K ki, PAP mn div paid hai -80K, ye dono automatically net
hojatay hain or bal sheet items mn iski koi entry nhi hogi.

2. Pichly slide mn point A ka mtlb ye hai k jb NCI ko hum PAP share dete hain to us mn
already div uska minus mn show hota hai i.e. 500k*20% = 100K ka profit - div 20K = 80K PAP,
or 20K ka sirf payable bach jata hai consol books mn hence NCI ko group se div realise hojata
hai uska (NCI ki earnings mn se uska div usko dedete hain)
To memorandum entry div declared ki 1 hi hogi consol mein:
NCI 20K ie NCI ka hissa km hogya or usko div realise hogya
Div Pay 20K
Agr entry aisy hui v hai then baqi sb theek hai.

35
 Intra-Group Adjustments Disposal of PPE Between Parent & Subsidiary

Sold an asset for Rs.500,000 at year end

Parent Subsidiary
Carrying amount is Rs.400,000

Cash 500,000 PPE 500,000

PPE 400,000 Cash 500,000
Gain on disposal 100,000

Unadjusted Balance Sheet Adjustment Adjusted Consolidated Balance Sheet

Parent Subs.
Group reserves 100,000
PPE 500,000 PPE 400,000
PPE 100,000

R/E 100,000 R/E --

If subsidiary sold to parent

At RD Net assets of subs. 100,000

PPE 100,000

Yhan bhi unrealised gain URG hai, or ye URG 2 surto mn realise ho skta hai, ya to PPE
depreciate(use) ho or ya grp se bahar bik jaye, yhan RD pe hi URG occur hua to sara hi
URG rahega RD pe, sara reverse

36
 Intra-Group Adjustments Disposal of PPE Between Parent & Subsidiary

Sold an asset for Rs.500,000 at year start

Parent Subsidiary
Carrying amount is Rs.400,000. Remaining UL 4 years

Cash 500,000 PPE 500,000

PPE 400,000 Cash 500,000

Gain on disposal 100,000 Dep. exp 125,000

PPE 125,000
Group k hisab se sirf depreciation hona chahiye
𝟒𝟎𝟎,𝟎𝟎𝟎
Dep. Exp = 𝟒 𝒚𝒆𝒂𝒓𝒔
= 𝟏𝟎𝟎, 𝟎𝟎𝟎 Net Assets of Subsidiary At Acq. At RD
Retained earnings deprec -- (125,000)
CA Hai kiya (500,000 – 125,000) 375,000
100,000 25,000
CA Honi chahiye (400,000 – 100,000) 300,000 Group Reserves
75,000 Retained earnings 100,000 gain on disp
Post acq. profit (125,000)
Group reserves 75,000 Unrealized profit (75,000)
PPE 75,000 (100,000)

1. To find URG. Alternatively shuru mn URG tha 100K mgr ab 1 sal mn 25K ka incremental
depreciation ki surat mn URG realise hogya to ab URG bacha hai 75K ka.
URG = URG initially - incremental deprec due to URG
2. Agr subsid P ko PPE bechti tb NA of subsid se 75k nikalta or PPE credit hota anyway

37
Class 04. Components of Consideration

A. ye sari transactions sh holders of subs se hoti hain na k subs se

Components of Consideration Cash Consideration

Company A acquired 80% shares of Company B, and paid Rs.25 per share

Share price at acquisition = Rs.25 / share

Subsidiary
Total Shares = 100,000
Parent

Share
holder

Entry in Parent’s Books

Investment 2,000,000 (100,000 x 80% = 80,000 shares x Rs.25)

Cash 2,000,000

1. Investment is recorded at FV of consid given if its FV is reliably measurable, yhan consid

given FV of subsid shares k brabr hai to usi pe record hua

38
 Components of Consideration Share Consideration
Company A acquired 80% shares of Company B. Consideration consists of cash amounting to Rs.2 million and share
consideration of four shares in Company A for every two shares in Company B
Share price at acquisition = Rs.50 / share

Subsidiary B
Share price at acquisition = Rs.12.50 / share
Total Shares = 100,000
Parent

