Chapter 26 Flashcards
What does control mean?
Control means that a parent is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary
What are the three essential elements for an investor?
- power over the investee (subsidiary)
- exposure, or rights, to variable returns from its involvement with the investee
- the ability to use its power over the investee to affect the amount of the
investor’s returns.
On what has an investor power off?
An investor has power over the investee when the investor has existing rights that give it the current ability to direct the relevant activities of the investee. Power arises from rights, such as voting rights attaching to shares. Power can also result from one or more contractual arrangements. For control to exist, the investor must have the ability to use its power to affect the returns. If an investor is an agent and not a principal, it has delegated decision rights and it acts on behalf and for the benefit of another party.
What concept does IFRS 10 introduce?
IFRS 10 introduces the concept of de facto control. Even if an investor does not have the majority of the voting rights, the existing voting rights might give the investor the power to direct the relevant activities unilaterally
What does IFRS standards allow on an investement?
IFRS Standards also allows the investment to be measured at fair value or at net asset value. As the fair value option is seldom used for investments in subsidiaries, we will not discuss that measurement option any further. In applying the option of net asset value, the investment is then recorded at its share in equity in the statement of financial position, and its share in profits is included in the statement of comprehensive income. This gives more information about the subsidiary’s value and profitability.
What does IFRS 10 require of an investor?
Requires a parent to prepare consolidated financial statements using uniform accounting policies for like transactions and other events in similar circumstances. Consolidated accounts combine assets, liabilities, equity, income, expenses and cash flows of the parent with those of its subsidiaries into a single economic entity.
On what conditions does IFRS 10 exempt investors with presenting financial statements?
- The parent is a wholly owned or partly owned subsidiary of another entity.
- The parent’s debt or equity instruments are not traded in a public market or the parent is not in the process of issuing any class of instruments in a public market.
- The ultimate or any intermediate parent produces consolidated statements available for public use that comply with IFRS Standards.
What would be useful information for a group accountants?
we have identified a need for group accounts to show useful information to users. But what would be useful information to these users. to know the total assets and liabilities of the subsidiary that they control, together with the parent’s own assets and liabilities.
How do we need to prepare consolidated accounts?
We obviously have to prepare consolidated accounts subsequent to the date of acquisition, and as long as we know the fair value of the assets acquired and the cost of that acquisition, this is quite easy. We can only include the parent share of the reserves post-acquisition in the consolidation. In order for the group to realize a profit on sale, the sale must be made to a customer outside the group
What is common for entities within a group?
It is commonplace for entities within a group to shuffle liquidity and inventories between themselves as and when required and indeed this is one of the advantages of a group structure. Each entity will carry balances within the group.
What is not possible to cancel out?
it is not possible to cancel out such inter-entity balances, and this may often be due to a transfer of goods or cash between group entities straddling the financial year end. A consolidation adjustment is required at the year end to adjust for goods or cash in transit between two entities before we can carry out the consolidation of accounts .
What is important to note with adjustments?
It is important to note that the adjustments we are making here only affect the consolidated accounts; we make no adjustment for these inter-entity balances to the individual accounts of each entity.
When is the financial statement of an investor drawn up?
The financial statement of a parent and its subsidiaries will be drawn up to the same date to enable easy preparation of consolidated financial statements. However, sometimes it is impracticable to do this and consolidation can take place using the accounts prepared to different dates provided the difference is no greater than a specified number of months.
