Introduction to Group Financial

Statements
 INTRODUCTION TO CONSOLIDATION

• Major definitions used in consolidation.

• The treatment of associates in consolidated
financial statements
• Examination of the consolidated statement of
financial position
• Examination of the consolidated statement of
profit or loss and other comprehensive
income.
 The Concept of a Group
• Many large businesses consist of several
companies controlled by one central or
administrative company.
– Together these companies are called a group. The
controlling company, called the parent or holding
company, will own some or all of the shares in the
other companies, referred to as subsidiaries.
 Cont’d
• Reasons for one company to buy all or part of
another:
– for the goodwill associated with the names of the
subsidiaries
– For tax or legal purposes and so forth. In many cases,
one company will grow by buying other companies.
**A group of companies consists of a parent
company and one or more subsidiary companies
that are controlled by the parent company.
The Need For Group Financial Statements

• The information contained in the individual financial

statements of a parent company and each of its
subsidiaries does not always give a picture of the
group's total activities.
– Users of the accounts will be unable to obtain an
understanding of the overall position and performance of
the group by looking at the numerous financial statements
of the individual companies that make up the group.
• Therefore, consolidated financial statements are
prepared.
The nature of Group Financial Statements

• Consolidated financial statements

– combine 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 used synonymously in practice.
• A parent company can present its own
individual accounts and its group accounts in a
single package.
 Cont’d
• The package typically comprises the following:
– parent company financial statements, which will include
'investments in subsidiaries' as an asset in the statement of
financial position, and income from subsidiaries (dividends)
in the statement of profit or loss and other comprehensive
income;
– consolidated statement of financial position;
– consolidated statement of profit or loss and other
comprehensive income;
– consolidated statement of changes in equity; and
– consolidated statement of cash flows.
 Exemption from Consolidation
• Where an entity elects, or is required by local
regulations, to present separate financial
statement, the entity shall apply IAS 27
Separate Financial Statements
– This Standard shall be applied in accounting for
investments in subsidiaries, joint ventures and
associates.
 Exemption from Consolidation Cont’d
A parent need not present consolidated financial
statements if it meets all of the following conditions:
[IFRS 10:4(a)]
• it is a wholly-owned subsidiary or is a partially-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
presenting consolidated financial statements
•  its debt or equity instruments are not traded in a public
market (a domestic or foreign stock exchange or an over-
the-counter market, including local and regional markets)
 Exemption from Consolidation Cont’d
•  it did not file, nor is it in the process of filing, its
financial statements with a securities commission or
other regulatory organisation for the purpose of
issuing any class of instruments in a public market,
and
•  its ultimate or any intermediate parent of the parent
produces financial statements available for public
use that comply with IFRSs, in which subsidiaries are
consolidated or are measured at fair value through
profit or loss in accordance with IFRS 10.
 IFRSs Applicable to Group Financial
Statements
• IAS 27 Separate Financial Statements
• IFRS 3 Business Combinations
• IFRS 10 Consolidated Financial Statements
• IFRS 11 Joint Arrangements
• IAS 28 Investments in Associates
– These standards are all concerned with different
aspects of group financial statements, but there is
some overlap between them.
 Definitions
• In the first part of this topic we will concentrate on
the basic group definitions and consolidation
procedures of a parent-subsidiary relationship.
• First, we consider all the important definitions which
determine how to treat each particular type of investment
in group financial statements.
 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)
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 entity. (IFRS 10)
 Definitions Cont’d
• Parent
– An entity that controls one or more subsidiaries. (IFRS 10)
• Group
– A parent and all its subsidiaries. (IFRS 10)
• Associate
– An entity over which the investor has significant influence. (IAS
28)
• Significant influence
– Is the power to participate in the financial and operating policy
decisions of an investee but is not control or joint control over
those policies. (IAS 28)
 Definitions Cont’d
• Definitions above refer to 'entities' rather than
'companies'.
– There is no requirement for members of
accounting groups to be companies and groups
may include partnerships or other non-corporate
entities.
• Throughout this module we shall, however, concentrate
on groups made up solely of companies.
Summary of the different types of investment and the
required accounting for them is as follows:
IN V E S T M E N T C R IT E R IA R E Q U IR E D T R E A T M E N T IN G R O U P
ACCOUNTS
Su b sid ia ry C o n tro l F u ll co n so lid a tio n
A sso cia te Significant influence E q u ity a cco u n tin g
Investment which No significant influence A s i n sin g le co m p a n y a cc o u n ts
is neither ofth e
a b o ve
 Investment in Subsidiary

• The important point here is control.

