7 Introduction to groups Flashcards
Define: Control; Power; Subsidiary; Parent; Group; Associate; Significant influence
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) 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 an investor has significant influence and which is neither a subsidiary nor an interest in a joint venture. (IFRS 10) Significant influence. The power to participate in the financial and operating policy decisions of an investee but it is not control or joint control over those policies
We can summarise the different types of investment and the required accounting for them as follows.
Subsidiary=>Control(>50% rule)=> Full consolidation
Associate => Significant influence (20%+ rule) => Equity accounting
Investment which is none of the above => Asset held for accretion of wealth =>As for single company accounts per IFRS
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.
(a) Power over the investee (b) Exposure to, or rights to, variable returns from its involvement with the investee (c) The ability to use its power over the investee to affect the amount of the investor’s returns
Power (as defined under Key Terms) can be obtained directly from 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 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 Other rights, such as those specified in a management contract
Investments in associates:Significant influence can be presumed not to exist if the investor holds less than 20% 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.
(a) Representation on the board of directors (or equivalent) of the investee (b) Participation in the policy making process (c) Material transactions between investor and investee (d) Interchange of management personnel (e) Provision of essential technical information
IFRS 10 requires a parent to present consolidated financial statements True or false
IFRS 10 requires a parent to present consolidated 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.
Exemption from preparing group accounts A parent need not present consolidated financial statements if and only if all of the following hold:
. (a) The parent is itself a wholly-owned subsidiary or it 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. (b) Its securities are not publicly traded. (c) It is not in the process of issuing securities in public securities markets. (d) The ultimate or intermediate parent publishes consolidated financial statements that comply with International Financial Reporting Standards.
An entity may own share warrants, share call options, or other similar instruments that are convertible into ordinary shares in another entity. If these are exercised or converted they may give the entity voting power or reduce another party’s voting power over the financial and operating policies of the other entity (potential voting rights). The existence and effect of potential voting rights, including potential voting rights held by another entity, should be considered when assessing whether an entity has control over another entity (and therefore has a subsidiary). True or false
An entity may own share warrants, share call options, or other similar instruments that are convertible into ordinary shares in another entity. If these are exercised or converted they may give the entity voting power or reduce another party’s voting power over the financial and operating policies of the other entity (potential voting rights). The existence and effect of potential voting rights, including potential voting rights held by another entity, should be considered when assessing whether an entity has control over another entity (and therefore has a subsidiary).
The rules on exclusion of subsidiaries from consolidation are necessarily strict, because this is a common method used by entities to manipulate their results. If a subsidiary which carries a large amount of debt can be excluded, then the gearing of the group as a whole will be improved. In other words, this is a way of taking debt out of the consolidated statement of financial position. IAS 27 did originally allow a subsidiary to be excluded from consolidation where control is intended to be temporary. This exclusion was then removed by IFRS 5. Subsidiaries held for sale are accounted for in accordance with IFRS 5 Non-current assets held for sale and discontinued operations. True/ False
The rules on exclusion of subsidiaries from consolidation are necessarily strict, because this is a common method used by entities to manipulate their results. If a subsidiary which carries a large amount of debt can be excluded, then the gearing of the group as a whole will be improved. In other words, this is a way of taking debt out of the consolidated statement of financial position. IAS 27 did originally allow a subsidiary to be excluded from consolidation where control is intended to be temporary. This exclusion was then removed by IFRS 5. Subsidiaries held for sale are accounted for in accordance with IFRS 5 Non-current assets held for sale and discontinued operations.
In most cases, all group companies will prepare accounts to the same reporting date. One or more subsidiaries may, however, prepare accounts to a different reporting date from the parent and the bulk of other subsidiaries in the group. 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’s accounts may still be used for the consolidation, provided that the gap between the reporting dates is three months or less. Where a subsidiary’s accounts are drawn up to a different accounting 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. True/ false
In most cases, all group companies will prepare accounts to the same reporting date. One or more subsidiaries may, however, prepare accounts to a different reporting date from the parent and the bulk of other subsidiaries in the group. 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’s accounts may still be used for the consolidation, provided that the gap between the reporting dates is three months or less. Where a subsidiary’s accounts are drawn up to a different accounting 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.
Uniform accounting policies: Consolidated financial statements should be prepared using uniform accounting policies for like transactions and other events in similar circumstances. Adjustments must be made where members of a group use different accounting policies, so that their financial statements are suitable for consolidation.
Uniform accounting policies: Consolidated financial statements should be prepared using uniform accounting policies for like transactions and other events in similar circumstances. Adjustments must be made where members of a group use different accounting policies, so that their financial statements are suitable for consolidation.
IFRS 10 requires the results of subsidiary undertakings to be included in the consolidated financial statements from:
(a) The date of ‘acquisition’, ie the date on which the investor obtains control of the investee, to (b) The date of ‘disposal’, ie the date the investor loses control of the investee. Once an investment is no longer a subsidiary, it should be treated as an associate under IAS 28 (if applicable) or as an investment under IFRS 9
A parent company will usually produce its own single company financial statements and these should be prepared in accordance with IAS 27 (revised) Separate financial statements. In these statements, investments in subsidiaries and associates included in the consolidated financial statements should be either:
(a) Accounted for at cost, or (b) In accordance with IFRS 9
Disclosure – individual financial statements Where a parent chooses to take advantage of the exemptions from preparing consolidated financial statements (see above) under IAS 27 the separate financial statements must disclose:
(a) The fact that the financial statements are separate financial statements; that the exemption from consolidation has been used; the name and country of incorporation of the entity whose consolidated financial statements that comply with IFRSs have been published; and the address where those consolidated financial statements are obtainable
(b) A list of significant investments in subsidiaries, jointly controlled entities and associates, including the name, country of incorporation, proportion of ownership interest and, if different, proportion of voting power held (c) A description of the method used to account for the investments listed under (b) When a parent prepares separate financial statements in addition to consolidated financial statements, the separate financial statements must disclose: (a) The fact that the statements are separate financial statements and the reasons why they have been prepared if not required by law (b) Information about investments and the method used to account for the
Non-controlling interest should be presented in the consolidated statement of financial position within equity, separately from the parent shareholders’ equity. Most parent companies present their own individual accounts and their group accounts in a single package. The package typically comprises the following.
Parent company financial statements, which will include ‘investments in subsidiary undertakings’ as an asset in the statement of financial position, and income from subsidiaries (dividends) in the statement of profit or loss Consolidated statement of financial position Consolidated statement of profit or loss and other comprehensive income Consolidated statement of cash flows
