Final Acco 420 Fall 2014

Chapter 1 Investments
Things to remember regarding adjustments and their respective journal entries:
Assets = Liabilities + Equity
Dr.
Cr.
Cr.
Assets dr.
Liabilities cr.
Equity cr.
Revenues cr.
Expenses dr.
Dividends dr.
Assets - FTL
Assets - FTA
Liability - FTA
Liability - FTL
There are two possible type of investments:

Non-strategic investments: These investments are made to earn income either through capital
appreciation or dividends (e.g. investing in shares with excess cash)
Strategic investments: Investments that will benefit the holder of these investments (e.g. vertical
integration, horizontal integration)

FVTPL*
Non-strategic investment
0% 20%
Recognize at FV at the end of
every reporting period with
gains or loss going directly to
income
Can elect to have G/L going to
OCI for all that class of
shares

Equity Method**
Strategic investment
20% - 50%
Investment in associate
Cost
+ Share of P/L
- Dividends

Consolidation
Strategic investment
> 50%
Full line-by-line consolidation
P + S Adjustments =
Consolidation

Remove intercompany
transactions (Chapter 4)

Remove intercompany
transactions (Chapter 4)

*For FVTPL, remember to re-measure them at FV at the end of each reporting period (i.e. the original cost will
no longer matter.
** For the equity method, find the balance of the Investment in Associate account at the beginning of the
period before adding the Share of P/L or removing the dividends to arrive at the ending balance.

Chapter 2 Acquiring Net Assets

Acquiring all the net assets of a company. Therefore it your acquisition analysis, include the net assets at FV.
Remember:
Contingent considerations are contingent liabilities to the acquirer
Contingent liabilities (real liabilities; NOT POSSIBLE liabilities) of the acquiree are recognized
as provisions even if they do not meet the recognition criteria under IAS 37
If you are paying liabilities on behalf of the acquiree
They are a credit to cash
Do not include them in the FV of acquired net assets
Recognize intangibles even if the sub did not record them because they did not meet the
recognition criteria (e.g. patents, customer lists, trademarks, government contracts). The
rationale behing this is that these intangibles are no longer developed internally. Put simply,
the acquirer is purchasing these intangibles at fair market value.
Goodwill is not amortized, it is tested for impairment annually. Further, once impaired, they
cannot be written back up.
Intangibles with indefinite lives are not amortized, they are tested for impairment annually.
Buying Assets vs. Buying Shares
Buying Assets
Preferred by acquirer
Not responsible for hidden liabilities

Buying Shares
Preferred by acquiree
Can use QSBC Lifetime Capital Gains Exemption
if CCPC

Can choose individual assets; eliminate the need

to acquire redundant assets
The UCC (CCA base) will be at FV higher CCA
less taxes

Chapter 3 Acquiring 100% of Shares

A business combination is a transaction or other event in which an acquirer obtains control of one or
more businesses.
What is a business?

Inputs an economic resource (e.g. non-current assets, intellectual property) that creates outputs when
one or more processes are applied to it

Process a system, standard, protocol, convention or rule that when applied to an input or inputs, creates
outputs (e.g. strategic management, operational processes, resource management)

Output the result of inputs and processes applied to those inputs.

You have to purchase a BUSINESS! If you are just purchasing multiple warehouses, then account for it using IAS
16 PPE. In a case, argue why it is a business and not an assets.
All business combinations are accounted for using the acquisition method.
1) Determine acquirer
a. Who will obtain control? If you cant determine this, then:
i. Deemed to have control through voting rights or majority member of the board
ii. Which company is larger?
2) Determine acquisition date
a. Date which control is obtained. If you cant determine this, then:
i. Date title of which net assets are transferred
ii. Date which binding contract is signed
3) Recognize all identifiable and separable assets and liabilities at FV
a. Remember that Assets = Liabilities + Equity or Equity = Assets Liabilities or Equity = Net assets
at BV
b. Since we include Equity in FVINA/consideration received, you will only recognize
assets/liabilities that have a FV different from its BV
4) Compute goodwill or gain on bargain purchase
a. Determine Consideration transferred
i. Cash + Shares + Acquireess liabilities paid on their behalf + Contingent Considerations
ii. Contingent considerations are possible resource outflows relating to the acquisition. Even
if they are not probable, you must recognize them.
b. Goodwill = Consideration transferred/Acquisition costs > Consideration received/FVINA
c. Gain on bargain purchase = Consideration transferred/Acquisition costs < Consideration
received/FVINA
i. In a case, be VERY careful when you obtain Bargain Purchases. In a business setting, why
would someone sell their ongoing business for less? This occurs when there are hidden
liabilities or the business has a going concern or something fishy!

1-year measurement period rule

You have one year from date of acquisition to revise (in light of new info) the acquisition cost, fair values of the net
identifiable assets, and therefore G/W - adjustments are made to goodwill. Anything after this period is treated as
an error - and accounted for as a retrospective adjustment.
1 year measurement period applies for ASPE and IFRS

Doesnt apply to contingent consideration

Changes in contingent consideration is not considered a measurement period adjustment; so the one year
measurement rule doesnt apply to contingent considerations so dont adjust goodwill
Adjust it directly to NI if its a contingent consideration that is a liability
Adjust it to Equity if its an entity settled contingent consideration (RE)

Different Year End (Highly unlikely that you will see this)
If sub and parent have different year ends, there are two possible alternatives:
1) Difference is less than 3 months
a. Consolidate taking into consideration the major events/transactions for the discrepancy
b. Sub produces new pro-forma F/S
2) Difference is more than 3 months
a. No choice but to produce new F/S

Fair Value Adjustments

Since the sub will continue to operate as a separate entity, it will record transactions it its own books and file its
own tax reports. However, since the acquisition recognized net assets at FV, there will be discrepancies which we
must reconcile during the consolidation process. These FV difference will also give rise to tax consequences.
Example:
Sub has PPE with a carrying value of $100, FV of $200. The PPE still has a useful life of 10 years.
Account
Dep exp (CCA)

Subs Book

100
=$ 10 / y
10

Consolidated F/S

200
=$ 20 / y
10

Difference
$10/y

This represents the difference between what was in the subs book and what should have been done on a
consolidated basis.

