2. Chapter 5 Consolidation Subsequent To Acquisition (No Intercompany Profits)

3. © 2009 Clarence Byrd Inc.2 Conceptual Alternatives Income Statements (Ponto Owns 70 Percent of Sonto) PontoSonto Sales$500,000$200,000 Cost Of Goods Sold $300,000$110,000 Other Expenses 80,00040,000 Total Expenses $380,000$150,000 Net Income $120,000$50,000

4. © 2009 Clarence Byrd Inc.3 Consolidated Income Statement Proprietary Solution Sales [$500,000 + (70%)($200,000)] $640,000 Cost Of Goods Sold [$300,000 + (70%)($110,000)] $377,000 Other Expenses [$80,000 + (70%)($40,000)] 108,000 Total Expenses $485,000 Consolidated Net Income $155,000

5. © 2009 Clarence Byrd Inc.4 Consolidated Income Statement Parent Company Solution Sales ($500,000 + $200,000) $700,000 Cost Of Goods Sold ($300,000 + $110,000) $410,000 Other Expenses ($80,000 + $40,000) 120,000 Total Expenses $530,000 Combined Income $170,000 Non-Controlling Interest [(30%)($50,000)] 15,000 Net Income $155,000

6. © 2009 Clarence Byrd Inc.5 Consolidated Income Statement Entity Solution Sales ($500,000 + $200,000) $700,000 Cost Of Goods Sold ($300,000 + $110,000) $410,000 Other Expenses ($80,000 + $40,000) 120,000 Total Expenses $530,000 Consolidated Net Income $170,000 Note – entity approach views NCI as an additional class of owner’s equity therefore not on the income statement

7. © 2009 Clarence Byrd Inc.6 CICA Solution Section 1582, 1601,1602 – basically mirror IAS. Section 1582, 1601,1602 – basically mirror IAS. Section 1602 specifically indicates that NCI should be shown as a separate item within Shareholders’ equity (balance sheet)Section 1602 specifically indicates that NCI should be shown as a separate item within Shareholders’ equity (balance sheet) Section 1602 is not as clear on the income statement (in conflict with IFRS regulations if full adoption is not done).Section 1602 is not as clear on the income statement (in conflict with IFRS regulations if full adoption is not done). For purposes of this text – NCI will be presented in the income statement as a distribution of consolidated Net income rather than an expense.For purposes of this text – NCI will be presented in the income statement as a distribution of consolidated Net income rather than an expense.

8. © 2009 Clarence Byrd Inc. 7 Consolidated Income Statement Current CICA solution Sales ($500,000 + $200,000) $700,000 Cost Of Goods Sold ($300,000 + $110,000) $410,000 Other Expenses ($80,000 + $40,000) 120,000 Total Expenses $530,000 Consolidated Net Income of the Enterprise $170,000 Non-Controlling interest (30%)($50,000) (15,000) Controlling interest in Consolidated Net Income $155,000

9. © 2009 Clarence Byrd Inc.8 Classification of Problems Open Trial Balance (Requires more than just a Balance Sheet) Open Trial Balance (Requires more than just a Balance Sheet) Investment at CostInvestment at Cost Investment at EquityInvestment at Equity

10. © 2009 Clarence Byrd Inc.9 Classification of Problems Closed Trial Balance (Requires only a Balance Sheet) Closed Trial Balance (Requires only a Balance Sheet) Investment at CostInvestment at Cost Investment at EquityInvestment at Equity

11. © 2009 Clarence Byrd Inc.10 Classification of Problems Focus on investment at cost Focus on investment at cost Problems involving the equity method are given limited coverage in Chapter 7 Problems involving the equity method are given limited coverage in Chapter 7

