IFRS 10 (Group Statements) Learning Outcomes • To compile the group financial statements of a parent and a wholly-owned subsidiary. • Define a parent and a subsidiary. • Explain the difference between simple and complex groups. • Describe the provisions regarding accounting and disclosure as they relate to group financial statements of companies. • Explain the meaning of control and identify a parent- subsidiary relationship between companies. • To prepare consolidated financial statements in accordance with IFRS 10. Introduction
•In many countries, company law requires
that the results of a group should be presented as a whole. •The results of a group should be consolidated. •A group of companies consists of a parent company and one or more subsidiary companies which are controlled by the parent. Group accounts
•Many large businesses consist of several
companies controlled by one central or administrative company. •Together these companies are called a group. •The parent or holding company will own some shares or all of the shares in the other companies, called subsidiaries. PARENT-SUBSIDIARY RELATIONSHIP
Control is presumed to exist when a parent holds,
more than half of the voting power of an entity.
ABC LTD
80% 100% PARENT-SUBSIDIARY RELATIONSHIP
BAC LTD CAB LTD
Both entities (BAC LTD and CAB LTD) are the
subsidiaries of ABC LTD, as the acquirer holds more than half of the voting power. 18 April 2024 Definitions
•Control. An investor controls an investee
when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through power over the investee. (IFRS 10) Definitions
•Power. Existing rights that give the current ability
to direct the relevant activities of the investee. (IFRS 10) •Subsidiary. An entity that is controlled by another company (IFRS 10) •Parent. An entity that controls one or more subsidiaries. (IFRS 10) •Group. A parent and all its subsidiaries. (IFRS 10) Investments in subsidiaries
•The important point here is control. In most
cases, this will involve the holding company or parent owning a majority of the ordinary shares in the subsidiary. •There are circumstances, however, when the parent may own only a minority of the voting power in the subsidiary, but the parent still has control. Investments in subsidiaries
•IFRS 10 provides a definition of control and
identifies three separate elements of control: •An investor controls an investee if and only if it has all of the following: 1. Power over the investee. 2. Expose to, or rights to, variable returns from its involvement with the investee; and Investments in subsidiaries
3. The ability to use its power over the
investee to affect the amount of the investor’s returns. •If there are changes to one or more of these three elements of control, then an investor should reassess whether it controls an investee. Investments in subsidiaries
•Power can be obtained directly from the
ownership of the majority of voting rights or can be derived from other rights, such as: •Rights to appoint, reassign or remove key management personnel who can direct the relevant activities Accounting treatment in group accounts
•IFRS 10 requires a parent to present
consolidated financial statements, in which accounts of the parent and subsidiary (or subsidiaries) are combined and presented as a single entity. Consolidated and separate financial statements
•Consolidated financial statements: The
financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity Consolidated and separate financial statements
•When a parent issues consolidated
financial statements, it should consolidate all subsidiaries, both foreign and domestic. Different reporting dates
•In most cases, all group companies will
prepare accounts to the same reporting date. •It may happen that one subsidiary may prepare accounts to a different reporting date from the parent and the bulk of other subsidiaries in the group. Different reporting dates
•In such cases the subsidiary may
prepare additional statements to the reporting date of the rest of the group, for consolidation purposes. If this is not possible the subsidiary accounts may still be used for consolidation provided the gap between the reporting date is three months or less. Different reporting dates
•Where a subsidiary’s accounts are
drawn up to a different reporting date, adjustments should be made for the effects of significant transactions or other events that occur between that date and the parent’s reporting date. Date of inclusion/ exclusion
• IFRS 10 requires the results of subsidiary
undertakings to be included in the consolidated financial statements from the date of acquisition (i.e. the date on which the investor obtains control of the investee) to and excluded from the date of ‘disposal’, the date the investor loses control of the investee. Date of inclusion/ exclusion
•Once an investment is no longer a
subsidiary, it should be treated as an associate under IAS 28 or as an investment under IFRS 9. Content of group accounts and group structure
•Consolidated accounts are one form of
group accounts which combines the information contained in the separate accounts of a holding company and its subsidiaries as if they were the accounts of a single entity. •Group accounts and consolidated accounts are terms often used Content of group accounts and group structure
•In simple terms a set of consolidated
accounts is prepared by adding together the assets and liabilities of the parent company and each subsidiary. •The whole of the assets and liabilities of each company are included, even though some subsidiaries may only be partly owned. Content of group accounts and group structure
•The equity and liabilities section of the
statement of financial position will indicate how much of the net assets are attributable to the group and how much to outside investors in partly owned subsidiaries. •These outside investors are known as the non-controlling interest. Content of group accounts and group structure
•Non-controlling interest: The equity in a
subsidiary not attributable, directly or indirectly, to a parent. •Non controlling interest should be presented in the consolidated statement of financial position within equity, separately from the parent shareholders’ equity. Basic procedure
a) The carrying amount of the parent’s
investment in each subsidiary and the parent’s portion of equity of each subsidiary are eliminated or cancelled. b) Non controlling interest in the net income of consolidated subsidiaries are adjusted against group income, to arrive at the net income attributable to the owners of the parent. Basic procedure
c) Non controlling interests in the net
assets of consolidated subsidiaries should be presented separately in the consolidated statement of financial position. d) Other matters to be dealt with include the following: Basic procedure •Goodwill on consolidation should be dealt with according to IFRS 3. •Dividend paid by a subsidiary must be accounted for. •IFRS 10 states that all intragroup balances and transactions, and the resulting unrealised profits, should be eliminated in full. •Unrealised losses resulting from intragroup transactions should also be eliminated unless cost can be recovered. To be explained later as we progress.
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