By Arthur S.

Cayanan

Copyright Arthur S. Cayanan 2013

Revenue recognition policies Matching of investing and financing activities Accounting for real estate for sale and land held for future development Classification of accounts receivable Accounting for investment properties Profitability ratios Liquidity ratios IFRIC 15

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Accrual method is applied when completed projects are sold and there are no uncertainties with collection. Percentage of completion method is used when the real estate company has material obligations under the sales contract to complete the project after the property is sold. Installment method is used when there are uncertainties with collections. Under this method, gross profit is recognized upon collection.

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Estimate streams of cash flows from the real estate project Determine the long-term sources of financing For long-term debt, determine the maturity dates through the notes to financial statements

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Total debt/ Total assets Long-term financing/ Total assets

Long-term liabilities/ Total assets

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Real estate for sale inventories Land for future development - inventories

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Cost model Fair value model unrealized gains and losses are reported in the income statement

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Determine revenues and profits generated from each segment If the real estate company leases some of its real estate properties, determine the return on property value. Return on property value = (Annual rental income)/ (Market value of the property)

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Quick ratio = (Cash + trading account securities + current AR)/ Current liabilities Adjusted quick ratio = (Cash + trading account securities)/ Current liabilities

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Developer transfers to the buyer control and significant risks and rewards of ownership of the work in progress in its current state as construction progresses.

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Copyright Arthur S. Cayanan 2013

Valuation of property, plant and equipment used in the power distribution (cost vs revaluation) Revenues and system losses Operating Expenses Maximum Annual Price (MAP) Electric Power Industry Reform Act (EPIRA) or R.A. 9136 Financial Ratios

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Pass-through charges Distribution charge or wheeling charge

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System loss charge represents the recovery of the cost of power lost due to technical and non-technical losses which is pegged at 9.5% of purchased power for private distribution utilities and 14% for electric cooperatives. The 9.5% cap for MERALCO is based on Republic Act 7832 or Anti-Pilferage of Electricity and Theft of Electric Transmission Lines/Materials Act of 1994
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The MAP and the Annual Revenue Requirement (ARR) is approved by the Energy Regulation Commission (ERC). The following are among the factors considered: Operating expenses Regulatory depreciation Regulatory asset base Working capital allowance Corporate income tax Capital expenditures Weighted average cost of capital (WACC)

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Power distribution companies can also be generation companies but there is a limit as regards their generation capacity.

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Interest coverage ratios Cash flow adequacy ratios Profitability ratios Capital structure and leverage ratios Operations and maintenance expense/revenues ratio

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EBIT Interest expense

EBITDA Interest expense

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Funds from operations Total debt Free operating cash flow Total debt
Free operating cash flow is cash provided by operating activities less capital expenditures, loan repayment, and customers refund in the case of MERALCO.

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EBITDA Sales
For MERALCO, sales should only refer to distribution charge

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Long-term debt Total capital Debt Equity

Total debt Total capital

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Operations and maintenance expense Distribution charge

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By Arthur S. Cayanan

Copyright Arthur S. Cayanan 2013

Introduction Definition of Terms Control When is parent allowed not to consolidate? Accounting for business combination How is consolidation done? Some Important Disclosure Requirements Issues on Consolidated Financial Statements

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Consolidated financial statements - are the financial statements of a group presented as those of a single economic entity. Group is a parent and all its subsidiaries. Parent - is an enterprise that has one or more subsidiaries. Subsidiary - is an entity, including an unincorporated entity such as partnership, that is controlled by another entity (known as the parent). Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Non-controlling interest is the equity in a subsidiary not attributable, directly or indirectly, to a parent.

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Presumed to exist when a parent owns more than half of the voting power of an entity

May also exist when the parent owns half or less of the voting power of an entity when there is:
a. Power over more than half of the voting rights by virtue of an agreement with other investors. b. Power to govern the financial and operating policies of the entity under a statue or an agreement. c. Power to appoint or remove the majority of the members of the board of directors or equivalent governing body and control d. Power to cast the majority of votes at meetings of the BOD or equivalent governing body and control of the entity is by that board or body.

PAS 27 par. 13

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Alpha Co. owns 80% of Beta Co. and 30% of Gamma Co. Beta Co. owns 40% of Gamma Co. Question: What percentage of Beta Co. and Gamma Co. is effectively owned by Alpha Co.?

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The parent is itself a wholly-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not preparing consolidated financial statements. The parents debt or equity instruments are not traded in a public market ( a domestic or foreign stock exchange or an over-the-counter market)

PAS 27 par. 10

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The parent did not file, or is in the process of filing its financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market.

The ultimate or any intermediate parent of the parent produces consolidated financial statements available for public use that comply with International Financial Reporting Standards

PAS 27 par. 10

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The acquisition method accounts for a business combination as the acquisition of one enterprise by another. The acquiring enterprise records at its cost the acquired assets less liabilities assumed.

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A difference between the cost of an acquired enterprise and the sum of the fair values of tangible and identifiable intangible assets less liabilities assumed shall be recorded as goodwill. The reported income of an acquiring enterprise shall include the operations of the acquired enterprise after acquisition, based on the cost to the acquiring enterprise.

