Topic 3 Consolidated Financial Statement

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Financial Accounting 3A

MFAC73316
2024 Class

TOPIC 3:

Consolidated Financial Statements


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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