Fair Value Adjustments Table

This table is used to reconcile the difference between the FV and BV (in relation to the sub) at acquisition date.
Therefore, the date of the table is the date that the consolidation process takes places, NOT the date of
acquisition.
To recognize the net assets to FVAffecting

this years income

Account

Net Income (Present)

Gain on B/P

If the acquisition
occurred this year (no
tax!)

Goodwill

Affecting prior years income

Beg R/E (Past)

Always net of taxes
If the acquisition
occurred in prior years
(no tax)

Balance Sheet (Future)

(Dont forget to add it!

No tax!)

THINGS TO KEEP IN MIND:

No actual record of prior years consolidation is kept
Each year, you must redo the adjustments taking into consideration of the effect of time
If an account affected NI last year, then this year you would make the adjustment to
Beg R/E
Remember that you are NOT recording any new transactions, all of the actual business
transactions are already properly recorded. You are simply making adjustments to these
account to reflect the impact of the FV differences at acquisition.
Try to see the big picture
Consolidation means reporting both entity as if they were one entity
What the sub recorded and what should have been recorded
Pre-acquisition adjustments are simply
Investment in Sub
C/S sub
R/E sub
Goodwill or Gain on Bargain Purchase

Chapter 4 Intragroup Transactions

Recording

Recordin

Paren
t

P
S

Sub

Consolidation consists of reporting both the parent and the subs as a combined entity. In other words, it is as if
neither the parent nor the sub existed. Rather, the financial statements will report the transactions as only one
company; PS. Note that this is the first time you see the difference between recording and reporting.
Intragroup transactions defeat the purpose of consolidation. If you think about it, since only company PS exists,
PS cannot make sales to itself. Therefore intragroup transactions must be removed.
Some common intragroup transactions are:
1)
2)
3)
4)
5)
6)

Inventories
Depreciable assets
Non-depreciable assets
Dividends
Intercompany loans
Intercompany services

Inventories
Assume FIFO and perpetual inventory system

Sales during the current year (unrealized)

Sales Revenue full intercompany sales
amount
COGS full intercompany sales amount less
unrealized profit
Tax expense since you have less gross profit,
you pay less taxes

Sales made in previous years and sold this year

(realized)
Beg R/E remove amount of unrealized profit
net of taxes
COGS to realize profit
Tax expense you are making higher income

Inventory inventory will now be overstated

by the unrealized profit
FTA because you decreased the value of an

asset
Depreciable Assets
Assume that PPE were transferred at a gain. Keep in mind that the direction of the adjustments (arrows) are the
exact opposite in the event that an unrealized loss occurs.
The unrealized gain is realized through depreciation until fully depreciated or when disposal of the asset occurs.
PPE sold during the current year
Gain full gain amount
Tax expense less income, less taxes (yay!)
Dep exp realize the profit
Tax exp more income, more taxes (boo!)
PPE PPE is now overstated in the recipients
book
= Dep exp * # of year remaining
FTA

PPE sold in previous years

Beg R/E amount of unrealized gain less
depreciation times the number of year since the
sale, net of taxes
= (gain (dep exp * # of years)) * (1 tax rate)
Depreciation expense to realize profit
Tax expense you are making higher income
PPE PPE is now overstated in the recipients
book
= Dep exp * # of year remaining
FTA

Non-Depreciable Assets
Gain or losses on intercompany sales of non-depreciable assets will remain unrealized until sold.
Land sold during the current year
Gain full gain amount
Tax expense less income, less taxes (yay!)

Land sold in previous years

Beg R/E amount of unrealized gain, net of
taxes

Land Land is overstated in the recipients

book
FTA

If still on hand:
Land Land is overstated in the recipients
book
FTA

*Note that for non-depreciable assets sold during

the current year has to remain on hand at year
end. If sold before year end, NO
ADJUSTMENTS.

If sold to external party during the current year:

Gain Land is overstated in the recipients
book thus giving rise to a higher cost base, which
understates the gain
Tax Expense

Intercompany Dividends
Intercompany dividends (i.e. dividends paid from sub to parent) must be removed. Why?

Parent
100
%

Dividen
ds

Sub
Since dividends are paid on a per share basis, and the parent owns 100% of the shares, then the parent is entitled to 100% of
the dividends paid by the sub. As a result, this becomes intragroup.

Dividends Declared
Dividend declared To remove the dividends
from sub to parent
Dividend revenue To remove the dividends
received by the parent from the sub
Dividend payable To remove the dividend
payable to the parent from the sub
Dividend receivable To remove the dividend
receivable from the sub to the parent

Dividends Declared and Paid

Dividend declared To remove the dividends
from sub to parent
Dividend revenue To remove the dividends
received by the parent from the sub
*Note that in this case, the transfer of cash relating to
the dividend cancels out during the consolidation
process.

*** EXTRA IMPORTANT:

Actual dividends paid by the parent to their shareholders are legitimate transactions and MUST NOT be adjusted
for.

They will be subtracted from Available for Appropriation to arrive to Consolidated End R/E
Consolidated Beg R/E + Consolidated NI Parents DIVIDENDS = Consolidated End R/E
Adjustments to dividends are only for the CURRENT YEAR. Anything relating to dividends in previous years are to
be disregarded.

Parents beginning R/E are overstated

Subs beginning R/E are understated

Thus they cancel out

There are not tax consequences with respect to dividends both from a sub perspective and from a parent perspective.

Intercompany Services
Intercompany services are to be removed. The rational being that PS (consolidated entity) cannot technically
provide services to itself.
Rent paid from sub to parent
Rent Expense To remove the rent paid from sub to parent
Rent revenue To remove the rent received by the parent from the sub

Adjustments to intercompany services are only for the CURRENT YEAR. Anything relating to intercompany services
rendered in previous years are to be disregarded.

Parents beginning R/E are overstated

Subs beginning R/E are understated

Thus they cancel out

There are not tax consequences with respect to intercompany services, both from the parent and subs perspective.

Intercompany Loans
Intercompany loans are to be removed. The rational being that PS (consolidated entity) cannot theoretically
provide loans to itself.
Bond payable from Sub to Parent
Bond payable To remove the bond payable by the sub to the parent
Bond in Sub To remove the bond receivable from the sub to the parent
Interest expense To remove the interest expense in the subs books
Interest revenue To remove the interest revenue in the parents books
Interest payable To remove the interest payable by the sub to the parent
Interest receivable To remove the interest receivable from the sub to the parent
Remember the interest component relating to the loan. There is no tax effect to these adjustments.