• 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:
• Power over the investee;
• Exposure to, or rights to, variable returns from its involvement with
the investee; and
• 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.
 Cont’d
• In most cases, the parent has control because they own a majority
of the ordinary shares in the subsidiary (to which normal voting
rights are attached).
• There are circumstances, however, when the parent owns only a
minority of the voting power in the subsidiary, but still has control
because it has:
– rights to appoint, reassign or remove key management personnel who can
direct the relevant activities;
– rights to appoint or remove another entity that directs the relevant
activities;
– rights to direct the investee to enter into, or veto changes to, transactions
for the benefit of the investor; and
– other rights, such as those specified in a management contract.
 Cont’d
• An entity's relevant activities are those which
significantly affect its profits or losses (an investor's
returns), normally its trading, operating and financial
activities.
• If a parent has invested in a subsidiary it normally
expects to obtain some kind of return on its investment.
– The key point here is that the return must have the potential
to vary as a result of the investee's performance. If an investor
has control over an investee, the amount of the return that it
receives depends on the investee's results.
 Accounting Treatment in Group Financial
Statements
• IFRS 10 requires a parent to present
consolidated financial statements, in which
the accounts of the parent and subsidiary (or
subsidiaries) are combined and presented as a
single entity.
 Investments In Associates

• This type of investment is something less than a subsidiary,

but more than a simple investment. The key criterion here
is significant influence. This is defined as the 'power to
participate', but not to 'control' (which would make the
investment a subsidiary).
• Significant influence can be determined by the holding of
voting rights (usually attached to ordinary shares) in the
entity. IAS 28 states that if an investor holds 20 per cent or
more of the voting power of the investee, it is presumed
that the investor has significant influence over the investee,
unless it can be clearly shown that this is not the case.
 Cont’d
• Significant influence can be presumed not to exist if the
investor holds less than 20 per cent of the voting power of
the investee, unless it can be demonstrated otherwise.
• The existence of significant influence is evidenced in one
or more of the following ways:
– representation on the board of directors (or equivalent) of the
investee;
– participation in the policy making process;
– material transactions between investor and investee;
– interchange of management personnel; and/or
– provision of essential technical information.
Accounting Treatment in Group Financial Statements

