6.3 Principles for the consolidation of financial statements

Question 1

According to IFRS 10, what is the principle of control?

Answer 1

There are three elements:
1 Power over the investee (i.e. 50% voting rights)
2 Rights to variable returns (e.g. a dividend)
3 The ability to use power over the investee to affect the mount of investor returns

Question 2

What are 4 ways in which control can be exercised?

Answer 2

1 Direct and indirect voting rights
2 Via a contract
3 Control of the Board of directors
4 Through de facto controls

Question 3

What is de facto control?

Answer 3

A broad concept focusing on influence rather than legal control e.g. a party could have a relatively large holding while a majority is held by lots of smaller, unconnected parties.

Question 4

What is the process, in simple terms for consolidating group accounts

Answer 4

1 The company establishes whether any parent- subsidiary relationships exist (considering all aspects of control)
2 The parent and subsidiary accounts are added line by line

Question 5

What factors must be considered when consolidating group accounts?

Answer 5

1 Avoid double counting on intercompany transactions
2 Parent investments in subsidiaries are cancelled out
3 Accounting policies of the group must be aligned so that like items are treated equivalently
4 Subsidiaries should align their reporting dates with parent

Question 6

What must be done if a parent loses control of a subsidiary part way through the financial year?

Answer 6

The financial results must be time-apportioned (according to when the parent had control) during the consolidation process.

Question 7

What four items are included in consolidated financial statements?

Answer 7

1 Consolidated statement of financial position
2 Consolidated statement of comprehensive income
3 Consolidated cash flow statement
4 Consolidated notes to the financial statements