*Note: Sometimes, intercompany loans and dividends are not disclosed in the additional information section.
Consequently, LOOK in the BODY of the F/S provided.

10

CHAPTER 5 NON-CONTROLLING INTEREST

We saw in Chapter 3 that the parent acquired the 100% of all the outstanding shares of the sub.
Furthermore, we determined that all intragroup transactions must be removed since it defeated the
purpose of consolidation.

Parent
100

All intragroup transactions are to be

removed by 100% regardless of the
stream of the transaction

Subsidiary

In Chapter 5, the parent does not acquire

100% of the sub.
Rather, they acquire a portion of the sub to obtain control (i.e. 50% + 1). This will give rise to a portion
of the sub being owned by a minority group; non-controlling interest (NCI). The parent will still be
required to prepare consolidated financial statements, including their operations, their portion of
ownership in the sub and NCI.

SUBSIDIARY
Parent

NCI

NCI; 20%
Parent; 80%

* Remember that consolidation consist of reporting all these groups as if they

were only 1 entity P

+S + NCI adjustments=Consolidated Amount Reported

Parent
80%

Subsidiary

11

Goodwill
IFRS allows NCI to be reported using two methods; Cost or FV.

Full
GW
Non-Controlling

NCI @ FV
Must be
disclosed
Must segragate
P's Gw and NCI's
GW from total
Goodwill

Interest

Parti
al
GW

NCI kept at cost

Only P's GW

When the Full Goodwill method is used, total consideration transferred will consist of:
P's Consideration transferred
+ NCI @ FV
Total Consideration Transferred

Goodwill Computations Compared

Full Goodwill

Partial Goodwill

Consideration Transferred:
(1) P's Consideration Transferred
+ (2) NCI-FV
(3) Total Consideration Transferred
(1 + 2)

Consideration Transferred:
(1) P's Consideration Transferred

FVINA
(4) Equity (C/S + R/E + COCI)
(5) FV adjustments (Do not
forget taxes)
(6) Consideration received (4 + 5)
(7) Total Goodwill (3 - 6)
(8) P's GW (1 - (%Ownership x
6)**

FVINA
(4) Equity (C/S + R/E + COCI)
(5) FV adjustments (Do not forget
taxes)
(6) Consideration received (4 + 5)
x % of P's Ownership
(7) P's % of consideration received
(8) P's GW (1 - 7)**

12

(9) NCI's GW (2 - (% of NCI x 6) or

(7 - 8)
** Note that regardless of the method used, Ps Goodwill will always be equal.

P' s Goodwill under FullGoodwill =P' s Goodwill under Goodwill

Thus, Ps Goodwill is ALWAYS calculated as such:

P' s Goodwill=P' s consideration transferred ( of ownership x FVINA )

Where:

FVINA=Equity+ FV adjustments

Fair Value Adjustments Tables

This table is for the consolidation date (i.e. date which the consolidation process takes place)
Affecting this years income

Account
Asset
Tax

Net Income (Present)

Affecting prior years income

Beg R/E (Past)

To recognize the net assets to FV

Balance Sheet (Future)

TOTAL*
Goodwill

* Please note that we now include a TOTAL before adding Ps Goodwill contrary to what we had
previously saw in chapter 3. This is for the simple reason that these FV differences reflect 100% of total
amount (all relating to the SUB) whereas Ps Goodwill is already prorated to their share of ownership.
We must allocate this amount between the parent and NCI.
** Remember that the FV table is ALWAYS in relation to the sub. This will matter when we are
computing NCIs share of income, Consolidated Retained Earnings and NCIs balance at any date.

13

INTRAGROUP TRANSACTIONS
In chapter 4, we learned that intragroup transaction must be removed for consolidation purposes.
Furthermore, we removed 100% of the transaction regardless of the stream of the transaction since the
parent owned 100% of the sub therefore profits as a consolidated entity was not affected. Given that the
sub is not wholly-owned by the parent, intragroup transactions will be affected by upstream
transactions. The main difference is that for upstream transactions, we will reduce the unrealized profit
by P% of ownership in the sub and the residual is removed from NCIs share of income.

DOWNSTREAM TRANSACTIONS
When the parent sells/transfers assets or services to the sub, these are called downstream
transactions. As illustrated by the chart, the transfer of title/ownership is in a downward
direction (since the parent will always be on top).
Recall that during the year, each company operates independently and record their
transactions in their OWN books. Consequently, the profit/gain in this case is recorded at
100% in the PARENTs books. As such, when removing the downstream position.
Example: P sold $100,000 of inventory to S. This inventory had cost P $80,000. All of this
inventory remained on hand at year end.
From this example, we can see that P recorded $20,000 of gross profit in its books.

100 % Gross profit of $20,000

was recorded
80
Sales
$100,000
COGS $80,000
GP
$20,000

Sales Revenue (@100%) $100,000

COGS $100,000 - $20,000 = $80,000
Tax expense (40%) 80,000

Inventory $20,000
FTA $80,000

Parent

*Note that NCI is unaffected since, NCI can only be affected by transactions relating to the Sub and it
this case, the downstream, was recorded in the parents book.

Subsidiary

14

UPSTREAM TRANSACTIONS
On the other hand, when the Sub sells/transfers assets to the parent, this is called upstream
transactions similar the rational discussed above.
In this case, when the sub records the profit/gain on their books, this profit is allocated partially to the
parent and the remainder to NCI. In other words, EVERYTIME YOU SEE AN UPSTREAM
TRANSACTION, YOU HAVE TO DEVELOP A REFLEX THAT NCI WILL BE INVOLVED.

Example: S sold $100,000 of inventory to P. This inventory had cost P $80,000. All of this
inventory remained on hand at year end.
From this example, we can see that S recorded $20,000 of gross profit in its books. However,
when consolidating, we know that 80% of this profit, $16,000, is entitled to the Parent while the
remainder 20% or $4,000 will belong to OCI.