• IAS 28 requires use of the equity method of

accounting for investments in associates.
– This method will be explained in detail later.
 Section Summary
IN V E S T M E N T C R IT E R IA R E Q U IR E D T R E A T M E N T IN G R O U P
ACCOUNTS
S u b sid ia ry Control (> 50 per cent rule) Full consolidation (IFRS 10)
A sso c ia te Significant influence (20 per cent E q u ity a c c o u n tin g (IA S 2 8 )
+ ru le )
Investment which is No significant influence A s fo r sin g le c o m p a n y a c c o u n ts
neither of the above (< 2 0 p e r c e n t ru le )
 Consolidated Financial Statements
• These are 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. (IFRS 10)
•  When a parent issues consolidated financial
statements, it consolidates all subsidiaries, both foreign
and domestic.
– IFRS 10 provides guidance on the mechanics of consolidation
including exemptions from consolidation, the use of uniform
accounting policies, matching reporting dates and the
elimination of intra-group transactions.
 Intra-group Transactions
• It is common for parent companies to transact
with their subsidiaries. These transactions
should not be reflected in the consolidated
accounts.
 Cont’d
• One of the reasons why groups grow and companies
acquire other companies is vertical integration where a
company acquires its suppliers or customers.
• Therefore, it follows that intra-group or intercompany
transactions are commonplace within groups.
– One group company may sell goods to another, or one company
provides funding for others.
– Equally, where a subsidiary pays a dividend to its shareholders,
some, or all of this amount is due to the parent company.
 Cont’d
• These transactions between group companies are (quite
rightly) represented in the companies' individual accounts.
When preparing the group accounts, however, it must be
remembered that they present the group as a single
economic entity.
– One entity is unable to trade with itself or lend to itself, and
therefore the effects of intra-group transactions must be
eliminated on consolidation. The mechanics of this are covered
later in this module.
– The net result is that the group accounts only include the effects
of transactions between the group companies and third parties
outside the group.
 Revision Question 1
During the last three years Harvert Ltd has held 400 000
ordinary shares in Jamee Ltd. The issued share capital of
Jamee Ltd is 1 million shares totaling $500 000. The
finance director of Harvert Ltd is a director of Jamee Ltd.
How should the investment in Jamee Ltd be treated in the
consolidated financial statements of Harvert Ltd?
A as a subsidiary
B as an associate
C as a current asset investment
D as a non-current asset investment
 Revision Question 2
A owns 51 per cent of the voting shares in B and 100 per
cent of the voting shares in D. B owns 25 per cent of the
voting shares in C and has board representation in that
company. All holdings have been held for a number of
years. Which of the following statements is correct?
A B, C and D are subsidiaries of A
B B and D are subsidiaries of A while C is a subsidiary of B
C B and D are subsidiaries of A while C is an associate of
B D D is a subsidiary of A while B and C are investments
of A
 Revision Question 3
Which of the following provide evidence of a parent-subsidiary relationship?
I The parent has representation on the board of directors
II The parent has power to direct the operating activities of the entity by
statute
III The parent has the power to remove a majority of members of the board
of directors
IV The parent has power over more than 50 per cent of the voting rights
through agreement with other investors
A IV only
B I and IV only
C II, III and IV only
D I, II, III and IV
 Revision Question 4
During the last financial year, Orius Ltd acquired 44 per cent of the
issued share capital of Eerus Ltd. Under the terms of the acquisition,
the finance director of Orius was appointed to the board of directors of
Eerus.
Which of the following correctly describes how Orius should account
for its interest in Eerus in the consolidated financial statements?
A As a subsidiary, using equity accounting
B As an associate, using equity accounting
C As a subsidiary, using consolidation accounting
D As an associate, using consolidation accounting
 Revision Question 5
Which of the following provides evidence of a situation
where the investee should be accounted for using the
equity method?
A A a shareholding of 18 per cent in the investee
B provision of operational personnel by the parent to the
investee
C provision of essential technical information by the
parent to the investee
D the parent has the power to govern the financial
policies of the investee by agreement
 Revision Question 6
Where a subsidiary does not prepare accounts to the same date as the
parent company, which of the following is true?
A Additional financial statements must be prepared to the group
reporting date by the subsidiary.
B The subsidiary's accounts may be used for the consolidation provided
that the gap between the reporting dates is three months or less.
C The subsidiary's accounts may be used for the consolidation provided
that they are prepared to a date within three months after the end of
the group reporting period.
D The subsidiary's accounts may be used for the consolidation provided
that they are prepared to a date within three months before the end of
the group reporting period.
 Revision Question 7
Which of the following statements are true?
I Intra-group transactions must be eliminated on consolidation
II Where a group comprises a parent company and an investee over which
the parent has significant influence, consolidated accounts must be prepared
III A holding of 10 per cent of ordinary voting shares in another company
must be accounted for in accordance with IAS 28 Investments in Associates
IV Where a subsidiary does not adopt the same accounting policies as its
parent company, adjustments must be made to bring its accounting policies
into line prior to consolidation
A I and II only
B I and IV only
C III and IV only
D I, II, III and IV
 NON-CONTROLLING INTERESTS
The consolidated statement of financial position
shows non-controlling interest as a separate
item in equity.
• It was mentioned earlier that the total assets and liabilities of subsidiary
companies are included in the consolidated statement of financial
position, even if the subsidiaries are not wholly owned by the parent. A
proportion of the net assets of such subsidiaries in fact belongs to
investors from outside the group (non-controlling interests).
• IFRS 3 allows two alternative ways of measuring the non-controlling
interest at acquisition:
– as a proportionate share of the fair value of the subsidiary's net assets; or
– at fair value (based on the market value of the shares held by the non-
controlling interest). Regardless of the measurement method used, the non-
controlling interest reported in the consolidated statement of financial position
at subsequent reporting dates is increased by the non- controlling interest's
share of profits made by the subsidiary since acquisition.
 Worked Example
P Co has owned 75 per cent of the share capital of S Co since the date of S Co's
incorporation. Their latest statements of financial position are given below.
P CO
STATEMENT OF FINANCIAL POSITION
$ $
A sse ts
N o n -c u rre n t a sse ts
Property, plant and equipment 50 000
3 0 0 0 0 o r d in a r y s h a r e s in S C o a t c o s t 30 000
80 000
C u rre n t a sse ts 45 000
T o ta l a sse ts 125 000
Equity and
liabilitiesE q u i t y
8 0 0 0 0 o r d in a r y s h a r e s 80 000
R e t a in e d e a r n in g s 25 000
105 000
Current liabilities 20 000
Total equity and liabilities 125 000
 S CO
STATEMENT OF FINANCIAL POSITION
$ $
A sse ts
Property, plant and equipment 35 000
C u rre n t a sse ts 35 000
T o ta l a sse ts 70 000
E q u it y a n d lia b ilit ie s
E q u ity
4 0 0 0 0 o rd in a r y s h a r e s 40 000

