Consolidated Financial

Statements (Part 3)
Chapter 6
Impairment of Goodwill
• When NCI is measured at proportionate share, goodwill is attributed
only to the owners of the parent.
• When NCI is measured at fair value, goodwill is attributed to both the
owners of the parent and NCI.
• Step 1: Analysis of effects of intercompany transaction
• Step 2: Analysis of subsidiary’s net assets
• Step 3: Goodwill
• Step 4: Non-controlling interest in net assets
• Step 5: Consolidated retained earnings
• Step 6: Consolidated profit or loss
Intercompany Items In-Transit and
Restatements
a. Accruals and deferrals of income and expenses and corrections of
errors;
b. In-transit items – items arising from intercompany transactions that
were already recorded by one party but not yet by the other.
c. Hyperinflationary economy – the financial statements of a group
member that reports in a currency of a hyperinflationary economy
are restated first in accordance with PAS 29 before they are
consolidated.
d. Currency translations – the financial statements of a subsidiary
whose functional currency is different from group’s presentation
currency are translated first in accordance with PAS 21 before they
are consolidated.
Continuous Assessment
• An investor reassesses whether it controls an investee if facts and
circumstances indicate that there are changes to one or more of the
three elements of control.
Changes in Ownership Interest not Resulting
to Loss of Control
• If the parent’s ownership interest in a subsidiary changes but does
not result to loss of control, the change is accounted for as an equity
transaction.
Loss of Control
• A parent can lose control of a subsidiary in much the same way it can
obtain control. That is, with or without a change in absolute or
relative ownership levels and with or without the investor being
involved in that event.
Derecognition of Other Comprehensive
Income
Type of OCI Accounting
a. Revaluation surplus Directly in equity
b. Actuarial gains or losses on defined benefit plans Directly in equity
c. Unrealized gains or losses on FVOCI investments Directly in equity
d. Translation gains or losses on foreign operations Profit or loss
e. Effective portion of cash flow hedges Profit or loss
Sale of Subsidiary to an Associate or Joint
Venture
• Former subsidiary becomes an associate or joint venture
If the parent retains an investment in the former subsidiary and
the former subsidiary is now an associate or a joint venture, the
parent recognizes the part of the gain or loss resulting from the
remeasurement at fair value of the investment retained in that
former subsidiary in its profit or loss only to the extent of the
unrelated investors’ interest in the new associate or joint venture.
• Former subsidiary becomes an associate or joint venture
If the parent retains an investment in the former subsidiary that is
now accounted for in accordance with PFRS 9, the part of the gain
or loss resulting from the remeasurement at fair value of the
investment retained in the former subsidiary is recognized in full in
the parent’s profit or loss.
Importance of Consolidation
1. Consolidated financial statements provide true and fair view of the
financial position and performance of the group.
2. It would be burdensome for users to gather together all the
individual financial statements of a parent and its many subsidiaries
in order to get an idea of the financial position and performance of
the group, so parent entities are required to prepare consolidated
financial statements.
3. Consolidated financial statements lessen the temptation of hiding
certain activities in the subsidiary’s or special purpose entity’s (SPE)
separate financial statements.
4. Consolidated financial statements eliminate the effects of
transactions with related entities making the consolidated financial
statements more useful than the aggregate of each of the group
members’ separate financial statements.
Theories of Consolidation
a. Proprietary theory – this theory focuses on the parent’s legal
interest in the subsidiary.
b. Parent company theory – this theory focuses on the parent’s ability
to control the subsidiary as a whole and not only up to the extent of
its legal interest in the subsidiary.
c. Entity theory – consolidated financial statements should be
prepared from the viewpoint of the group rather than of the
owners of the parent.
d. Hybrid theory – Incorporates the characteristics of both the parent
company theory and the entity theory.
Historical Background
• PAS 31 Interests in Joint Ventures, the predecessor of PFRS 11 Joint
Arrangements, required the use of the proprietary theory in
accounting for investments in jointly controlled entities.
• PAS 22 Business Combinations, which became effective on January 1,
1985, supported the parent company theory.
• The original PFRS 3 Business Combinations and PAS 27 Consolidated
and Separate Financial Statements initially supported the hybrid
theory.
• However, on July 1, 2009, PFRS 3 and PAS 27 were revised.
• PFRS 10 Consolidated Financial Statements and PFRS 12 Disclosure of
interests in other entities which became effective on January 1, 2013
also support the entity theory.
Advantages and Disadvantages of the Entity
Theory
• The primary advantage of the entity theory over the other theories is
that the entity theory provides more relevant and representationally
faithful information to users.