Sales $100,000
COGS $80,000
GP
$20,000

Sales Revenue (@100%) $100,000

COGS $100,000 - $20,000 = $80,000
Tax expense (40%) 80,000
NCI-I/S $2,400 (20,000 x (1-.4)) x 0.2

Ps Share =
$16,000

NCIs Shar
$4,000

Inventory $20,000
FTA $8,000
NCI-B/S (End) $2,400

*Note that NCI is unaffected since, NCI can only be affected by transactions relating to the Sub and it this case, the down

15

COMPARING DOWNSTREAM AND UPSTREAM

To reiterate, the following tables outline the differences between upstream and downstream
transactions.
80

* Please note that you can simply begin by writing your adjustments as if they were all
downstream transaction and simply add in the appropriate NCI calculations once youve
completed the previous step when there an upstream transaction.
Inventory Transferred during Current Period and Remains on Hand (i.e. unrealized)
DOWNSTREAM
Sales Revenue
COGS
Tax expense

UPSTREAM
Unrealized at year
end

Inventory
FTA

Sales Revenue
COGS
Tax expense
NCI-I/S Income effect net
of taxes @20%

Unrealize
d at year
end

Inventory
FTA
NCI-B/S (End) Inventory x (1-tax rate) @ 20%

Inventory Transferred during Previous Period and Sold this period

DOWNSTREAM

UPSTREAM

Beg R/E @ 100% } Unrealized at beginning

Beg R/E @ 100%

NCI-I/S Unrealized Profits
@20%

COGS
Tax expense

Unrealized at
Beginning of
the year

Realized during
the year
COGS
Tax expense
NCI-I/S Income
effect net of taxes
@20%

Realized during
the year

16

Depreciable Assets Transferred during Current Period and Remains on Hand

DOWNSTREAM
Gain
Tax expense

Depreciation
Expense
Tax expense
PPE(dep
exp/year x #
of year
remaining)
FTA

UPSTREAM
Unrealized during
the year

Gain
Tax expense
NCI-Beg Gain net of taxes @20%
Depreciation Expense
Tax expense
NCI-I/S Depreciation net of taxes @20%

Realized during the

year

PPE (dep exp/year x # of year remaining)

FTA
NCI-B/S (End) PPE x net of taxes @ 20%

Remains unrealized
at year end

Depreciable Assets Transferred during Previous Period and Remains on Hand

DOWNSTREAM

UPSTREAM

Beg R/E (Gain (dep exp x # of year past

excluding current year)) net of taxes

Beg R/E (Gain (dep exp x # of year past

excluding current year)) net of taxes
NCI-Beg Beginning R/E computed @20%

Depreciation Expense
Tax expense
PPE(dep exp/year x # of year remaining)
FTA

Depreciation Expense
Tax expense
NCI-I/S Depreciation net of taxes @20%
PPE (dep exp/year x # of year remaining)
FTA
NCI-B/S (End) PPE x net of taxes @ 20%

Non-Depreciable Assets Transferred During Previous Period and Remains on Hand

DOWNSTREAM

UPSTREAM

17

Depreciable Assets Transferred during Previous Period and Remains on Hand

DOWNSTREAM

UPSTREAM

Beg R/E = Gain net of taxes

Beg R/E Gain net of taxes

NCI-Beg Beginning R/E computed @20%

Land
FTA

Land
FTA
NCI-B/S (End) Land net of taxes @ 20%

Dividends
When adjusting for intercompany dividends where NCI is concerned, we are only concerned
with the SUBs dividends distribution (i.e. dividends declared, dividends paid). Simply put,
intragroup dividends are inherently upstream. Unlike Chapter 4 where the parent received
100% of these dividends, NCI will be entitled to a portion of the dividends thus requiring that
we account for it accordingly.
Dividends Declared (Sub)

Dividends Paid (Sub)

Dividends declared @ 100%

Dividends revenue @ 80%
Dividends receivable @ 80%
Dividends payable @ 80%
NCI- Dividends @ 20%

Dividends declared @ 100%

Dividends revenue @ 80%
NCI- Dividends @ 20%

Intercompany Services
DOWNSTREAM

UPSTREAM

Service expense
Service revenue

Service expense
Service revenue

* There are no tax or NCI effects

* There are no tax or NCI effects

18

Intercompany Loans
DOWNSTREAM

UPSTREAM

Bond in Sub
Bond payable
Interest expense
Interest revenue
* There are no tax or NCI effects

Bond in Sub
Bond payable
Interest expense
Interest revenue
* There are no tax or NCI effects

BUILDING THE FINANCIAL STATEMENTS

You will be required to build a Statement of Comprehensive Income and a Statement of Changes in
Equity. As such, there are several accounts that you must master in order to a score the maximum of
points on the exam.
Statement of Comprehensive Income
The Statement of Comprehensive Income is simple the Income Statement including Other
Comprehensive Income (OCI).

Ad
j

Con
s.

1. Computing comprehensive income is identical to Chapters 3 & 4. Remember that:

a. Once you have built the consolidated net income, you must allocated this amount
between the Parent and NCI.
Ps share of income:

P s incomeP s share of intra+downstream realized downstream unrealized

S ' income FVA +upstreamrealizedupstream unrealized
+80

NCIs share of income:

20 ( S' income FVA ()+upstream realizedupstreamunrealized )

Once you have calculated each entitys share of income, each individual amount should add up to total
Net Income you have computed above.
Further, do not forget to include OCI if any. Similar to the computation of the share of income;

19

Ps share of OCI:

P s OCI +80 ( S' OCI )

NCIs share of OCI:

20 ( S' OCI )

Next, total comprehensive income for each will be:

P s Total Comprehensive Income=P s share of Income+ P s share of OCI

Similarly,

NCI ' s Total Comprehensive Income=NCI s share of Income+ NCI s share of OCI
2. You will then need to build a Statement of Changes in Equity
Recall that the basic format of this statement is as such:
Share Capital

Retained Earnings

COCI

NCI

Beg. Balance
NI
Dividends
OCI
End. Bal
However, the main elements, coincidently the most complex, are Retained Earnings and NCI. You will
be expected to compute the ending balances of these accounts.
Recall that the basic Ending Retained Earnings formula is:

Ending R/ E=Beginning R/ E+ Net IncomeDividends

For consolidation purposes, this slightly modified to:

Consolidated Ending R / E=BeginningConsolidated Adjusted R/ E+ P' s share of IncomeP' s Dividends

20

Retained Earnings Computation (an actual computation will be done during the course)
Retained Earnings
P's Beg R/E

xxx

S' Beg R/E

xx

S' R/E @ Acquisition

(xx)

FVA (look at the Beg R/E column)

xx

Upstream Unrealized 1

(xx)
xx

x 80%

xxx

Downstream Unrealized 2

(xxx)

Adjusted Beg R/E

xxx

+ P's share of Income 3

xxx

- P's Dividend 4

(xxx)

Ending R/E

xxx

1.
2.
3.
4.