A Share
holder
Entry in Parent’s Books
Investment 4,000,000
Cash 2,000,000
Share capital 1,600,000 (80,000 / 2 x 4 = 160,000 shares x Rs.10)

Share premium 400,000 (80,000 / 2 x 4 = 160,000 shares x Rs.2.5)

1. Investment FV of P pe record hogi for shares issued q k hum adayegi apne shares k FV k
brabr kr rhe hain na k Subs k shares k brabr i.e. P k shares ki value lag rai hai.
2. hum payment SH ko krte hain while investing in subs, not to subs (basic)
3. P k 4 shares subs k 2 shares, yani double shares issue krega parent

39
 Components of Consideration Deferred Consideration
Company A acquired 80% shares of Company B. Consideration consists of cash amounting to Rs.2 million and share
consideration of four shares in Company A for every two shares in Company B. Further company also agreed to pay
Rs.1,200,000 after one year. IBR is 20%
Share price at acquisition = Rs.50 / share

Share price at acquisition = Rs.12.50 / share Subsidiary

Parent Total Shares = 100,000

Share
holder
Entry in Parent’s Books
After One Year
Investment 5,000,000
Interest expense 200,000
Cash 2,000,000
Deferred consideration 200,000
Share capital 1,600,000 (80,000 / 2 x 4 = 160,000 shares x Rs.10)
Share premium 400,000 (80,000 Deferred consideration
/ 2 x 4 = 160,000 1,200,000
shares x Rs.2.5)
Deferred consideration 1,000,000 (1,200,000 / 1.2) Cash 1,200,000

1. Investment pe PV of def consid pe record hogi def consid q k time value ajati hai, bd mein int
exp(PL) book krega parent or def consid original value pe ajayegi, phir pay hojayegi

40
 Components of Consideration Contingent Consideration
Company A acquired 80% shares of Company B. Consideration consists of cash amounting to Rs.2 million and share consideration
of four shares in Company A for every two shares in Company B.
Further company also agreed to pay Rs.1,200,000 after one year. IBR is 20%.
Further, company will pay Rs.1,000,000 if profit of subsidiary exceeds Rs.12,000,000. Fair value of contingent consideration
estimated to be Rs.600,000. Share price at acquisition = Rs.50 / share

Share price at acquisition = Rs.12.50 / share Subsidiary

Parent Total Shares = 100,000

Entry in Parent’s Books Share

Investment 6,100,000
holder
Cash 2,000,000
Share capital 1,600,000 (80,000 / 2 x 4 = 160,000 shares x Rs.10)
Share premium 400,000 (80,000 / 2 x 4 = 160,000 shares x Rs.2.5)
Deferred consideration 1,000,000 (1,200,000 / 1.2)

Contingent consideration 600,000

1. Ye bhi being a direct cost, investment mein record hogi, iski FV examiner dedeta hai coz
actuarial assumptions involve hoti hain

41
 Components of Consideration PPE as Consideration
Company A acquired 80% shares of Company B. Consideration consists of cash amounting to Rs.2 million and share consideration
of four shares in Company A for every two shares in Company B.
Further company also agreed to pay Rs.1,200,000 after one year. IBR is 20%.
Further, company will pay Rs.1,000,000 if profit of subsidiary exceeds Rs.12,000,000. Fair value of contingent consideration
estimated to be Rs.600,000.
Further, company transferred its plant having a carrying amount of Rs.400,000. fair value of the plant at the date of transfer was
Rs.500,000.
Share price of parent at acquisition = Rs.12.50 / share
Entry in Parent’s Books Share price of subsidiary at acquisition = Rs.50 / share
Investment 6,100,000 Total Shares of subsidiary = 100,000
Cash 2,000,000
Share capital 1,600,000 (80,000 / 2 x 4 = 160,000 shares x Rs.10)
Share premium 400,000 (80,000 / 2 x 4 = 160,000 shares x Rs.2.5)
Deferred consideration 1,000,000 (1,200,000 / 1.2)
Plant 400,000
Gain on disposal 100,000
Contingent consideration 600,000

1. For PPE given, same as shares consid, FV of consid given pe investment record
hogi if reliably measurable(given in question)