R e t a in e d e a r n in g s
10 000 50 000

Current liabilities 20 000

Total equity and liabilities 70 000

Required
Prepare the consolidated statement of financial position. P Co's accounting policy is to
measure non- controlling interest at acquisition as a proportional share of the subsidiary's net
assets.
 Solution

• All of S Co's net assets are consolidated

despite the fact that the company is only 75
per cent owned.
• The amount of net assets attributable to non-
controlling interests is calculated as follows:
Non-controlling interest at acquisition:
$
Non-controlling share of share capital (25% ´ $40 000) 10 000
Non-controlling share of S Co's profits since acquisition:
Non-controlling share of retained earnings (25% ´ $10 000) 2 500
12 500
• Of S Co's share capital of $40 000, $10 000 is included in the figure for non-
controlling interest, while
• $30 000 is cancelled with P Co's asset 'investment in S Co'.
• Of S Co's retained earnings of $10 000, $2500 is included in the figure for non-
controlling interest, while $7500 'belongs' to the group and so is included in
group retained earnings in the consolidated statement of financial position.
The consolidated statement of financial position can now be prepared.
P GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
$ $
A sse ts
Property, plant and equipment 85 000
C u rre n t a sse ts 80 000
T o tal a sse ts 165 000
E q u it y a n d lia b ilit ie s
Equity attributable to owners of the parent
Share capital 80 000
R e t a in e d e a r n in g s $ (2 5 0 0 0 + ( 7 5 % ´ $ 1 0 0 0 0 ) ) 3 2 5 0 0
112 500
Non-controlling interest 12 500
125 000
Current liabilities 40 000
Total equity and liabilities 165 000
 Procedure in summary
• Aggregate the assets and liabilities in the statement of
financial position i.e. 100 per cent P + 100 per cent S
irrespective of how much P actually owns.
– This shows the amount of net assets controlled by the group.
• Share capital is that of the parent only.
• Calculate the non-controlling interest share of the fair value
of the subsidiary's net assets (share capital plus retained
earnings plus any other reserves).
• The balance of the subsidiary's retained earnings and other
reserves are consolidated (after cancelling any intra-group
items).
 Question 2: Part cancellation