Look for upstream transaction where you adjusted beginning R/E

Look for upstream transaction where you adjusted beginning R/E
P's share of Income excluding OCI
P's dividends distribution (on their own F/S)

Alternative Retained Earnings Computation

P's Ending R/E

xxx

S' Ending R/E

xx

S' R/E @ Acquisition

(xx)

FVA (look at the Beg R/E + NI column)

xx

Upstream Unrealized 1

(xx)
xx

x 80%

xxx

Downstream Unrealized 1

(xxx)

Ending R/E

xxx

1. Look in your intragroup adjustments where BALANCE SHEET accounts are involved (e.g. inventory, PPE, land (excluding
bonds, and dividends)). You will take this amount net of taxes and plug it into your calculations.

21

Non-Controlling Interest
You will be also expected to compute NCIs ending balance. The formula to derive NCIs balance is similar to
the equity method.
NCI Formula
NCIs beginning balance
+ NCIs share of total comprehensive income
- NCIs dividends
NCIs ending balance

Equity Method
Investment beginning balance
+ Share of P/L
- Share of dividends
Investment ending balance

The first thing to keep in mind is that NCIs balance at any date can be computed by simply taking adding all
taking the fair value of the Sub multiplied by NCIs ownership percentage net of upstream intercompany
transactions. Note that NCIs goodwill should be included since this goodwill is part of the fair value of the
company.
An issue arise when computing NCIs beginning balance since the FVA table reflects the FV adjustments at the
date when consolidation takes place. As such, when calculating NCI beginning balance, the table must be
reversed to the beginning of the period.
To illustrate:
Assume P acquired S at January 1, 2012 and that there were two fair value differences arising from PPE of
$10,000(10 years) in excess of the book value over and land of $5,000 in excess of the book value. The land was
sold in July 1, 2013.
PPE
Depreciation adjustments are $1,000 before tax or $700 (assuming 30% tax rate)
The acquisition differential will be allocated as such:

2 years to Beg
R/E
700 x 2 = $1,400
10 years

1 year to Net
Income
$1,000
7 years to B/S
1,000 x 7 =
$7,000

22

The arrows represent

the normal flow
between the
statements

FVA Table @ December 31, 2013

Account
PPE
Land (since it was sold)
Tax

Net Income
(1,000)

Beginning R/E
(1,400)

Balance Sheet
7,000
(2,100)

However, since we are calculating NCI BEGINNING balance, we are interest in the amount at JANUARY 1,
2013. Thus, we need to reverse the table so that it reflects the balances at that date. In other words, it is as we
were preparing the table at December 31, 2012.

FVA Table @ December 31, 2013

Account
PPE
Land (since it was sold)
Tax

Net Income
(1,000)

Beginning R/E
(1,400)

Balance Sheet
7,000
(2,100)

By reversing this, we arrive at the balances at January 1, 2013.

FVA Table @ January 1, 2013

Account
PPE
Land (since it was sold)
Tax

Net Income
(1,000)

Beginning R/E
(700)

Balance Sheet
8,000
(2,400)

It very important that you do these steps. In NCIs balance computation, we are looking at the balances shown
in the balance sheet column at their appropriate rate.

23

Calculating NCI
Common Share

xx

Beginning R/E

xx

Beginning COCI

xx

NCI's Goodwill (full method only)

xx

FVA (B/S Column @ January 1st )

xx
xxx

x 20%
xx

Upstream Unrealized1

(xx)

NCI-Beginning

xxx

+ NCI Total Comprehensive Income2

xx

- NCI - Dividends

(xx)

NCI - Ending

xxx

1. Look at your intragroup transaction where NCI beginning is adjusted; it should look like this
NCI-Beg
2.

NC I ' s Total Comprehensive Income=NC I ' s share of income+ NC I ' s share of COCI

24

Alternative Method
Similar to R/E computations, NCIs ending balance can be computed directly.
Common Share

xx

Ending R/E

xx

Ending COCI

xx

NCI's Goodwill (full method only)

xx

FVA (B/S Column @ December 31st )

xx
xxx

x 20%
xx

Upstream Unrealized1

(xx)

NCI - Ending

xxx

1. Look at your intragroup transaction where NCI beginning is adjusted; it should look like this
NCI-B/S (End)

*** For exam purposes, note that only one method will be tested on. Furthermore, it is
more likely that you will need to compute beginning balances rather than calculating
the ending balance directly. The rationale is that this must be done in order to show
the statement of changes in equity in proper form.

25

CHAPTER 6 INVESTMENTS IN ASSOCIATES

In chapter 6, we are the non-controlling interest. As such, we must account for this
investment using the equity method.
Basic Formula
Beginning balance of the investment
+ Share of P/L
- Share of dividends
Ending balance of the investment
An acquisition analysis is required with the purpose of calculating goodwill. However,
that is all you need to do in regards to the acquisition analysis for the purpose of this
course.
(1) Consideration Transferred
FVINA
(4) Equity (C/S + R/E + COCI)
(5) FV adjustments (Do not forget taxes)
(6) Consideration received (4 + 5)
x % of Ownership
(7) % of Consideration received
(8) Goodwil (1 - 7)

In regards to intragroup transactions, there is a difference between IFRS and ASPE.

Downstream
Upstream

IFRS
Remove % of ownership
Remove % of ownership

ASPE
Remove by 100%
Remove % of ownership

26

To illustrate:
ABC owns 30% of XYZ. During the year the following transactions occurred:
1. ABC sold inventory to XYZ at a gross profit of $100 (downstream). All of it is
unrealized.
2. XYZ sold inventory to ABC at a gross profit of $200 (upstream). All of it is
unrealized.
3. Ignore tax effects
Downstream
Upstream

IFRS
$30
$30

ASPE
$100
$30

Calculating Ending Balance of Investment in Associate

1. Calculate the beginning balance of the Investment in Associate account
a. If it is not explicitly stated, you can derived this number by:
Cost of acquisition
+ in R/E1
Beginning balance
2. Calculate the revised net income taking into account the effects of FVA and
intragroup transactions (consider the impact of the reporting framework and stream of
the transaction).
3. Pro-rate the revised net income to the % of ownership.
4. Calculate the share of dividends
Investment in Associate
Beginning balance of the investment (1)
+ Share of P/L (2)
- Share of dividends (3)
Ending balance of the investment (1 + 2 3)

1 in R/E = Beginning R/E R/E at acquisitionThe change in R/E will reflect the accumulated
profit less dividends since acquisition.