Investment in subs xx @FV of PPE given

PPE xx gain/loss may arise - GR

42
 Class 05:

1. Consol PL & IGAs

Consolidated P&L
Illustration Steps for Preparing Consolidated P&L
ABC acquired 80% shares of DEF Limited on July 1, 2018
2018. 1.
2. Identify
3.
4.
5. date
Distribute of acquisition
Park intragroup
Prepare unadjusted
adjusted
profit between
adjustments
consolidated
consolidated
parentP&L
and
P&LNCI
Following are the profit and loss statement of both
companies for the year ended December 31, 2018: Solution
Intragroup Adjusted
ABC DEF Adjustments
Sales 1,500,000 1,800,000 2,400,000 xxx 2,400,000
Cost of sales (300,000) (360,000) (480,000) xxx (480,000)
1,200,000 1,440,000 1,920,000 1,920,000
Selling expenses (120,000) (144,000) (192,000) xxx (192,000)
Admin expenses (81,600) (97,920) (130,560) xxx (130,560)
X 6/12
998,400 1,198,080 1,597,440 1,597,440
Interest Expense (149,760) (179,712) (239,616) xxx (239,616)
Profit before tax 848,640 1,018,368 1,357,824 1,357,824
Tax (212,160) (254,592) (339,456) xxx (339,456)
Profit after tax 636,480 763,776 1,018,368 1,018,368

All incomes and expenses are accrued evenly during the

Distribution of profit NCI (76,378)
year. Subsidiary separate books profit 381,888 Parent 941,990
Req: Prepare consolidated P&L x 20%
Share of NCI 76,378

Steps
1. Note acq date. Consolidate acq date se onwards krte hain PL mn bhi coz us se
phle wali incomes pe humara koi right nahi tha, right acq date se establish hua
2. Prepare unadj CSoCI & park IgAs.
3. Profit attributable: Take NCI's profit part from subs separate profit & remove it from
consol adjusted profit, baqi balance P ka hoga. subs k profit pe panga hai is liye usi
pe %age lgayenge NCI ka, consol profit ko nhi coz is mn P ka bhi shamil hai

43
2. Impact of IGAs on CSoCI

Intragroup Adjustments Income and Expenses – Corrected for Presentational Issue

Parent gave a loan of Rs.100,000 to subsidiary at a rate of 10%
Entry in Parent’s Books Entry in Subsidiary’s Books
Loan receivable 100,000 Cash 100,000
Cash 100,000 Loan payable 100,000
Interest receivable 10,000 Interest expense 10,000
Interest income 10,000 Interest payable 10,000

Balance Sheet Extracts Parent Subsidiary

Loan receivable 100,000 -
Interest receivable 10,000 -

Loan payable - 100,000

Interest payable - 10,000

P&L Extracts Parent Subsidiary Unadjusted Adjustments Adjusted

Interest expense - (10,000) (10,000) 10,000 -

Interest income 10,000 - 10,000 (10,000) -

1. Net impact interest exp/inc ka zero hi hoga mgr for the sake of presentation hum
dono ko reverse krdenge taky exp or inc mn iska impact na shamil ho.

44
 Intragroup Adjustments Fair value adjustments at acquisition of PPE/Intangibles
Net assets At Acq. At RD At RD Profit earned by subsidiary Rs.2.2 million (2020) and Rs.1.8
01-Jan-20 31-Dec-20 31-Dec-21 million (2021)
Share capital 500,000 500,000 500,000
Retained earnings 1,000,000 3,200,000 5,000,000 Carrying amount of building at acquisition = Rs.700,000
Building 250,000 187,500 125,000 Fair value of building at acquisition = Rs.950,000
1,750,000 3,887,500 5,625,000 Remaining useful life of building = 4 years
2,137,500
Post Acq. Profit 3,875,000
P&L Extracts 2020 Parent Subsidiary Unadjusted Adjustments Adjusted
Sales - 3,500,000 3,500,000 3,500,000
COGS - (1,125,000) (1,125,000) (1,125,000)
Gross profit - 2,375,000 2,375,000 250K/4=62.5K 2,375,000
Operating expense - (175,000) (175,000) 62,500 ↑ (237,500)
- 2,200,000 2,200,000 2,137,500

