CONSOLIDATION Flashcards
what does control of an investee mean?
when an investor can control how much returns it will get because it has voting power of investee.
what is non controlling interest?
when investor owns less than 50% of a company and doesnt have any control over the decisions.
what is the purpose of consolidated financial statements?
FS should fairly present to the owners of a parent what their investments represent. (if they have control of net assets of a subsidary)
IAS sets rules to ensure that consolidation includes all entities (foreign and domestic) that r controlled by a parent
what are the three elements of control?
-power over the investee;
-exposure/rights to variable returns
-the ability to affect those returns through the power held.
what are the indicators of power over an investee?
-normally 50% voting rights means power.
-any potential voting rights must also be taken into account (share options or convertible. they must be exercisable at the current time or else they are ignored)
other than voting rights, power can be a result of a contractual agreement.
for example:
-the right to appoint or remove key management for benefit of investor
-the right to direct investee to say yes or no to transactions that will benefit investor.
ONLY substantive voting rights are considered. means, the investor can practically vote on decisions. (financial penalty or legal obstacles may result in non substantiveness)
an investor can have power even if other entities have influence and participate.
what does it mean to have exposure to variable returns?
variable returns mean returns related to investee’s performance, like dividends, fees or returns resulting from achieving synergies, economies of scale.
who is excluded from consolidation?
-a subsidary that has been exclusively bought for resale. it must meet criteria of IFRS 5. in this case it is carried at FV less cost to sell. and it is disclosed separately.
-immaterial
-there are no other exclusions. if it meets the critera of control, it has to be consolidated.
what conditions need to be met if parent does not want to present consolidated FS?
-the ultimate parent’s FS are as per IFRS and available for public use.
-parent’s debt and equity instruments are not traded in public market
-parent is not in the process of issuing securities in public market.
-the PARENT itself is a wholly owned subsidary and its owners dont object to it.
if partially owned , then the other owners (non controlling interest) must consent to it.
the logic behind it is that users of FS need info of group as a whole, so the ultimate parent (dada) consolidation is enough for them.
what disclosures need to be made if consolidated FS are not being made?
must disclose that:
-consolidated FS are not presented
-list the significant investments
(subsidaries, associates etc)
the % holding
place of business and country of incorporation
-the basis on which those investments have been accounted for in the separate FS.
why might a parent want to exclude subsidary in FS?
-POOR PERFORMANCE
-DIFFERENT ACTIVITIES
-POOR FINANCIAL POSITION
these reasons arent permitted
why is it necessary to use coterminous (same time) year ends
-if company’s have differnet accounting dates, in practice, fs will be prepared according to group accounting date
-ifrs 10 states that if the date is different, subsidary shud prepare additional financial information as at the parents date, unless it is impracticable.
-if impracticable, 3 months difference is allowed , imp. transcations or events must be adjusted.