12. © 2009 Clarence Byrd Inc.11 Step A Procedures Step A-1 Procedure Eliminate 100 percent of the Investment In Subsidiary account. Step A-1 Procedure Eliminate 100 percent of the Investment In Subsidiary account. Step A-2 Procedure Eliminate 100 percent of all the balances in the subsidiary’s common shareholders’ equity that are present on the acquisition date. Step A-2 Procedure Eliminate 100 percent of all the balances in the subsidiary’s common shareholders’ equity that are present on the acquisition date. Step A-3 Procedure Allocate any debit or credit Differential to 100 percent of fair value change on the identifiable assets, liabilities and goodwill (Bargain Purchase Gain). Step A-3 Procedure Allocate any debit or credit Differential to 100 percent of fair value change on the identifiable assets, liabilities and goodwill (Bargain Purchase Gain). Step A-4 Procedure Record Non-Controlling interest at the time of acquisition. Depending on management’s choice, the amount to be recorded will be either the non- controlling interest’s share of the fair value of the subsidiary’s identifiable assets or, alternatively, the fair value of the non-controlling interest Step A-4 Procedure Record Non-Controlling interest at the time of acquisition. Depending on management’s choice, the amount to be recorded will be either the non- controlling interest’s share of the fair value of the subsidiary’s identifiable assets or, alternatively, the fair value of the non-controlling interest

13. © 2009 Clarence Byrd Inc.12 Step A Procedures Complete coverage in Chapter 4 Complete coverage in Chapter 4 Will be repeated unchanged in every problem Will be repeated unchanged in every problem

14. © 2009 Clarence Byrd Inc.13 Step B Procedures Chapter 4 Coverage Chapter 4 Coverage Step B-1 Procedure Eliminate 100 percent of all intercompany assets and liabilities.Step B-1 Procedure Eliminate 100 percent of all intercompany assets and liabilities. New In Chapter 5 New In Chapter 5 Realization of fair value changesRealization of fair value changes Goodwill impairmentGoodwill impairment Intercompany expenses and revenuesIntercompany expenses and revenues Intercompany dividendsIntercompany dividends

15. © 2009 Clarence Byrd Inc.14 Step C Distribution of subsidiary Retained Earnings since acquisition Distribution of subsidiary Retained Earnings since acquisition Introduced in this ChapterIntroduced in this Chapter Modified in Chapter 6Modified in Chapter 6

16. © 2009 Clarence Byrd Inc. 15 Transition Problems: 2009-2011 Depending on the choices made, a given Canadian company might prepare consolidated financial statements under 3 different sets of standards Depending on the choices made, a given Canadian company might prepare consolidated financial statements under 3 different sets of standards Company may choose early adoption of full set of IFRSCompany may choose early adoption of full set of IFRS Company may choose early adoption of Section 1582, 1601, 1602, while continuing to use other Sections of existing CICA HandbookCompany may choose early adoption of Section 1582, 1601, 1602, while continuing to use other Sections of existing CICA Handbook Company may choose to continue using all Sections of the exisitng CICA Handbook until convergence is required in 2011.Company may choose to continue using all Sections of the exisitng CICA Handbook until convergence is required in 2011.

17. © 2009 Clarence Byrd Inc. 16 Step B(2) Realization of Fair Value Changes Basic Concept Basic Concept Acquisition amounts recorded in Step AAcquisition amounts recorded in Step A As assets are sold or used, the recorded fair value changes become realizedAs assets are sold or used, the recorded fair value changes become realized As the fair value changes become realized, the Step A amounts must be reduced, with the changes taken into incomeAs the fair value changes become realized, the Step A amounts must be reduced, with the changes taken into income

18. © 2009 Clarence Byrd Inc.17 Step B(2) – Current Assets On January 1, 2009, Par acquires 100 percent of the voting shares of Sub. Sub has Inventories with a carrying value of $550,000 and a fair value of $600,000. During the year ending December 31, 2009, the Inventories are sold, with Sub recording a Cost Of Goods Sold of $550,000.

19. © 2009 Clarence Byrd Inc.18 Step B(2) - Inventories Required Adjustment 2009 Required Adjustment 2009 Increases Cost Of Goods Sold and reverses the Step A debit of $50,000 Increases Cost Of Goods Sold and reverses the Step A debit of $50,000 Year Ending December 31, 2009 Cost Of Goods Sold $50,000 Inventories$50,000

20. © 2009 Clarence Byrd Inc.19 Step B(2) - Inventories Required adjustment 2010 Required adjustment 2010 This entry will be required in every subsequent year This entry will be required in every subsequent year Year Ending December 31, 2010 Cost Of Goods Sold $50,000 Inventories$50,000

21. © 2009 Clarence Byrd Inc.20 Step B(2) - Depreciable Assets On January 1, 2009, Par acquires 100 percent of the voting shares of Sub. Sub has a factory building with a carrying value of $810,000 and a fair value of $900,000. The building will be used for 3 years and retired on December 31, 2011 with no salvage value. It is subject to straight line amortization at the rate of $270,000 per year.

