Chapter 4 Group Accounts: basic principles Flashcards
1.1 concept of consolidated accounts – individual company accounts
When a company buys another company the accounting entries are Dr Investment and Cr Cash.
If the parent company owns more than 50% of the ordinary shares this will usually give them control and they will have enough voting power to appoint all or the majority of directors in the company. In legal terms the companies remain distinct but in economic substance they can be regarded as a single unit (a group).
1.2 Group accounts
Made up of consolidated statement of financial position, comprehensive income, changes in equity, cash flows and notes to the consolidated accounts. The purpose is to present financial information about a parent undertaking and its subsidiary undertakings as a single economic unit, show the resources controlled by the group, the group obligations, and the results of the group. There are five accounting standards relevant to consolidated financial statements: IFRS 3, IFRS 10, IFRS 11, IFRS 12 and IAS 2.
1.3 Consolidated statement of financial position
Consolidate 100% of assets and liabilities of the companies with the exception of the investment in subsidiaries in the parents statement of financial position. Include parents share capital and premium only in equity. Consolidate all the parents retained earnings but only consolidate the parents share of subsidiaries retained earnings since the acquisition. If the parent does not own 100% subsidiary this is reflected in equity that the non-controlling interest owns a share of the net assets being consolidated. Ownership is reflected in equity section of the financial position.
1.4 Consolidated statement of profit or loss
100% of the revenue and expenses of the group are included in profit after tax. After profit for the year, we show ownership of that profit attributable to the shareholders of the group and to the non-controlling interest.
1.5 Control
IFRS 10 defines control as consisting of power over the investee, exposure, 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. Power can also arise through:
- Rights to appoint, reassign or remove KMPs who can direct relevant activities
- Appoint or remove another entity that directs 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
1.6 Coterminous year ends
Some companies in a group may have different accounting dates. Such companies will often prepare financial statements up to the group accounting date for consolidation purposes. IFRS 10 allows statements made up to a date not more than three months different to the parent with due adjustment for significant transactions or other events between the dates.
1.7 Uniform accounting policies
All group companies should apply the same accounting policies on consolidation. If a group member uses different policies in its individual statements, adjustments must be made as part of the consolidation.
1.8 IFRS 12 Disclosure of interests in other entities
This requires disclosure of significant judgements and assumptions made in determining the nature of an interest in another entity and determining the type of joint arrangement in which interest is held and information about interests in subsidiaries and structured entities not controlled by an investor. For subsidiaries disclosure is required of:
- Interest that the non-controlling interest has in the group’s activities and cash flows
- Nature and extent of significant restrictions on an investor’s ability to use group assets and liabilities
- Nature of the risks associated with an entity’s interest in consolidated structured entities
- Consequences of changes in ownership interest in subsidiaries