27

MODULE 2 FOREIGN CURRENCY

PART I HEDGING & HEDGE ACCOUNTING

Foreign
Currency

Fluctuatio
ns

The first part of foreign currency deals with transactions where the currency is not the
functional currency.

Risks

For the purpose of this course, we assume that everyone is risk averse therefore they
will look into ways to mitigate such risks. This is also called hedging.
There are many ways in which a company or individual can hedge but for the scope of
this course (i.e. the final), you should know at least two ways.

Natural
Hedge

Forward
Contracts

Method:

Procedures:

Opening a U.S.
Bank Account
Use $ from A/R
to pay A/P

Going to the
bank or a broke
to obtain a
contract to sell
or buy foreign
currency

Pros & Cons

Pros

Simple & Cheap

Can substantially
reduce risks
Can apply hedge
accounting

Cons
A/R A/P

Cons
Does not
eliminate risks
completly
Can be complex
and expensive

28

Functional Currency
IFRS requires that an entity determined its functional currency first. Once the functional
currency is determined, any currency other than the functional currency will be
considered foreign and must be translated accordingly. There are guidelines
(categorized by importance) to assist a company when determining it functional
currency.
1. Where is the sales price determined?
a. When the company sets the selling price of its product or services, are
these price determined based on Canadian dollars?
2. The currency used to pay suppliers and workers
a. When the company pays their suppliers, do they pay using Canadian
dollars?
3. In which currency is financing obtained?
a. Did the company borrowed funds in Canadian dollars?
4. Where is retained earnings kept?
a. Does the company retrieve the excess profits back to Canada?
When there is clear/pervasive indications that the companys operations are all related
to the Canadian currency, we can assume that their functional currency is the Canadian
dollars.
Under ASPE, it is assumed by default that the functional currency is the Canadian
dollars since ASPE is Accounting Standards for Private Canadian enterprises. However,
an entity can select any current to be the functional currency.

Rates
When translating transactions and financial statements, understanding the terminology
of different rates is very important. The reason being is that there are specific standards
determining which rate to use.
Spot rate is ALWAYS the rate of that specific date and time. For example, today,
November 28, 2014 at 7:44 PM, the rate is 1 USD = 1.14.
Historical Rate
Spot rate at which the
transaction occurred. Simply
put, the spot rate at the day of

Average Rate
The average of the spot rate
throughout the year

Closing Rate
Spot rate at year end

29

the transaction becomes the

historical rate

Accounting Standards
Current accounting standards requires that transactions in foreign currencies be
translated as such:
Transaction/Account
Sales & Expenses

Day of the Transaction

Recorded at the spot rate

Monetary Items

Recorded using the spot

rate
Recorded using the spot
rate
Recorded using the spot
rate
N/A

Non-Monetary Items
Common Shares
R/E

Year End
Kept at historical rate,
if impractical use
average rate
Restated at the
current rate
Kept at the historical
rate
Kept at the historical
rate
Kept at cumulative
historical rate

Financial Items vs. Monetary Items

Financial items are items that are expected to generate or incur future financial
benefits/disbursements. The key word being financial (i.e. benefits to the entity in terms
of cash inflow or outflow). For example, investments in other company are expected to
provide returns to the investors in terms of capital appreciation or dividends. On the
other hand, PPE used for operations will generate benefits that are non-monetary since
they are used for production. The production process will not provide any direct cash
inflows to the company.

Monetary Items
Monetary items are financial items that binds the bearer by contract to receive or pay a
fixed pre-determined amount.

30

Hedge Accounting
When a cash flow hedge is used, the company can use hedge accounting if he can prove
that the cash flow hedge is effective. To be effective, he must provide accurate estimates of :

Timing
Hedging Item (contract)
Hedge Item (inventory, PPE)
Risks

If an election is made to use hedge accounting, all the FV gain/loss relating to the
contract (derivative) will be added to OCI rather than income. As such, this decreases
the volatility of income due to fluctuations of foreign currency from one year to the
other. In other words, all the FV gains/losses from prior years will be deferred in OCI
and subsequently transferred to net income.

April 2013

Feb2014

April
2014

Dec
2013

Purchase
d
inventory
to be
delivered
on Feb 1

Year End

Receive
d
Inventor
y

Enter into
contract

Expiration
of forward
contract
Payment
tosupplier

In this example, the company enters into two separate/distinct transactions:

1. The contract or derivative (monetary)
2. The purchase of inventory
a. Account payable will be monetary
b. Inventory will be non-monetary
As such, accounting these two transactions is strongly recommended:

31

No Hedge Accounting
Contract

Inventory & A/P

With Hedge Accounting

Contract

Inventory & A/P

April 2013
Dec 2013

No entry
Restate contract at its fair
value. Not the spot rate at
year end!
FV G/L - NI

No entry
No entry

No entry
Restate contract at its fair
value. Not the spot rate at
year end!
FV G/L - OCI

No entry
No entry

Feb 2014

Restate contract at its fair

value.

Record inventory
and A/P at the spot
rate @ Feb 1

Restate contract at its fair

value.