22. © 2009 Clarence Byrd Inc.21 Step B(2) - Depreciable Assets Required Adjustment 2009 Required Adjustment 2009 Increases Amortization Expense from $270,000 ($810,000 ÷ 3) to $300,000 ($900,000 ÷ 3). Reduces the Step A allocation from $90,000 to $60,000. Increases Amortization Expense from $270,000 ($810,000 ÷ 3) to $300,000 ($900,000 ÷ 3). Reduces the Step A allocation from $90,000 to $60,000. Year Ending December 31, 2009 Amortization Expense ($90,000 ÷ 3) $30,000 Building (Net) $30,000

23. © 2009 Clarence Byrd Inc.22 Step B(2) - Depreciable Assets Required adjustment 2010 Required adjustment 2010 Reduces the opening Retained Earnings to reflect the 2009 amortization. Increases Amortization Expense from $270,000 ($810,000 ÷ 3) to $300,000 ($900,000 ÷ 3). Reduces the Step A allocation from $90,000 to $30,000. Reduces the opening Retained Earnings to reflect the 2009 amortization. Increases Amortization Expense from $270,000 ($810,000 ÷ 3) to $300,000 ($900,000 ÷ 3). Reduces the Step A allocation from $90,000 to $30,000. Year Ending December 31, 2010 Retained Earnings (Opening) $30,000 Amortization Expense 30,000 Building (Net) $60,000

24. © 2009 Clarence Byrd Inc.23 Step B(2) - Depreciable Assets Required adjustment 2011 Required adjustment 2011 Reduces the opening Retained Earnings to reflect the 2009 and 2010 amortization. Increases Amortization Expense from $270,000 ($810,000 ÷ 3) to $300,000 ($900,000 ÷ 3). Reduces the Step A allocation from $90,000 to Nil. Reduces the opening Retained Earnings to reflect the 2009 and 2010 amortization. Increases Amortization Expense from $270,000 ($810,000 ÷ 3) to $300,000 ($900,000 ÷ 3). Reduces the Step A allocation from $90,000 to Nil. Year Ending December 31, 2011 Retained Earnings (Opening) $60,000 Amortization Expense 30,000 Building (Net) $90,000

25. © 2009 Clarence Byrd Inc.24 Step B(2) Depreciable Assets Required adjustment 2012 Required adjustment 2012 This entry will be required in every subsequent year This entry will be required in every subsequent year Year Ending December 31, 2012 Retained Earnings $90,000 Building (Net) $90,000

26. © 2009 Clarence Byrd Inc.25 Step B(2) - Land On January 1, 2009, Par acquires 100 percent of the voting shares of Sub. Sub has Land with a carrying value of $450,000 and a fair value of $600,000. Sub sells this parcel of Land on December 31, 2012 for $700,000.

27. © 2009 Clarence Byrd Inc.26 Step B(2) - Land As Land does not depreciate, no entry is required in 2009, 2010, or 2011.

28. © 2009 Clarence Byrd Inc.27 Step B(2) - Land Sub’s entry when Land is sold Sub’s entry when Land is sold Year Ending December 31, 2012 Cash$700,000 Gain On Sale Of Land $250,000 Land450,000

29. © 2009 Clarence Byrd Inc.28 Step B(2) - Land Required Consolidation Adjustment Required Consolidation Adjustment Reduce gain to $100,000 ($700,000 - $600,000)Reduce gain to $100,000 ($700,000 - $600,000) Reverse the Step A allocation to LandReverse the Step A allocation to Land Year Ending December 31, 2012 Gain On Sale Of Land $150,000 Land$150,000

30. © 2009 Clarence Byrd Inc.29 Step B(3) – Goodwill Impairment Goodwill is no longer subject to amortization Goodwill is no longer subject to amortization Must be tested annually for impairment Must be tested annually for impairment If impaired: The Step A allocation must be adjusted and charged to income If impaired: The Step A allocation must be adjusted and charged to income