Set out below are the draft statements of

financial position of P Co and its subsidiary S Co.
You are required to prepare the consolidated
statement of financial position.
The non-controlling interest is valued at its
proportional share of the fair value of the
subsidiary's net assets.
 P CO
$ $
A sse ts
N o n -c u rre n t a sse ts
Property, plant and equipment 3 1 0 0 0
In v e s t m e n t in S C o
12 000 ordinary shares at cost 1 2 0 0 0
$ 8 0 0 0 1 0 % lo a n a t c o s t 8 0 0 0
2 0 0 0 0
5 1 0 0 0
C u rre n t a sse ts 2 1 0 0 0
T o ta l a sse ts 7 2 0 0 0

E q u it y a n d lia b ilit ie s
E q u it y
4 0 0 0 0 O r d in a r y s h a r e s 4 0 0 0 0
R e t a in e d e a r n in g s 2 2 0 0 0
6 2 0 0 0
Current liabilities 1 0 0 0 0
Total equity and liabilities 7 2 0 0 0

S C O
$ $
A sse ts
Property, plant and equipment 3 4 0 0 0
C u rre n t a sse ts 3 2 0 0 0
T o ta l a sse ts 6 6 0 0 0
E q u it y a n d lia b ilit ie s
E q u it y
2 0 0 0 0 O r d in a r y s h a r e s 2 0 0 0 0
Revaluation surplus 6 0 0 0
R e t a in e d e a r n in g s 4 0 0 0
3 0 0 0 0
Non-current liabilities
1 0 % lo a n s t o c k 2 6 0 0 0
Current liabilities 1 0 0 0 0
Total equity and liabilities 6 6 0 0 0
 Steps to the Solution
• The group structure is: P Co controls 60 per cent in S
Co
• Partly cancelling items are the components of P Co's
investment in S Co, i.e. ordinary shares and loan
stock. Non-controlling shareholders have an interest
in 40 per cent (8000/20 000) of S Co's ordinary
shares, including reserves.
• You should now total the assets and liabilities and
produce workings for non-controlling interest,
revaluation surplus and retained earnings as follows:
 Workings:
Revaluation surplus
$
P Co –
Share of S Co's revaluation surplus (60% ´ 6 000) 3 600
3 600
 Workings cont’d
Retained earnings
$
P Co 22 000
Share of S Co's retained earnings (60% ´ 4 000) 2 400
24 400
 Workings cont’d
Non-controlling interest
$
S Co's net assets (66 000 – 36 000) 30 000
´ 40% 12 000

• The results of the workings are now used to

construct the consolidated statement of
financial position.
 Notes
• S Co is a subsidiary of P Co because P Co owns 60 per cent of its
ordinary capital.
• As always, the share capital in the consolidated statement of
financial position is that of the parent alone. The share capital in S
Co's statement of financial position was partly cancelled against the
investment shown in P Co's statement of financial position, while
the uncancelled portion was credited to the non-controlling interest.
• The figure for the non-controlling interest comprises the interest of
outside investors in the share capital and reserves of the subsidiary.
The uncancelled portion of S Co's loan stock is not shown as part of
the non-controlling interest but is disclosed separately as a liability
of the group.
Now, prepare the consolidated
statement of financial position
 Revision Question
Pam Co acquired 90 per cent of the ordinary voting shares in Sam Co on 1 March
2017 for $5.6 million. At that date the fair value of a 10 per cent holding in Sam Co
was $460 000. Sam Co has made the following profits since acquisition:
• $275 400 in the year ended 28 February 2018
• $286 000 in the year ended 28 February 2019
The net assets of Sam Co at 28 February 2019 are $5.56 million and the fair value of
a 10 per cent shareholding at that date based on market values is $520 000. What is
the non-controlling interest in the Pam Co Consolidated Statement of Financial
Position at 28 February 2019 assuming that it is group policy to apply the fair value
method of measurement of non-controlling interest?
A $516 140
B $520 000
C $556 000
D $1 016 000