• A disadvantage of the entity theory is that many critics believe that
measuring goodwill at fair value is unreliable and irrelevant.
Consolidated of a Reverse Acquisition
• The consolidated financial statements prepared after a reverse
acquisition are issued under the name of the legal parent but
described in the notes as a continuation of the financial statements of
the legal subsidiary.
Non-Controlling Interest
• A non-controlling interest arises in a reverse acquisition when some
of the owners of the legal acquiree do not exchange their equity
interests for equity interests of the legal parent.
Special Purpose Entities
• A special purpose entity (SPE) is a legal entity created by a sponsor to
accomplish a narrow and well-defined objective for the sponsor.
Consolidated Financial
Statements (Part 4)
Chapter 7
Investment in Subsidiary Measured at Other
Than Cost
• The investment in subsidiary is initially measured equal to the value
assigned to the consideration transferred at the acquisition date and
subsequently measured either:
a. At cost;
b. In accordance with PFRS 9 Financial Instruments; or
c. Using the equity method.
Complex Group Structures
• A complex group structure arises when the parent obtains control
over another entity indirectly through its direct holdings over another
entity.
a. Vertical group – the parent’s subsidiary has its own subsidiary.
b. D-shaped group – the parent has a direct controlling interest in
at least one subsidiary, and in addition, both the parent and the
subsidiary together hold a controlling interest in another entity.
Identifying the Acquisition Date
• The acquisition date is the date the acquirer obtains control of the
acquiree. For a sub-subsidiary, it is the date the sub-subsidiary
becomes a member of the parent group.
Consolidation of a Vertical Group
• A parent entity is required to consolidate all entities it controls,
whether through direct or indirect holdings. Therefore, the parent
shall consolidate both the subsidiary and the sub-subsidiary. The
consolidation procedures for a vertical group differ from those of a
simple group only on the computations of goodwill and NCI.
Consolidation of a D-Shaped Group
• The consolidation procedures for a D-shaped group are similar to a
vertical group. However, in a D-shaped group, the parent holds both a
direct and an indirect interest in a sub-subsidiary.
Complex Group Structure with Associate
• Investments in associates are accounted for under the equity method
which is often times referred to as one-line consolidation.
Push-Down Accounting
• Under push-down accounting, FVA are directly recorded in the
subsidiary’s books. Therefore, FVA are reflected in the subsidiary’s
individual financial statements.
Authoritative Status of Push-Down
Accounting
a. Requires push-down accounting if a subsidiary is substantially
wholly-owned;
b. Encourages push-down accounting if a parent’s ownership interest
is 80% to less than 95%; and
c. Prohibits push-down accounting if the parent’s ownership interest
is less than 80%.
Arguments on the Use Push-Down
Accounting
• Proponents’ view
Proponents of push-down accounting argue that a substantial
change in ownership creates a new basis of accounting for the
subsidiary’s assets and liabilities.
• Oppositions’ view
Those who oppose push-down accounting argue that a new basis
of accounting should not arise irrespective of the ownership
change in a subsidiary.
• When push-down accounting is used, the subsidiary:
a. Records the goodwill arising from the business combination;
b. Records the acquisition-date fair value adjustments to its
identifiable assets and liabilities;
c. Eliminates the pre-acquisition retained earnings; and
d. The balancing figure after performing (a) to (c) is recorded in the
push-down capital account.
Separate Financial
Statements
Chapter 8
Separate Financial Statements
a. Consolidated financial statements; or
b. The financial statements of an entity with an investment in
associate or joint venture that is accounted for using equity method
in accordance with PAS 28 Investments in Associates and Joint
Ventures.

Consolidated financial statements are 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.
Preparation of Separate Financial Statements
• Separate financial statements are prepared in accordance with all
applicable PFRSs, except that investments in subsidiaries, associates
or joint ventures are accounted for either:
a. At cost,
b. In accordance with PFRS 9 Financial Instruments, or
c. Using the equity method under PAS 28 Investments in Associates
and Joint Ventures.
Cost Method
a. The investment is initially measured at the transaction price plus
transaction costs directly related to the acquisition and
subsequently measured at cost.
b. Dividends from the investment are recognized in profit or loss when
the entity’s right to receive the dividends is established.
c. The entity shall not recognize any share from the profit of the
investee.
Fair Value Method
• Under PFRS 9 Financial Instruments, investments in equity
instruments are either accounted for at fair value with changes in fair
value recognized through profit or loss (FVPL) or through other
comprehensive income (FVOCI).
Equity Method
• Under the equity method, the investment is initially recognized at
cost and subsequently adjusted for the investor’s share in the
changes in the investee’s equity.