31. © 2009 Clarence Byrd Inc.30 Step B(4) – Intercompany Expenses and Revenues Must be eliminated for purposes of consolidation Must be eliminated for purposes of consolidation Unless an unrealized profit is involved, the elimination does not change controlling interest in Net Income or the Non- Controlling Interest in income Unless an unrealized profit is involved, the elimination does not change controlling interest in Net Income or the Non- Controlling Interest in income

32. © 2009 Clarence Byrd Inc.31 Step B(4) – Intercompany Expenses and Revenues During 2009, a subsidiary pays interest of $50,000 to its parent During 2009, a subsidiary pays interest of $50,000 to its parent Required adjustment: Required adjustment: Year Ending December 31, 2009 Interest Revenue (Parent’s) $50,000 Interest Expense (Subsidiary’s) $50,000

33. © 2009 Clarence Byrd Inc.32 Step B(5) – Intercompany Dividends Required Adjustments Required Adjustments Eliminate the Dividend Revenue recorded by the parentEliminate the Dividend Revenue recorded by the parent Eliminate 100 percent of the Dividends Declared by the subsidiaryEliminate 100 percent of the Dividends Declared by the subsidiary Statement Of Retained Earnings contains parent company approach income (doesn’t include minority share) Statement Of Retained Earnings contains parent company approach income (doesn’t include minority share) This means minority dividends cannot be shown in the Statement of Retained Earnings This means minority dividends cannot be shown in the Statement of Retained Earnings Minority share of dividends debited to the Non-Controlling Interest in the Balance SheetMinority share of dividends debited to the Non-Controlling Interest in the Balance Sheet

34. © 2009 Clarence Byrd Inc.33 Step C – Concepts Step A: Eliminate the non- controlling share of Retained Earnings At Acquisition Step A: Eliminate the non- controlling share of Retained Earnings At Acquisition Step B: Make adjustments to the balance of Retained Earnings since acquisition Step B: Make adjustments to the balance of Retained Earnings since acquisition Step C: Allocate the balance since acquisition to Non-Controlling Interest and consolidated Retained Earnings Step C: Allocate the balance since acquisition to Non-Controlling Interest and consolidated Retained Earnings

35. © 2009 Clarence Byrd Inc.34 Step C Schedule Beginning Balance Of Retained Earnings $1,200,000 Step A Elimination ( 800,000) Balance Since Acquisition $ 400,000 Step B Adjustments (Fair Value Changes and Goodwill Impairment) and Goodwill Impairment) ( 120,000) Balance To Be Distributed $ 280,000 To Non-Controlling Interest (20%) ( 56,000) To Consolidated Retained Earnings $ 224,000 *Numbers created for this example

36. © 2009 Clarence Byrd Inc.35 Step C Schedule This schedule will be modified in Chapter 6 to deal with unrealized intercompany profits This schedule will be modified in Chapter 6 to deal with unrealized intercompany profits

37. © 2009 Clarence Byrd Inc.36 Preparing The Statements General Approach General Approach Add parent and subsidiary figuresAdd parent and subsidiary figures Add or subtract the Step A and Step B and Step C adjustmentsAdd or subtract the Step A and Step B and Step C adjustments

38. © 2009 Clarence Byrd Inc.37 Definitional Calculations Useful for checking figures arrived at through statements Useful for checking figures arrived at through statements In problems or exams, this may be the only requirement In problems or exams, this may be the only requirement

39. © 2009 Clarence Byrd Inc.38 Consolidated Net Income – Definitional Calculation Parent Company Income $1,000,000 Less: Intercompany Dividends ( 60,000) Balance $ 940,000 Subsidiary Net income $220,000 Fair Value and Goodwill adjustments ( 125,000) $95,000 Consolidated Net Income Of The Enterprise $1,035,000 Non-Controlling interest (20%)(95,000) ( 19,000) Consolidated Net Income $1,016,000 *Numbers created for this example

40. © 2009 Clarence Byrd Inc.39 Consolidated Retained Earnings – Definitional Calculation Parent Company Closing Retained Earnings $3,500,000 Add: Parent’s Share Of Subsidiary Retained Earnings Since Acquisition adjusted for fair value and goodwill adjustments (Step B) Retained Earnings Since Acquisition adjusted for fair value and goodwill adjustments (Step B)440,000 Consolidated Retained Earnings $3,940,000 *Numbers created for this example