Record inventory and A/P at the

spot rate @ Feb 1
Transfer all the FV G/L OCI to
inventory

March 1

Restate contract at its fair

value which will be the spot
rate at that day
FV G/L - NI
Make the exchange with the
broker. The difference will be
the total derivative
asset/liability

Restate contract at its fair

value which will be the
spot rate at that day
FV G/L - OCI
Pay the supplier with
the cash received by
the broker
The difference
between the recorded
A/P and the amount
paid in foreign
currency will be the
FX G/L - NI

Make the exchange with

the broker. The difference
will be the total derivative
asset/liability

Pay the supplier with the cash

received by the broker

The difference between the

recorded A/P and the amount
paid in foreign currency will be
the FX G/L - NI

32

33

Foreign Currency Translation

There are 3 scenarios possible which will require foreign currency translation. However,
two of these scenarios are identical however can be presented differently.
Situation 1
ABC inc. is a Canadian corporation with 100% of its operations in Canada. As such, its
functional currency is determined to be the Canadian dollars.
Mr. Jones, an American investor, would like to invest in ABC however, due to the
financial statements being denominated in Canadian dollars, he is unable to make a
decision. He has asked ABC to translate the financial statements in USD.
ABC inc.
Functional
currency:
Canadian $

ABC inc.
Presentation
currency: USD

The USD will be considered to be the presentation currency. When translating the
functional to presentation currency, the current rate method is used. The rational is that
there a no risks involved with the foreign exchange gains/losses.
ABC owns 100% of XYZ. XYZ is currently located in the U.S.A. and is determined to
be foreign operations. ABCs functional currency is the Canadian dollars.
Two scenarios can arise from this. XYZ can either have a functional currency
different from its parents (e.g. USD) or the same as its parents (i.e. CAD)

Situation 2

ABC

CAD $

34

XYZ

USD $

Situation 3
Autonomous (IFRS)
Self-sustaining (ASPE)

ABC

CAD $

When a foreign sub has a different

functional currency than its parent, the sub
is considered to be autonomous. In other
words, it is bearing all the economic risks
relating to the foreign currency fluctuations.
As such, we will use the current rate
method.
Indicators:
The subs has freedom in managing its
operations
The sub does not receive any loans or
capital from its parent
The number of intercompany transactions is
relatively small
***Note: Since XYZs functional currency is
the USD, the CAD $ will simply be its
presentation currency similar to scenario 1.

XYZ

CAD $

Not Autonomous (IFRS)

Integrated (ASPE)

When a foreign sub has the same functional

currency than its parent, the sub is
considered not to be autonomous since in
essence, it is the parent who bears all the
risks relating to the foreign currency
fluctuations. The temporal method will be
used.
Indicators:
The subs is merely an extension of the
parents operations
The sub receive loans or capital from its
parent
The number of intercompany transactions is
significant

35

Current Rate Method

Temporal Method

Balance Sheet

All assets/liabilities at
closing rate

Share capital

At historical rate

Monetary Assets at Closing rate

Non-monetary assets/liability at historical
rate
At historical rate

Retained Earnings

At historical rate
(should be given)

At historical rate (should be given)

36

Income statement

Revenues and expenses

at average rate

Revenues and expenses relating to monetary

items at average rate
Revenues and expenses relating to nonmonetary items (e.g. depreciation) are kept
at historical rate

37

Consolidation Q1

On January 1, 2011 Glass Inc. acquired 80% of the share capital of Crystal
Ltd. For $400,000. At this date, the equity of Crystal consisted of:

Share capital: $200,000

Retained earnings: $75,000

At January 1, 2011 all of Crystals identifiable assets and liabilities were

recorded at fair value except for the following:

Equipment (cost $150,000)

Carrying amount: $80,000 Fair value: $90,000

Land

Carrying amount: $40,000 Fair Value: $80,000

The equipment had a further useful life of 5 years. The land is still on
hand. Glass uses the partial goodwill method.

Financial information for the two companies at December 31, 2013 is as

follows:

Glass
Crystal
Sales Revenue
Other income

950,000

800,000

50,000

40,000

1,000,000
840,000 Cost of sales
600,000
450,000
Other expenses

125,000

725,000
Income tax expense
45,000
625,000 Income before tax
45,000
Net Income
230,000
275,000
215,000
170,000
Retained earnings
90,000
(1/1/13)
80,000
320,000
250,000
Dividend paid
15,000
Dividend declared
10,000
10,000
5,000 25,000
15,000
Retained earnings
295,000

175,000

38

Additional information:
1. During 2012, Crystal sold some inventory to Glass for $10,000. This
inventory had originally cost Crystal $4,000. At December 31, 2012,
20% of these remained unsold by Glass.
2. The ending inventory of 2013, of Glass, included inventory sold
to it by Crystal at a profit of $4,000 before tax. This had cost
Crystal $15,000.
3. The tax rate is 30%.
4. Glasss share capital has always been $100,000.
5. On January 1, 2014, Glass sold 10% of its ownership in Crystal so that
it now owns 70%.
They received $30,000 for the shares. Required:
(a) Prepare the consolidated statement of comprehensive income and
statement of changes in equity at December 31, 2013.
(b) Calculate the effect on consolidated equity in 2014 from the sale of
the shares

39

Consolidation Q2
Orange Inc. acquired 80% of Apple Inc. on January 1, 2010 for
$131,600. All of the identifiable assets and liabilities were recorded
at fair value except for:

Book Value

Fair Value

Plant

50,000

55,000

A/R

30,000

38,000

The plant is to be amortized by 10 years using the straight-line

method and the land was sold in December 2012.

Oranges accounts for NCI using the full goodwill method. The FV of
NCI at acquisition was $31,500.

At January 1, 2010, the equity of Sub were as follows:

Common Shares
Retained Earnings

$100,000
$40,000

Additional information:
1. Apples inventory at December 31, 2012 included $10,000
that was sold from Apple. Apples internal transfer pricing
policy is to earn a gross profit of 25%.
2. During the year, a total of $60,000 of sales were made by
Apple to Orange. Apples pricing policy is to earn 20% markup on cost. Half of this inventory was sold to Banana Inc. (nonrelated company).
3. Apple sold PPE to Orange for $50,000 on July 1, 2012. The
original cost of the PPE was $100,000 and had an
accumulated depreciation of $55,000. The PPE is to
depreciated over 5 years.
4. During the year, Orange provided consulting services to
Apple. Apple spent $2,200 in administration expenses.

Furthermore, Orange repaired one of Apples manufacturing

machine for $2,800.
5. Beginning COCI for Orange and Apple is $10,000 and $8,000
respectively.
6. Apple owes $100,000 to Orange in form of 5% coupon bonds.

