Section 9

Consolidated and Separate Financial Statements

 OVERVIEW OF SECTION 9
• Scope of this section

• Requirement to present consolidated financial statements

• Special purpose entities

• Consolidation procedures

• Disclosures in consolidated financial statements

• Separate financial statements

• Disclosures in separate financial statements

• Combined financial statements

• Compare and contrast Consolidated and Separate Financial

Statements of Full IFRS and IFRS for SME.
 SCOPE OF THIS SECTION

• This section defines the circumstances in which an

entity presents consolidated financial statements and
the procedures for preparing those statements. It also
includes guidance on separate financial statements
and combined financial statements.
 REQUIREMENT TO PRESENT
CONSOLIDATED FINANCIAL
STATEMENTS
• Except as permitted or required by IFRS for SME, a parent entity shall present consolidated
financial statements in which it consolidates its investments in subsidiaries in accordance
with this IFRS. Consolidated financial statements shall include all subsidiaries of the parent.
• A parent need not present consolidated financial statements if:
(a) both of the following conditions are met:
(i) the parent is itself a subsidiary, and
(ii) its ultimate parent (or any intermediate parent) produces consolidated general
purpose financial statements that comply with full IFRSs or with this IFRS; or
(b) It has no subsidiaries other than one that was acquired with the intention of selling or
disposing of it within one year. A parent shall account for such a subsidiary:
(i) at fair value with changes in fair value recognized in profit or loss, if the fair value of
the shares can be measured reliably, or
(ii) otherwise at cost less impairment
 EXAMPLE

1. Entity B has a subsidiary, Entity C. Entity B’s, immediate and ultimate, parent is
Entity A. Entities A, B and C do not have public accountability. Entities A, B and C
produce general purpose financial statements; Entities B and C do so in compliance
with the IFRS for SMEs while Entity A presents consolidated financial statements in
compliance with local GAAP.

2. Entity B has a subsidiary Entity C. Entity B is owned by Entity A. Entity A does not
prepare financial statements because the jurisdiction in which it registered and
operates dos not require the preparation of financial statements.

3. Entity B has a subsidiary, Entity C. Entity B’s, immediate and ultimate, parent is
Entity A. Entities A, B and C do not have public accountability. They produce
general purpose financial statements in compliance with the IFRS for SMEs.
Consequently, Entity A presents consolidated financial statements.
 Cont…

• A subsidiary is an entity that is controlled by the parent. Control is the power to

govern the financial and operating policies of an entity so as to obtain benefits from

its activities. If an entity has created a special purpose entity (SPE) to accomplish a

narrow and well defined objective, the entity shall consolidate the SPE when the

substance of the relationship indicates that the SPE is controlled by that entity.

• Control is presumed to exist when the parent owns, directly or indirectly through

subsidiaries, more than half of the voting power of an entity. That presumption may

be overcome in exceptional circumstances if it can be clearly demonstrated that such

ownership does not constitute control. Control also exists when the parent owns half

or less of the voting power of an entity but it has:

 Cont…
(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 statute 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 of the entity is by that
board or body; or
(d) Power to cast the majority of votes at meetings of
the board of directors or equivalent governing body
and control of the entity is by that board or body.
 EXAMPLE

1. Entity A owns 60 per cent of the ordinary shares, to which voting rights are attached,
of Entity B. Entity B owns 70 per cent of the ordinary shares, to which voting rights
are attached, of Entity C.

2. Entity A owns 40 per cent of the ordinary shares, to which voting rights are attached,
of Entity B. Furthermore, a shareholder owning 15 per cent of the ordinary shares of
Entity B has ceded its voting rights to Entity A. All ordinary shares in Entity B carry
equal voting rights.

3. Entity A owns 40 per cent of the ordinary shares, to which voting rights are attached,
of Entity B. The government of the country in which Entities A and B are registered
and operate has granted Entity A in law the sole right to determine the
financial and operating policies of Entity B.
 Cont…
• Control can also be achieved by having options or convertible instruments that are
currently exercisable or by having an agent with the ability to direct the activities for
the benefit of the controlling entity.

• A subsidiary is not excluded from consolidation simply because the investor is a

venture capital organization or similar entity.

• A subsidiary is not excluded from consolidation because its business activities are
dissimilar to those of the other entities within the consolidation. Relevant information
is provided by consolidating such subsidiaries and disclosing additional information in
the consolidated financial statements about the different business activities of
subsidiaries.