41. © 2009 Clarence Byrd Inc.40 Non-Controlling Interest Calculation - Balance Sheet Using the procedures Using the procedures Add: Step A AllocationAdd: Step A Allocation Subtract: non-controlling dividendsSubtract: non-controlling dividends Add: Non-controlling interest in incomeAdd: Non-controlling interest in income Add: Step C allocationAdd: Step C allocation Direct Calculation May Be Easier Direct Calculation May Be Easier If NCI on identifiable, multiply NCI percent times the subsidiary’s Shareholder’s Equity after Step B adjustments.If NCI on identifiable, multiply NCI percent times the subsidiary’s Shareholder’s Equity after Step B adjustments. Doesn’t work if NCI based on its fair value.Doesn’t work if NCI based on its fair value.

42. © 2009 Clarence Byrd Inc.41 Subsidiary Preferred Shares If held intercompany: they will be eliminated If held intercompany: they will be eliminated If outstanding: They are a component of the Non-Controlling Interest in the Balance Sheet If outstanding: They are a component of the Non-Controlling Interest in the Balance Sheet

43. © 2009 Clarence Byrd Inc.42 Application of the Equity Method Paragraph 3051.08 Investment income as calculated by the equity method should be the amount necessary to increase or decrease the investor's income to that which would have been recognized if the results of the investee's operations had been consolidated with those of the investor. (August, 1978) Paragraph 3051.08 Investment income as calculated by the equity method should be the amount necessary to increase or decrease the investor's income to that which would have been recognized if the results of the investee's operations had been consolidated with those of the investor. (August, 1978) “One Line Consolidation”: “One Line Consolidation”: All consolidation adjustments are treated as adjustments of investment incomeAll consolidation adjustments are treated as adjustments of investment income No elimination of intercompany assets, liabilities, expenses, or revenuesNo elimination of intercompany assets, liabilities, expenses, or revenues

44. © 2009 Clarence Byrd Inc.43 Investment Income Under The Equity Method Reported Investment Income (All Sources) $200,000 Less: Intercompany Dividends ( 80,000) $120,000 Parent’s Equity In Subsidiary Net Income adjusted for fair value and goodwill adjustments for current year 105,000 Equity Method Investment Income $225,000 *Numbers created for this example

45. © 2009 Clarence Byrd Inc.44 Investment Account Balance Under The Equity Method Investment Cost $1,200,000 Investor’s Equity In Investee Retained Earnings Since Acquisition adjusted for fair value and goodwill adjustments 175,000 Equity Method Investment Account Balance $1,375,000 *Numbers created for this example

46. © 2009 Clarence Byrd Inc.45 Consolidated Statement Of Cash Flows In general, the procedures are the same for consolidated Cash Flow Statements as for single entity Cash Flow Statements In general, the procedures are the same for consolidated Cash Flow Statements as for single entity Cash Flow Statements Preparation requires a consolidated Net Income figure Preparation requires a consolidated Net Income figure

47. © 2009 Clarence Byrd Inc.46 Consolidated Statement Of Cash Flows Differences Differences Cash flows from operation must included controlling and non-controlling interests.Cash flows from operation must included controlling and non-controlling interests. The dividend figure in this statement (all dividends of parent and sub) will be different than the dividend figure in the Statement Of Retained Earnings (excludes dividends to non-controlling interest)The dividend figure in this statement (all dividends of parent and sub) will be different than the dividend figure in the Statement Of Retained Earnings (excludes dividends to non-controlling interest)

48. © 2009 Clarence Byrd Inc.47 Consolidated Statement Of Cash Flows Parent acquires additional subsidiary shares Parent acquires additional subsidiary shares For cash from sub: an intercompany transaction that would be eliminatedFor cash from sub: an intercompany transaction that would be eliminated For cash from non-controlling shareholders: an outflow of consolidated cashFor cash from non-controlling shareholders: an outflow of consolidated cash Similar analysis for sales of shares Similar analysis for sales of shares