P&L Extracts 2021 Parent Subsidiary Unadjusted Adjustments Adjusted

Sales - 2,800,000 2,800,000 2,800,000
COGS - (825,000) (825,000) (825,000)
Gross profit - 1,975,000 1,975,000 1,975,000
Operating expense - (175,000) (175,000) 62,500 ↑ (237,500)
- 1,800,000 1,800,000 1,737,500

1. FV adjustment ki entry: assuming FV is excess of CA

NA of subs debit
Goodwill credit
Surplus nhi book hota bs GW change hoti hai
2. FV adj k se jo incremental deprec arise hogi wo CSoCI mn charge krenge, agr plant
hai to uski depr chunke cost of inventory mn jati hai to CoGS mn dalenge otherwise
operating expenses.
3. Agr acq date 2 sal pehle ki thi i.e. 2 sal phle FV adj hui v thi, or ab hum 2 sal bd RD
pe khary hain to inc dep 1 sal ki hi charge krenge PL mn coz PL is for the year.

Entry for inc dep:

Op exp/CGS xx
NA of subs xx
**NA of subs may include land/building/software etc.

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 Intragroup Adjustments Impairment of Goodwill
Profit earned by subsidiary Rs.2.2 million (2020)
Goodwill has been impaired by 40,000

Net assets At Acq. At RD Goodwill

Group Reserves
01-Jan-20 31-Dec-20 Consideration 1,900,000
RE of Parent --
Share capital 500,000 500,000 Net assets (1,500,000)
Post acquisition 2,200,000
Retained earnings 1,000,000 3,200,000 Goodwill 400,000
Impairment (40,000)
1,500,000 3,700,000 Impairment (40,000)
Post Acq. Profit 2,200,000 2,160,000
360,000

P&L Extracts 2020 Parent Subsidiary Unadjusted Adjustments Adjusted

Sales - 3,500,000 3,500,000 3,500,000
COGS - (1,125,000) (1,125,000) (1,125,000)
Gross profit - 2,375,000 2,375,000 2,375,000
Operating expense - (175,000) (175,000) 40,000 ↑ (215,000)
- 2,200,000 2,200,000 2,160,000

Entry would be:

GR/Op exp xx
Goodwill xx

OR if full GW
GR/Op exp xx
NCI xx
Goodwill xx

46
 Intragroup Adjustments Dividend Adjustment
Subsidiary announced dividend of Rs.100,000
Parent owns 80% shares in the subsidiary
Entry in Subsidiary’s Books Entry in Subsidiary’s Books
Retained earnings 100,000 Dividend receivable 80,000
Dividend payable 100,000 Retained earnings 80,000
Net assets At Acq. At RD NCI
01-Jan-20 31-Dec-20 Share of NCI 300,000
Share capital 500,000 500,000 Post acquisition 420,000
Retained earnings 1,000,000 3,100,000 720,000
1,500,000 3,600,000
Post Acq. Profit Group Reserves
2,100,000
RE of Parent 80,000
80% 20% Post acquisition profit 1,680,000
Parent NCI
1,680,000 420,000 1,760,000
P&L Extracts 2020 Parent Subsidiary Unadjusted Adjustments Adjusted
Sales - 3,500,000 3,500,000 3,500,000
COGS - (1,125,000) (1,125,000) (1,125,000)
Gross profit - 2,375,000 2,375,000 2,375,000
Investment income 80,000 80,000 80,000 ↓ --
Operating expense - (175,000) (175,000) (175,000)
- 2,200,000 2,280,000 2,200,000

1. Subs side pe koi dividend nahi show hoga PL mn q k dividend koi expense nahi
hai appropriation of profit hai, hence sirf P k dividend income ko reverse krdenge