Dividends
• Dividends from a subsidiary, associate or joint venture are recognized
in profit or loss when the entity’s right to receive the dividends is
established, except when the investment is accounted for using the
equity method, in which case the dividends are recognized as
deduction to the carrying amount of the investment.
Financial Reporting in
Hyperinflationary Economies
Chapter 9
Price Level Changes and Purchasing Power
• Price level change is the increase or decrease in the price of goods or
services in a given market during a given interval.
a. General price level change is increase or decrease in the overall
level of prices of goods or services throughout the economy.
b. Specific price level change is increase or decrease in the price of
a specific good or service.

Purchasing power means the goods and services that money can buy.
Scope
• PAS 29 shall be applied to the financial statements, including the
consolidated financial statements, of any entity whose functional
currency is the currency of a hyperinflationary economy.
Hyperinflation
• Hyperinflation refers to loss of purchasing power of money at such a
rate that comparison of amounts from transactions and other events
that have occurred at different times, even within the same
accounting period, is misleading.
Identifying Hyperinflation
• PAS 29 does not establish an absolute rate at which hyperinflation is
deemed to arise.
Indicators of Hyperinflation
• Hyperinflation is indicated by characteristics of the economic
environment of a country.
Core Principles
• The financial statements of an entity whose functional currency is the
currency of a hyperinflationary economy, whether they are based on
a historical cost approach or a current cost approach, shall be stated
in terms of the measuring unit current at the end of the reporting
period.
Restatement of Financial Statements
• The financial statements of an entity operating in a hyperinflationary
economy, whether prepared based on the historical cost approach or
current cost approach should be restated using the constant peso
accounting.
a. Historical cost to Constant Peso; and
b. Current cost to Constant Peso
Historical cost pertains to the historical exchange price experienced
in an actual transaction.
Current cost is the cost that would be incurred at the present time.
Constant peso pertains to pesos that are restated to reflect changes
in purchasing power.
Historical cost to Constant Peso
• Statement of Financial Position
Only non-monetary items, statement of financial position
amounts not already expressed in terms of the measuring unit
current at the end of the reporting period, are restated when
using the constant peso accounting.
Monetary items are not restated because they are already
expressed in terms of the monetary unit current at the end of the
reporting period.
Monetary items are money held and items to be received or paid in
fixed or determinable amount of money without reference to future
prices of specific goods or services.
Equity items such as share capital and share premium are non-
monetary items and thus restated.
Non-Monetary Items Carried At Cost
• Most non-monetary items are carried at cost or cost less
depreciation; hence they are expressed at amounts current at their
date of acquisition.
Non-Monetary Items Carried at Other Than
Cost
• As a general guide, only non-monetary measured at cost are restated.
Again, monetary items are not restated because they are already
expressed in terms of the monetary unit current at the end of the
reporting period.
Non-Monetary Items Carried at NRV or Fair
Value
• Some non-monetary items are carried at amounts current at the end
of the reporting period, such as net realizable value (NRV) and fair
value, so they are not restated.
Revalued Non-Monetary Items
• Some non-monetary items are carried at amounts current at dates
other than that of acquisition or that of the statement of financial
position.
Impairment After Restatement
• The restated amount of a non-monetary item is reduced, in
accordance with appropriate PFRSs, when it exceeds its recoverable
amount.
Investment in Associate
• Prior to computing the share in the profit or loss and net assets of an
associate operating in a hyperinflationary economy, the associate’s
financial statements should be restated first under PAS 29.
Borrowing Costs
• The impact of inflation is usually recognized in borrowing costs. It is
not appropriate both to restate the capital expenditure financed by
borrowing and to capitalize that part of the borrowing costs that
compensates for the inflation during the same period.
Index-Linked Assets and Liabilities
• Assets and liabilities linked by agreement to changes in prices are
adjusted in accordance with the agreement in order to ascertain the
amount outstanding at the end of the reporting period.
Assets Acquired Through Issuance of
Noninterest-Bearing Liabilities
• An entity may acquire assets under an arrangement that permits it to
defer payment without incurring an explicit interest charge.
First Period Application of PAS 29
• At the beginning of the first period of application of PAS 29, the
components of owners’ equity, except retained earnings and any
revaluation surplus, are restated by applying a general price index
from the dates the components were contributed or otherwise arose.
Statement of Profit or Loss and Other
Comprehensive Income
• PAS 29 requires that all items in the statement of profit or loss and
other comprehensive income should be expressed in terms of the
measuring unit current at the end of the reporting period.