49. © 2009 Clarence Byrd Inc.48 Section 1540 on Business Combinations Paragraph 1540.42 The aggregate cash flows arising from each of business combinations accounted for using the purchase method (acquisition method) and disposals of business units should be presented separately and classified as cash flows from investing activities. (August, 1998) Paragraph 1540.42 The aggregate cash flows arising from each of business combinations accounted for using the purchase method (acquisition method) and disposals of business units should be presented separately and classified as cash flows from investing activities. (August, 1998)

50. © 2009 Clarence Byrd Inc.49 Section 1540 on Business Combinations Paragraph 1540.43 An enterprise should disclose, in aggregate, in respect of both business combinations accounted for using the purchase method and disposals of business units during the period each of the following: Paragraph 1540.43 An enterprise should disclose, in aggregate, in respect of both business combinations accounted for using the purchase method and disposals of business units during the period each of the following: (a) the total purchase or disposal consideration; (a) the total purchase or disposal consideration; (b) the portion of the purchase or disposal consideration composed of cash and cash equivalents; (b) the portion of the purchase or disposal consideration composed of cash and cash equivalents; (c) the amount of cash and cash equivalents acquired or disposed of; and (c) the amount of cash and cash equivalents acquired or disposed of; and (d) the total assets, other than (d) the total assets, other than Cash or cash equivalents, and total liabilities acquired or disposed of. (August, 1998) Cash or cash equivalents, and total liabilities acquired or disposed of. (August, 1998) IAS 7 P40 essentially contains the same basic requirementsIAS 7 P40 essentially contains the same basic requirements

51. © 2009 Clarence Byrd Inc.50 Step Acquisitions Section 1582 (based on IFRSs) requires a completely different approach. Section 1582 (based on IFRSs) requires a completely different approach. Paragraphs 1582.41 and 1582.42 Paragraphs 1582.41 and 1582.42

52. © 2009 Clarence Byrd Inc. 51 Step Acquisition When Control Acquired When Control Acquired Re-measure existing investment at fair valueRe-measure existing investment at fair value Record gain or loss resulting from re-measurementRecord gain or loss resulting from re-measurement If amounts have been allocated to comprehensive income – treat as you normally would on disposalIf amounts have been allocated to comprehensive income – treat as you normally would on disposal

53. © 2009 Clarence Byrd Inc. 52 Step Acquisition When control is acquired, account for total investment as a new business combination When control is acquired, account for total investment as a new business combination Recognize 100 percent of fair value changes on identifiable assetsRecognize 100 percent of fair value changes on identifiable assets Recognize NCI under either acceptable alternativeRecognize NCI under either acceptable alternative

54. © 2009 Clarence Byrd Inc.53 Summary Of Consolidation Procedures Step A-1 Procedure Step A-1 Procedure Eliminate 100 percent of the Investment In Subsidiary account. Step A-2 Procedure Step A-2 Procedure Eliminate 100 percent of all the acquisition date balances in the subsidiary’s shareholders’ equity (includes both contributed capital and retained earnings). Step A-3 Procedure Step A-3 Procedure Allocate any debit or credit Differential to 100 percent of fair value changes on identifiable assets, liabilities and Goodwill (Bargain Purchase Gain). The amount allocated to Goodwill or Bargain Purchase Gain is dependent on the measurement used for the non-controlling interest. Step A-4 Procedure Step A-4 Procedure Record Non-Controlling interest at the time of acquisition. Depending on management’s choice, the amount to be recorded will be either the non-controlling interest’s share of the fair value of the subsidiary’s identifiable net assets or, alternatively, the fair value of the non-controlling interest.

55. © 2009 Clarence Byrd Inc.54 Summary Of Consolidation Procedures Step B-1 Procedure Step B-1 Procedure Eliminate 100 percent of all intercompany assets and liabilities. Step B-2 Procedure Step B-2 Procedure Give recognition to the post-acquisition realization of acquisition date fair value changes on assets and liabilities that have been used up or sold during the post-acquisition period. To the extent that this realization occurred in prior periods, recognition will require an adjustment of the opening retained earnings of the subsidiary. Alternatively, if the realization occurred in the current period, the adjustment will be to the subsidiary’s current period expenses, revenues, gains, or losses. Step B-3 Procedure Step B-3 Procedure Recognize current and cumulative goodwill impairment losses that have been measured since the acquisition of the subsidiary and the initial recognition of the goodwill balance. To the extent that the impairment took place during the current period, the measured amount will be charged to Goodwill Impairment Loss. To the extent that it occurred in prior periods, it will be charged to retained earnings.