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On December 31, Year 1, Parent Corporation acquired 90% of Subsidiary Company common stock for PHP270,000. At that time, the book value of Subsidiary Companys common stock was PHP300,000.
Required: Prepare the separate balance sheets of Parent Corporation and Subsidiary Company immediately after the acquisition.

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PARENT CORPORATION AND SUBSIDIARY Separate Balance Sheets (Prior to Business Combination) December 31, Year 1 Assets Parent Subsidiary Cash 500,000 50,000 Accounts receivable 300,000 100,000 Inventories 500,000 200,000 Plant assets,net of depreciation 1,500,000 500,000 Total assets 2,800,000 850,000 Liabilities and Stockholders' Equity Accounts payable Long term liabilities 450,000 Common stock, P10 par Additional paid in capital Retained earnings Total liabilities and stockholders' equity 850,000 250,000 750,000 1,000,000 500,000 300,000 100,000 50,000 150,000 100,000

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2,800,000

PARENT CORPORATION AND SUBSIDIARY Separate Balance Sheets (After Business Combination) December 31, Year 1 Assets Cash Accounts receivable Inventories Investment in Subsidiary Co. Common Plant assets,net of depreciation Total assets Liabilities and Stockholders' Equity Accounts payable Long term liabilities Common stock, P10 par Additional paid in capital Retained earnings Total liabilities and stockholders' equity 250,000 750,000 1,000,000 500,000 300,000 2,800,000 100,000 450,000 100,000 50,000 150,000 850,000 Parent 230,000 300,000 500,000 270,000 1,500,000 Subsidiary 50,000 100,000 200,000

500,000

2,800,000

850,000

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PARENT CORPORATION AND SUBSIDIARY COMPANY Consolidation - Line by Line December 31, Year 1 Parent Cash Accounts receivable Inventories Plant assets, net of depreciation 230,000 300,000 500,000 1,500,000 Subsidiary Consolidated 50,000 100,000 200,000 500,000 280,000 400,000 700,000 2,000,000

Accounts payable Long term liabilities

250,000 750,000

100,000 450,000

350,000 1,200,000

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PAR EN T C O R PO R A TIO N AN D SU BSID IAR Y C onsolidated Balance Sheet D ecem ber 31, Year 1 A ssets C ash Accounts receivable Inventories Plant assets, net of depreciation Total assets Liabilities and Stockholders' Equity Accounts payable Long term liabilities M inority interest in net assets of subsidiary C om m on stock, P10 par Additional paid in capital R etained earnings 350,000 1,200,000 30,000 1,000,000 500,000 300,000 280,000 400,000 700,000 2,000,000

3,380,000

Total liabilities and stockholders' 3,380,000 equity Copyright Arthur S. Cayanan 2013

If the parent company and the subsidiary are considered as one economic entity, then these inter-company account receivables and payables must be eliminated. Illustration On December 31, Yr. 2, Subsidiary Co. borrowed P100,000 from Parent Corp. Question: How will this transaction be reflected in the consolidated financial statements?

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For inter-company sale of merchandise, profit should only be recognized when the merchandise is finally sold to third parties. Any profit related with the unsold merchandise must be eliminated.

The reason for this is that if the parent company and its subsidiary are considered as one economic entity, then inter-company sale of merchandise is just like a mere transfer of the merchandise from one division to another.

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In Year 3, Parent Corporation bought P300,000 worth of merchandise from Subsidiary Company. Fifty thousand of this amount remained unsold as of the end of the year. This sale had a cost of P210,000 to Subsidiary Company. Required: Determine the effects on gross profit and cost of sales.

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Nature and extent of any significant restrictions on the ability of subsidiaries to transfer funds to the parent in the form of cash dividends or to repay loans or advances (PAS 27 par. 41d)

A schedule that shows the effects of any changes in a parent ownerships interest in a subsidiary that do not result in a loss of control on the equity attributable to owners of the parent (PAS 27 par. 41e)

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If control of a subsidiary is lost, the parent shale disclose the gain or loss, if any, recognized in accordance with par. 34, and: (i) the portion of that gain or loss attributable to recognizing any investment retained in the former subsidiary at its fair value at the date when control is lost (ii) the line item(s) in the statement of comprehensive income in which the gain or loss is recognized (if not presented separately in the statement of comprehensive income) (PAS 27 par 41f)

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The fact that the financial statements are separate financial statements and that the exemption from consolidation has been used. A list of significant investments in subsidiaries and proportion of ownership. A description of the method used to account for significant subsidiaries

PAS 27 par. 42

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List of companies included in the consolidated financial statements and the percentage of ownership. Subsidiaries not consolidated and the reasons for not consolidating. Breakdown of the loans, e.g parents loans and subsidiaries loans. Goodwill Separate financial statements of the parent and the subsidiaries
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Nature and amounts of related party transactions Segment information Nature and amounts of guarantees to subsidiaries

Commitments and other contingent liabilities

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