• A subsidiary is not excluded from consolidation because it operates in a jurisdiction

that imposes restrictions on transferring cash or other assets out of the jurisdiction.
 SPECIAL PURPOSE ENTITIES

• An entity may be created to accomplish a narrow objective (e.g. to effect

a lease, undertake research and development activities or securitize
financial assets). Such an SPE may take the form of a corporation, trust,
partnership or unincorporated entity. Often, SPEs are created with legal
arrangements that impose strict requirements over the operations of the
SPE.
• A special purpose entity (SPE) (sometimes called a special purpose
vehicle (SPV)) is an entity created to fulfill narrow, specific or
temporary objectives. Common reasons for creating SPEs include:
 Securitization: SPEs are commonly used to securitize loans (or other
receivables).
 SPECIAL PURPOSE ENTITIES

 Risk sharing: corporate entities sometimes use SPEs to isolate a high risk
project/asset from the parent company.
 Asset transfer: SPEs are sometimes used to facilitate the ownership and
transfer of assets and related components (such as permits relating to the
asset) where, because of complex legal or regulatory reasons, transfer of
ownership of the SPE is easier than transfer of the asset and its related
components.
 Regulatory reasons: a SPE is sometimes set up to circumvent regulatory
restrictions, such as regulations relating to nationality of ownership of
specific assets.
 CONSOLIDATION PROCEDURES

• The consolidated financial statements present financial information about the group as a single
economic entity. In preparing consolidated financial statements, an entity shall:
(a) combine the financial statements of the parent and its subsidiaries line by line by adding
together like items of assets, liabilities, equity, income and expenses;
(b) eliminate the carrying amount of the parent’s investment in each subsidiary and the parent’s
portion of equity of each subsidiary;
(c) measure and present non-controlling interest in the profit or loss of consolidated subsidiaries
for the reporting period separately from the interest of the owners of the parent; and
(d) measure and present non-controlling interest in the net assets of consolidated subsidiaries
separately from the parent shareholders’ equity in them. Non-controlling interest in the net assets
consists of:
(i) the amount of the non-controlling interest at the date of the original combination, and
(ii) the non-controlling interest’s share of changes in equity since the date of the
combination.
Cont…
Cont…
Cont…
 Cont…

• Non-controlling interest (NCI) is the equity in a subsidiary that is not attributable,

directly or indirectly, to a parent. NCI represents the non-controlling shareholder’s
proportionate share of the carrying amount of the acquiree’s identifiable net assets (i.e.
excluding goodwill) recognized in the consolidated statement of financial position.
• The calculation of the NCI at a particular date could be performed in three steps (if only
one set of comparative amounts is presented in the entity’s consolidated financial
statements):

I. Determining the NCI at the acquisition date;

II. Determining the change in NCI in the period between the acquisition date and
the beginning of the current financial period for which the consolidated financial
statements are being prepared; and

III. Determining the change in NCI in the current period.

 Cont…
• The facts are the same as the above Example. However, in this example,
Entity A acquires only 75 per cent of the ordinary shares, to which voting
rights are attached, of Entity B, but nevertheless obtains control of Entity B.
Entity A pays CU4,500 for the shares.

• Thus NCI is: 25 percent × Entity B’s identifiable net assets at fair value of
CU4,700 = CU1,175.
 Cont…

• Intra group balances and transactions, including income,

expenses and dividends, are eliminated in full. Profits and losses
resulting from intra group transactions that are recognized in
assets, such as inventory and property, plant and equipment, are
eliminated in full. Intra group losses may indicate an
impairment that requires recognition in the consolidated
financial statements. Section 29 Income Tax applies to
temporary differences that arise from the elimination of profits
and losses resulting from intra group transactions.
Cont…
 Cont…

• UNIFORM REPORTING DATE: The financial statements of the parent

and its subsidiaries used in the preparation of the consolidated financial

statements shall be prepared as of the same reporting date unless it is

impracticable to do so.

• UNIFORM ACCOUNTING POLICIES: Consolidated financial

statements shall be prepared using uniform accounting policies for like

transactions and other events and conditions in similar circumstances. If a

member of the group uses accounting policies other than those adopted in

the consolidated financial statements for like transactions and events in

similar circumstances, appropriate adjustments are made to its financial

statements in preparing the consolidated financial statements.

 Cont…

• An entity shall present non-controlling interest in the consolidated

statement of financial position within equity, separately from the equity of

the owners of the parent.

• The parent entity must make a judgment as to whether it is able to estimate

reliably the useful life of goodwill. If the parent entity is unable to make a

reliable estimate of the useful life of goodwill, the estimated useful life is

presumed to be ten years.