56. © 2009 Clarence Byrd Inc.55 Summary Of Consolidation Procedures Step B-4 Procedure Step B-4 Procedure Eliminate 100 percent of all intercompany expenses and revenues. Step B-5 Procedure. Step B-5 Procedure Eliminate 100 percent of subsidiary dividends declared. The parent’s share of this amount will be deducted from the revenues of the parent company and the non-controlling interest’s share of this amount will be deducted from the Non-Controlling Interest in the Balance Sheet.

57. © 2009 Clarence Byrd Inc.56 Summary Of Consolidation Procedures Step C-1 Procedure Step C-1 Procedure Eliminate the subsidiary’s adjusted Retained Earnings since acquisition and allocate the appropriate amounts of this balance to the Non-Controlling interest in the Balance sheet and to Consolidated Retained Earnings.

58. © 2009 Clarence Byrd Inc.57 Summary Of Definitional Calculations Identifiable Assets And Liabilities Identifiable Assets And Liabilities The amount to be included in the consolidated Balance Sheet for any identifiable asset or liability is calculated as follows: 100 percent of the carrying value of the identifiable asset (liability) on the books of the parent company at the Balance Sheet date; plus 100 percent of the carrying value of the identifiable asset (liability) on the books of the subsidiary company at the Balance Sheet date; plus (minus) 100 percent of the acquisition date fair value increase (decrease) on the asset (liability); minus (plus) amortization or realization of the fair value increase (decrease) on the asset (liability) for the period since acquisition to the current Balance Sheet date.

59. © 2009 Clarence Byrd Inc.58 Summary Of Definitional Calculations Goodwill Goodwill The Goodwill to be recorded in the consolidated Balance Sheet is equal to: The sum of the consideration paid for the controlling interest and the value assigned to the acquisition date non-controlling interest; minus The acquisition date fair value of the subsidiary’s identifiable net assets

60. © 2009 Clarence Byrd Inc.59 Summary Of Definitional Calculations Non-Controlling Interest - Balance Sheet there are 2 alternatives: Non-Controlling Interest - Balance Sheet there are 2 alternatives: The Non-Controlling Interest can be based on the non-controlling shareholders’ percentage interest in the fair value of the identifiable net assets in the subsidiaryThe Non-Controlling Interest can be based on the non-controlling shareholders’ percentage interest in the fair value of the identifiable net assets in the subsidiary The Non-Controlling Interest can be based on the fair value of the non-controlling shareholders’ interest in the enterprise. The estimate of this value can be based on the fair value of the controlling interest as measured by the investment cost or, alternatively, through some form of separate measurementThe Non-Controlling Interest can be based on the fair value of the non-controlling shareholders’ interest in the enterprise. The estimate of this value can be based on the fair value of the controlling interest as measured by the investment cost or, alternatively, through some form of separate measurement

61. © 2009 Clarence Byrd Inc.60 Summary Of Definitional Calculations Contributed Capital. Contributed Capital The Contributed Capital to be recorded in the consolidated Balance Sheet is equal to the contributed capital from the single entity Balance Sheet of the parent company.

62. © 2009 Clarence Byrd Inc.61 Summary Of Definitional Calculations Retained Earnings Retained Earnings The Retained Earnings amount to be included in the consolidated Balance Sheet is calculated as follows: 100 percent of the Retained Earnings of the parent company; plus (minus) the parent company’s share of the subsidiary’s Retained Earnings (Deficit) since acquisition. The adjustments to this balance would be for the accumulated amounts of fair value changes that have been realized since the acquisition date through use or sale. In addition, if the acquisition date non- controlling interest has been recorded at fair value, the adjustments would include any goodwill impairment that has been recognized since acquisition. If the acquisition date non-controlling interest was measured on the basis of identifiable assets only, any goodwill impairment would be subtracted in full against the sum fo the first two items.