Formula for Restatement
• Restatement is performed by reference to a general price index. PAS
29 requires the use of a general price index that reflects changes in
general purchasing power. It is preferable that all entities that report
in the currency of the same economy use the same index.

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑝𝑟𝑖𝑐𝑒 𝑖𝑛𝑑𝑒𝑥, 𝑖𝑛𝑑𝑒𝑥 𝑎𝑠 𝑜𝑓 𝑒𝑛𝑑 𝑜𝑓 𝑟𝑒𝑝𝑜𝑟𝑡𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑

• 𝐻𝑖𝑠𝑡𝑜𝑟𝑖𝑐𝑎𝑙 𝑐𝑜𝑠𝑡 ×
𝐻𝑖𝑠𝑡𝑜𝑟𝑖𝑐𝑎𝑙 𝑝𝑟𝑖𝑐𝑒 𝑖𝑛𝑑𝑒𝑥, 𝑖𝑛𝑑𝑒𝑥 𝑎𝑠 𝑜𝑓 𝑎𝑐𝑞𝑢𝑖𝑠𝑖𝑡𝑖𝑜𝑛 𝑑𝑎𝑡𝑒
Gain or Loss on Net Monetary Position
• In a period of inflation, an entity incurs purchasing power loss in
monetary assets held and realizes purchasing power gain on the
monetary liabilities.
• In a period of deflation, an entity incurs purchasing power gain on
monetary assets held and realizes purchasing power gain on its
monetary liabilities.
Statement of Cash Flows
• PAS 29 requires that all items in the statement of cash flows should
be expressed in terms of the measuring unit current at the end of the
reporting period.
Corresponding Figures
• Corresponding figures for the previous reporting period, whether
they were based on a historical cost approach or a current cost
approach, are restated by applying a general price index so that the
comparative financial statements are presented in terms of the
measuring unit current at the end of the reporting period.
Current Cost Accounting
• Current cost accounting involves the restatement of historical cost in
terms of current cost.
The current cost of an asset is the current replacement cost of the
asset owned, adjusted for the value of any operating advantages or
disadvantages of the asset owned.
The current replacement cost of an asset is the amount of cash or
cash equivalents that an entity would have to pay if the same or an
equivalent asset was acquired currently.
Determining Current Cost
The indexation approach should not be confused with general price
index numbers that are used to restate nominal costs into constant
pesos.
Direct pricing is made by reference to current invoice prices, vendors’
price lists or standard manufacturing costs that reflect current costs.
Holding Gains and Losses
• The application of current cost accounting involves the recognition of
holding gains and holding losses in the statement of profit or loss and
other comprehensive income.
Financial Statements Prepared Under Current
Cost Accounting
• A current cost statement of financial position reflects non-monetary
assets at their current cost.
Current Cost to Constant Peso
• PAS 29, paragraph 7, states that the financial statements of an entity
whose functional currency is the currency of a hyperinflationary
economy, whether they are based on a historical cost approach or a
current cost approach, shall be stated in terms of the measuring unit
current at the end of the reporting period.
Current Cost/Constant Peso Accounting
• Statement of financial position
Items stated at current cost are not restated because they are
already expressed in terms of the measuring unit current at the
end of the reporting period.
• Statement of profit or loss and other comprehensive income
The current cost statement of profit or loss and other
comprehensive income, before restatement, generally reports
costs current at the time at which the underlying transactions or
events occurred.
Gain or Loss on Net Monetary Position and
Holding gains and Losses
• The gain or loss on the net monetary position and holding gains and
losses are recognized in profit or loss.
Taxes
• The restatement of financial statements in accordance with PAS 29
may give rise to differences between the carrying amount of
individual assets and liabilities in the statement of financial position
and their tax bases.
Deferred Taxes
• Although deferred tax assets and deferred tax liabilities are monetary
items, they still need to be restated when applying PAS 29 because
they are affected by the movements in non-monetary items.
Consolidated Financial Statements
• A parent that reports in the currency of a hyperinflationary economy
ay have subsidiaries that also report in the currencies of
hyperinflationary economies. The financial statements of any such
subsidiary need to be restated by applying a general price index of the
country in whose currency it reports before they are included in the
consolidated financial statements issued by its parent.
Different Ends of Reporting Periods
• If financial statements with different ends of the reporting periods are
consolidated, all items, whether non-monetary or monetary, need to
be restated into the measuring unit current at the date of the
consolidated financial statements.
Economies Ceasing to be Hyperinflationary
• When an economy ceases to be hyperinflationary and an entity
discontinues the preparation and presentation of financial statements
prepared in accordance PAS 29, it shall treat the amounts expressed
in the measuring unit current at the end of the previous reporting
period as the basis for the carrying amounts in its subsequent
financial statements.