 Cont…

• ACQUISITION AND DISPOSAL OF SUBSIDIARIES: The income and expenses of a

subsidiary are included in the consolidated financial statements from the acquisition date. The
income and expenses of a subsidiary are included in the consolidated financial statements until the
date on which the parent ceases to control the subsidiary. The difference between the proceeds from
the disposal of the subsidiary and its carrying amount as of the date of disposal, excluding the
cumulative amount of any exchange differences that relate to a foreign subsidiary recognized in
equity in accordance with Section 30 Foreign Currency Translation, is recognized in the
consolidated statement of comprehensive income (or the income statement, if presented) as the gain
or loss on the disposal of the subsidiary.
• Profit or loss and each component of other comprehensive income shall be attributed to the owners
of the parent and to the non-controlling interest. Total comprehensive income shall be attributed to
the owners of the parent and to the non-controlling interest even if this results in the non-
controlling interest having a deficit balance.
 DISCLOSURES IN CONSOLIDATED
FINANCIAL STATEMENTS
• The following disclosures shall be made in consolidated financial statements:
(a) The fact that the statements are consolidated financial statements.
(b) The basis for concluding that control exists when the parent does not own,
directly or indirectly through subsidiaries, more than half of the voting power.
(c) Any difference in the reporting date of the financial statements of the parent
and its subsidiaries used in the preparation of the consolidated financial
statements.
(d) The nature and extent of any significant restrictions (e.g. resulting from
borrowing arrangements or regulatory requirements) on the ability of
subsidiaries to transfer funds to the parent in the form of cash dividends or to
repay loans.
 SEPARATE FINANCIAL STATEMENTS

• If a parent entity itself does not have public accountability, it may present its separate financial
statements in accordance with the IFRS for SMEs even if it presents its consolidated financial
statements in accordance with full IFRSs. An entity is eligible to use the IFRS for SMEs if it does not
have public accountability.
• A parent entity assesses its eligibility to use the IFRS for SMEs in its separate financial statements on
the basis of its own public accountability without considering whether other group entities have, or the
group as a whole has, public accountability.
• Separate financial statements, if presented, are generally(10) presented in addition to primary financial
statements. For a parent, an investor in an associate or a venturer in a jointly controlled entity, primary
financial statements are:
 Consolidated financial statements; or

 Financial statements of an investor with no subsidiaries, but that has investments in associates and joint
ventures, are accounted for using the cost model, equity method or the fair value model in accordance
with Sections 14
Investments in Associates and 15 Investments in Joint Ventures.
 DISCLOSURES IN SEPARATE
FINANCIAL STATEMENTS
• When a parent, an investor in an associate, or a venturer with an
interest in a jointly controlled entity prepares separate financial
statements, those separate financial statements shall disclose:
(a) that the statements are separate financial statements, and
(b) a description of the methods used to account for the
investments in subsidiaries, jointly controlled entities and
associates, and shall identify the consolidated financial statements
or other primary financial statements to which they relate.
 COMBINED FINANCIAL
STATEMENTS
• Combined financial statements include information about two or more entities under
common control, but do not include information about the controlling investor itself.
Combined financial statements are often prepared when the controlling investor does not
prepare financial statements. Reasons:

1. The controlling investor could be an individual.

2. Preparing combined financial statements is to distinguish a portion of a group from the rest
of the group, because financial information about that particular portion of the group can
be useful for users of the combined financial statements in making decisions.
• When preparing combined financial statements, all requirements of the IFRS for SMEs
must be applied. Combined financial statements must comprise all elements of financial
statements . Combined financial statements present the assets, liabilities, equity, income
and expenses of two or more entities controlled by a single investor, but not the investor
itself, as a single economic entity.
 Cont…

• As in a consolidation, internal transactions and balances are

eliminated in full. Combined financial statements that include the
entities under the common control of a single investor, but do not
include the controlling investor itself, will generally have no
elimination of capital of any of the combining entities unless the
entities included in the combined financial statements have
ownership in each other.
Cont…
Cont…
 DISCLOSURES IN COMBINED
FINANCIAL STATEMENTS

• The combined financial statements shall disclose the following:

(a) the fact that the financial statements are combined financial statements.
(b) the reason why combined financial statements are prepared.
(c) the basis for determining which entities are included in the combined
financial statements.
(d) the basis of preparation of the combined financial statements.
(e) the related party disclosures required by Section 33 Related Party
Disclosures.
 Differences between IFRS for SMEs and Full
IFRS
1. Both full IFRSs and the IFRS for SMEs use “control” to determine what is
consolidated. However, the definition of control is different. In the IFRS for
SMEs control of an entity is “The power to govern the financial and
operating policies of an entity so as to obtain benefits from its activities”. In
IFRS 10, which was issued in 2011, control of an entity is “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 its power over the investee”.
2. Both full IFRSs and the IFRS for SMEs recognize goodwill in accounting
for business combinations. However, there are significant differences
between the amount of goodwill recognized and the subsequent
measurement of goodwill.
 Cont…

3. In accordance with the IFRS for SMEs, non-controlling interest is measured at its
proportionate share of the group carrying amounts of the subsidiary’s identifiable net

assets (sometimes called the proportionate share method). Using this method, goodwill

is not included in the non-controlling interest balance. In accordance with IFRS 3, non-

controlling interest is measured using either the fair value method or the proportionate

share method.

4. In accordance with the IFRS for SMEs the consolidated financial statements must be

prepared using the financial statements of the parent and its subsidiaries prepared as of

the same reporting date unless it is impracticable to do so. IFRS 10 has similar

requirements; in addition, it specifies the maximum difference of the reporting periods

(three months) and the requirement to adjust for significant transactions that occur in

the gap period.