Required:
1. Prepared the Statement of Comprehensive Income for 2013
2. Calculate the balance in Ending Retained Earnings
3. Calculate the balance of NCI at December 31, 2013

Except of the financial statements at

December 31, 2013

Investment in Associate Q1
On January 1, 2011, Cynna purchased 40% of the shares of Eckers for
$63,200. At that date,
equity of Eckers consisted of:

Share capital $125,000

Retained Earnings $11,000

At Januray 1, 2011, the identifiable assets and liabilities of Eckers were

recorded at fair value.
Information about income and changes in equity for both companies for
the year ended
December 31, 2013, was shown:

Additional Information:
1. Cynna recognizes dividend revenue from Eckers before receipt of cash.
Eckers declared a
$5,000 dividend in December 2013, this being paid in February 2014.
2. On June 30, 2011, Eckers sold Cynna a motor vehicle for $12,000. The
vehicle had originally cost Eckers $18,000 and was written down to $9,000
for both tax and accounting purposes at time of sale to Cynna. Both
companies depreciated motor vehicles straight line over 5 years.

3. The beginning inventory of Eckers included good at $4,000 bought from

Cynna; the cost to Cynna was $3,200.
4. The ending inventory of Cynna included goods purchased from Eckers
at a profit before tax of $1,600.
5. The tax rate is $30%.
Required
a) Prepare the journal adjustments in the books of Cynna to account for
the investment in
Eckers in accordance to IAS 28 for the year ended December 31, 2013,
assuming Cynna does
not prepare consolidated financial statements.

b) Calculate the balance of the investment in Eckers at December 31,

2013 using IFRS.

c) Calculate the balance of the investment in Eckers at December 31,

2013 using ASPE.

Investment in Associate Q2
On January 1, 2012, Belanger acquired a 30% interest in one of its
suppliers, Chime, at a cost of $13,650. The directors of Belanger
believe they exert significant influence over Chime.
Chimes equity at that time was:

Share Capital (20,000 shares) $20,000

Retained Earnings 10,000

All the identifiable assets and liabilities of Chime at January 1, 2012

were recorded at fair values except for some depreciable noncurrent assets with a fair value of $15,000 greater than the carrying
amount. These depreciable assets are expected to have a further
five-year life.

Additional information:
1. At December 31, 2013, Belanger had inventory costing $100,000
on hand that had been purchased by Chime. A profit before tax of
$30,000 has earned on the sale.

2. At December 31, 2012, Belanger had inventory costing $60,000

on hand that had been purchased by Chime. A profit before tax of
$30,000 has earned on the sale.

3. The tax rate is 30%.

4. Revaluation of PPE in 2013 resulted in an increase of $30,000 for
that asset.

An excerpt of the Income Statement of Chime at Dec 31, 2013:

Income before tax
Income tax expense
Net income
R/E (1/1/13)
Dividend paid
Dividend declared
R/E (31/12/13)

$360,000
180,000
180,000
50,000
50,000
50,000

130,000

An excerpt of the Statement of Changes in equity of Chime at Dec 31,

2013:
Share Capital
Cumulative other comprehensive
income
Retained Earnings

$360,000
180,000
180,000

Required:

1. Prepare the journal entries assuming that Belanger does not

prepared consolidated financial statements.
2. Prepared the consolidation adjustments assuming that
Belanger prepares consolidated financial statements.

Hedge Accounting Q1
Dante Ltd. manufactures and distributes transmissions to various
companies in Europe. On April 2, 2013, Dante entered into a sales
contract with a company in Germany to sell 1,000 transmissions.
The contract price is 2,000 per transmission. Five hundred
transmissions are to be delivered on June 30, 2013 and the
remaining half is to be delivered on December 20, 2013. Payment is
due in two instalments with half due on August 31, 2013 and the
remaining half due January 30, 2014. However, the customer has
the right to cancel the contract with 30 days' notice.

On April 2, 2013 Dante entered into a forward contract to hedge

against the Euro exchange rate for 1 million coming due on
January 31, 2014. Dante has a December 31 year end.
Delivery of the transmissions occurred on the dates specified and
the company collected the receivables due and settled the forward
contract January 30, 2014.

The exchange rates were as followed:

Canadian equivalent
of euro

Spot rate

Forward rate to
January 30, 2014

April 2, 2013

1.50

1.54

June 30, 2013

1.51

1.57

August 31, 2013

1.53

1.58

December 20, 2013

1.55

1.56

December 31, 2013

1.54

1.55

January 30, 2014

1.56

settled

Required:

Assume that the forward contract is designated as a cash flow

hedge since the sale is highly probable. Prepare the journal entries
to record the sales and the hedge. Dante reports under IFRS.

Foreign Currency Translation 1

On December 31, Year 1, Precision Manufacturing Inc. (PMI) of Edmonton purchased 100% of the outstanding ordinary shares of Sandora Corp. of Flint, Michigan.
Sandoras comparative statement of financial position and Year 2 income
statement are as follows:

STATEMENT OF FINANCIAL
POSITION
at December
31
Year 2
Plant and equipment (net)

US$ 6,600,000

Year 1
US$ 7,300,000

Inventory

5,700,000

6,300,000

Accounts receivable

6,100,000

4,700,000

780,000

900,000

US$19,180,000

US$19,200,000

US$ 5,000,000

US$ 5,000,000

Retained earnings

7,480,000

7,000,000

Bonds payabledue Dec. 31, Year 6

4,800,000

4,800,000

Current liabilities

1,900,000

2,400,000

Cash

Ordinary shares

US$19,180,000

INCOME
STATEMENT
for the Year Ended December 31,
Year 2

US$19,200,000

Sales
Cost of purchases

US$30,000,000
23,400,000

Change in inventory

600,000

Depreciation expense

700,000

Other expenses

3,800,000
28,500,000

Profit

1,500,000

Additional Information
Exchange rates
Dec. 31, Year 1

US$1 = CDN$1.10

Sep. 30, Year 2

US$1 = CDN$1.07

Dec. 31, Year 2

US$1 = CDN$1.05

Average for Year 2

US$1 =CDN$1.08

Sandora declared and paid dividends on September 30, Year 2.

The inventories on hand on December 31, Year 2, were purchased when the
exchange rate was US$1 = CDN$1.06.

Required:
(a) Assume that Sandora9s functional currency is the Canadian dollar:
(i) Calculate the Year 2 exchange gain (loss) that would result from the translation of
Sandora9s financial statements.
(ii) Translate the Year 2 financial statements into Canadian dollars.
(b) Assume that Sandora9s functional currency is the U.S. dollar:
(i) Calculate the Year 2 exchange gain (loss) that would result from the translation of
Sandora9s financial statements and would be reported in other comprehensive
income.
(ii) Translate the Year 2 financial statements into Canadian dollars.