The Effects of Changes in
Foreign Exchange Rates
Chapter 10
Two Ways of Conducting Foreign Activities
1. Foreign currency transactions – These transactions need to be
translated to Philippine pesos before they can be recorded in the
books of accounts.
2. Foreign operations – Those financial statements need to be
translated to Philippine pesos before they can be combined with
the home office’s financial statements.
Two Main Accounting Issues
a. Which exchange rate(s) to use; and
b. How to report the effects of changes in exchange rates in the
financial statements.
Functional Currency
• This functional currency is the currency in which the entity’s cash
inflows and outflows are normally denominated into and is not
necessarily the currency of the country where the entity is based.
Presentation currency – is the currency in which the entity’s financial
statements are presented.
Foreign currency – is a currency other than the entity’s functional
currency.
Foreign Currency Transactions
• A foreign currency transaction is a transaction that is denominated or
requires settlement in a foreign currency.
Initial Recognition
Spot exchange rate is the exchange rate for immediate delivery or
simply, the current exchange rate on a given date.
Date of a transaction is the date on which the transaction first
qualifies for recognition in accordance with PFRSs.
Closing rate – the spot exchange rate at the reporting date.
Subsequent Measurement
Items Translated using
a. Monetary items  Closing rate
b. Nonmonetary items measured at historical cost  Exchange rate at the date of transaction
c. Nonmonetary items measured at fair value  Exchange rate at the date when the fair value was
determined
Monetary Items vs. Non-Monetary Items
Monetary items are currencies held as assets and liabilities to be
received or paid in a fixed or determinable amount of money.
Non-monetary items are those which do not give rise to the receipt
or payment of a fixed or determinable amount of money.
Direct vs. Indirect Quotation
a. Direct quotation – the exchange rate is stated in how much of a
local currency must be exchanged to receive one unit of a foreign
currency.
b. Indirect quotation – is the opposite of direct quotation. The
exchange rate is stated in how much of a foreign currency must be
exchanged to received one unit or a local currency.
Exchange Differences
• Exchange difference is the difference resulting from translating a
given number of units of one currency into another currency at
different exchange rates.
a. Monetary items are recognized in profit or loss in the period in
which they arise.
b. Nonmonetary items – if the gain or loss is recognized in other
comprehensive income, the exchange component of the gain or
loss is also recognized in OCI.
Items Measured at Other Than Historical
Cost
a. Inventories are measured at the lower of cost and net realizable
value in accordance with PAS 2 Inventories.
b. Property, plant and equipment are measured using either the cost
model or revaluation model in accordance with PAS 16 Property,
plant and equipment.
c. Non-current assets are measured at the lower of carrying amount
and recoverable amount in accordance with PAS 36 Impairment of
Assets.
Several Exchange Rates
• When several exchange rates are available, the rate used is that at
which the future cash flows represented by the transaction or
balance could have been settled if those cash flows had occurred at
the measurement date. If exchangeability between two currencies is
temporarily lacking, the rate used is the first subsequent rate at which
exchanges could be made.
Exchange Differences Recognized in OCI
• When a gain or loss on a non-monetary item is recognized in other
comprehensive income, any exchange component of that gain or loss
is recognized in other comprehensive income.
• When a gain or loss on a non-monetary item is recognized in profit or
loss, any exchange component of that gain or loss shall also be
recognized in profit or loss.
Translation of Financial Statements
• An entity is required to present its financial statements using its
functional currency.
Translation Procedures
Items Translated using
a. Assets and Liabilities  Closing rate at the date of the statement of
financial position
b. Income and Expenses  Exchange rates at the dates of the transactions
 All resulting exchange differences are recognized in other comprehensive income.
Foreign Operation
• A foreign operation is a subsidiary, associate, joint venture or branch
that is based in a foreign country and is using a foreign currency.
Net Investment in a Foreign Operation
• Net investment in a foreign operation is the amount of the reporting
entity’s interest in the net assets of that operation.
Disposal or Partial Disposal of a Foreign
Operation
• When a foreign operation is disposed of, the cumulative amount of
exchange differences recognized in other comprehensive income and
accumulated in equity is reclassified to profit or loss as a
reclassification adjustment.
Translation Procedures – Hyperinflationary
Economy
• If the functional currency is the currency of a hyperinflationary
economy, the entity’s financial statements are first restated in
accordance with PAS 29 Financial Reporting in Hyperinflationary
Economies before they are translated under PAS 21.