63. © 2009 Clarence Byrd Inc.62 Summary Of Definitional Calculations Revenue Revenue The amount of any revenue to be included in the consolidated Income Statement is calculated as follows: 100 percent of the amount reported in the parent company’s financial statements; plus 100 percent of the amount reported in the subsidiary’s financial statements; minus 100 percent of any intercompany amounts included in the parent or subsidiary figures; plus (minus) 100 percent of any fair value changes realized during the period through usage or sale of subsidiary assets. It would be unusual for fair value realizations to be related to revenues. However, it could happen. For example, amortization of a fair value change on a long-term receivable would be treated as an adjustment of interest revenue. Revenue Revenue The amount of any revenue to be included in the consolidated Income Statement is calculated as follows: 100 percent of the amount reported in the parent company’s financial statements; plus 100 percent of the amount reported in the subsidiary’s financial statements; minus 100 percent of any intercompany amounts included in the parent or subsidiary figures; plus (minus) 100 percent of any fair value changes realized during the period through usage or sale of subsidiary assets. It would be unusual for fair value realizations to be related to revenues. However, it could happen. For example, amortization of a fair value change on a long-term receivable would be treated as an adjustment of interest revenue.

64. © 2009 Clarence Byrd Inc.63 Summary Of Definitional Calculations Expense Expense The amount of any expense to be included in the consolidated Income Statement is calculated as follows: 100 percent of the amount reported in the parent company’s financial statements; plus 100 percent of the amount reported in the subsidiary’s financial statements; minus 100 percent of any intercompany amounts included in the parent or subsidiary figures; plus (minus) 100 percent of any fair value changes realized during the period through usage or sale of subsidiary assets.

65. © 2009 Clarence Byrd Inc.64 Summary Of Definitional Calculations Goodwill. Goodwill Impairment Loss If the required annual test of goodwill for impairment determines that any impairment has occurred during the current period, this amount will be recorded as a Goodwill Impairment Loss.

66. © 2009 Clarence Byrd Inc.65 Summary Of Definitional Calculations Consolidated Net Income Of The Enterprise Consolidated Net Income Of The Enterprise can be calculated as follows: 100 percent of the parent company’s Net Income, excluding dividends received from the subsidiary; plus (minus) 100 percent of the adjusted Net Income of the subsidiary. The adjustments are for 100 percent of the amounts charges to income for fair value changes realized during the period through use or sale. In addition, if the acquisition date non- controlling interest has been recorded at fair value, the adjustments would include any goodwill impairment that has been recognized during the period. If the acquisition date non-controlling interest was measured on the basis of identifiable assets only, any goodwill impairment recognized during the period would be subtracted in full against the sum of the first two items.

67. © 2009 Clarence Byrd Inc.66 Summary Of Definitional Calculations Non-Controlling Interest - Income Statement The non-controlling interest in the consolidated Income Statement is an amount equal to the non-controlling interest’s ownership percentage of the adjusted Net Income of the subsidiary. Non-Controlling Interest - Income Statement The non-controlling interest in the consolidated Income Statement is an amount equal to the non-controlling interest’s ownership percentage of the adjusted Net Income of the subsidiary. The adjustments are for 100 percent of the amounts charged to income for fair value changes realized during the period through use or sale. In addition if the acquisition date non-controlling interest has been recorded at fair value, the adjustments would include any goodwill impairment that has been recognized during the period The adjustments are for 100 percent of the amounts charged to income for fair value changes realized during the period through use or sale. In addition if the acquisition date non-controlling interest has been recorded at fair value, the adjustments would include any goodwill impairment that has been recognized during the period

68. © 2009 Clarence Byrd Inc.67 Summary Of Definitional Calculations Controlling Interest - Income Statement Controlling Interest - Income Statement The controlling interest in consolidated Net Income is simply the Consolidated Net Income Of The Enterprise, less the Non-Controlling Interest in that income. The controlling interest in consolidated Net Income is simply the Consolidated Net Income Of The Enterprise, less the Non-Controlling Interest in that income.

69. © 2009 Clarence Byrd Inc.68 International Convergence Standards Standards IFRS No. 3, Business CombinationsIFRS No. 3, Business Combinations IAS No. 27, Consolidated And Separate Financial StatementsIAS No. 27, Consolidated And Separate Financial Statements CICA Sections 1582, 1601, 1602 largely converge with these standards. CICA Sections 1582, 1601, 1602 largely converge with these standards.

70. © 2009 Clarence Byrd Inc.69