47
 Intragroup Adjustments Intragroup Sales
Case 1: 100% inventory sold out of the group
Group Group
Ultimate Parent Subsidiary Ultimate
= Rs.100 = Rs.250 Sales 250
Cost Sales 150 Sales 250 Sales
Cogs (100) Cogs (150) Cogs (100)
50 150 100 150
Parent Subsidiary
Stock 100 Stock 150
Cash 100 A/c Payable 150
A/c Receivable 150 Cash 250
Sales 150 Sales 250
COGS 100 COGS 150
Stock 100 Stock 150
Balance Sheet Extracts Parent Subsidiary P&L Extracts Parent Subsidiary Unadjusted Adjustments Adjusted
Accounts receivable 150 Sales 150 250 400 A 150 ↓ 250
COGS (100) (150) (250) 150 ↓ (100)
Accounts payable 150
Gross profit 50 100 150 150

A. jitna P ne sell kiya wo sara S ne CGS mn charge kiya, jb hum intagroup sales ko reverse
krdenge sales se coz grp k liye ye sales nahi hain to P ki sales eliminate hojayegi, or jab CGS
se to S ki CGS khatam, is se ultimate sale bachegi sirf 250 ki or ultimate CGS 100 ka, adjusted.

48
 Intragroup Adjustments Intragroup Sales
Case 2: 40% inventory sold out of the group
Group Group
Parent Subsidiary Sales 180
Ultimate Sales 150 Sales 180 Ultimate
= Rs.100 = Rs.180
Cost Cogs (100) Cogs (60) Sales Cogs (40)
50 170 120 140
x 60% = Rs.30 Overstatement of Profit Rs.30

Parent Subsidiary
Stock 100 Stock 150
Cash 100 A/c Payable 150
A/c Receivable 150 Cash 180
Sales 150 Sales 180
COGS 100 COGS 60
Stock 100 Stock 60
Balance Sheet Extracts Parent Subsidiary P&L Extracts Parent Subsidiary Unadjusted Adjustments Adjusted
Stock 90 Sales 150 180 330 150 ↓ 180
Accounts receivable 150 COGS (100) (60) (160) +150120 ↓(30) (40)
Accounts payable 150 Gross profit 50 120 170 150

1. Apni asani k liye:

First sales or CGS ko intagroup sales(100%) se reverse krdo q k grp k liye ye sales nahi hain
or ye charge hua va hota hai P or S ki side in case of 100% sold outta group, phir apko yd aya
k sari inventory outta group nahi gyi, so jitni sold outta grp nahi hui usko CGS ko charge hi
nahi ki thi subs ne to ap ne CGS ko kam krdiya zada hi, to jitni usne abhi charge nahi ki that is
basically URP, us se CGS ko wapas brha denge to rectify it. Is se ye hoga k inta group sale or
CGS dono adjust honge or intra group profit bhi eliminate hoga

49
Some summary of consol PL
Miscellaneous concepts:
1. BPG is opposite of GW, it would be added in GR(SOFP) & Investment income (SoCI)

2. Jab profit allocate kren P or NCI ko, hmare adjusted consolidated profit mn subs ka profit
shamil hai mgr after intragroup adjustments jiski waja se agr hum direct subs ka profit NCI k liye
nikal den total consol profit mn se to ghlt hoga, is liye hum phle subs profit mn wo "incremental
adjustments" park krenge jino ne subs k profit ko effect kiya hai (yd rhe k presentational adj
subs k profit ko effect nhi krte e.g. interest inc/exp).
Jab ye adj park krden to adj profit of subs ajayega, uspe phir %age lga kr NCI ka nikalenge,
phir is NCI k profit ko consol profit se nikal denge to bal fig P ka profit hoga.
eg of inc adj here would be URP, impairment of GW (if full GW, qk NCI ko bhi hissa milta), inc
dep/amort due to FV adj etc

3. Recon between NCI share from NA & NCI share from PL

NCI ne jo total kamaye subs se, wo hai NCI share from PL
minus usne jo dividend k torr pe realise krliya
equals NCI share from NA - net jo uska bach gaya

4. W.r.t consolidated PL, presentational adj wo hain jo sirf presentation ko thek krte hain eg
interest inc/exp.
AND Incremental adj wo hain jo subs ki profit ko bhi affect krte hain e.g inc dep/amort

50
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