Principles of consolidated financial statements

Question 1

What if one company owns more than 50% of the ordinary shares of another company:

Answer 1

• this will usually give the first company ‘control’ of the second company
• the first company (the parent company), has enough voting power to appoint all the directors of the second company (subsidiary company)
• P is able to manage S as if it were merely a department of P, rather than a separate entity
• in strict legal terms P and S remain distinct, but in economic substance they can be regarded as a single unit (group)

Question 2

What is the purpose of consolidated accounts

Answer 2

• present financial information about a parent undertaking and its subsidiary undertakings as a single economic unit
• show the economic resources controlled by the group
• show the obligations of the group
• show the results the group achieves with its resources

Question 3

Definition of Parent

Answer 3

• an entity that controls one or more entities

Question 4

Definition of the Subsidiary

Answer 4

• an entity that is controlled by another entity

Question 5

Definition of the Control of an investee

Answer 5

• an investor controls an investee when the investor is exposed, or has rights, to variable returns from tis involvement with the investee and has the ability to affect those returns through its power over the investee

Question 6

Three elements of the control

Answer 6

• power over the investee
• 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

Question 7

Determination of the investor has a power over an investee

Answer 7

• exercise of the majority of voting rights in an investee
• contractual arrangements between the investor and other parties holding less than 50% of the voting shares, with all other equity interests held by a numerically large, dispersed and unconnected group
• potential voting rights may result in an investor gaining or losing control at some specific date.

Question 8

Exemption from preparation of group financial statements

Answer 8

-the parent itself is a wholly owned subsidiary or a partially-owned subsidiary and its owners, including those not otherwise entitled to vote, have been informed about, and do not object
- the parent’s debt or equity instruments are not traded in a public market
- the parent did not file its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market
- the ultimate parent company produces consolidated financial statements that comply with IFRS Standards and are available for public use

Question 9

27 Separate Financial Statements requires disclosures when the exemption of group financial statements

Answer 9

• the fact that consolidated financial statements have not been presented
• a list of significant investments including percentage shareholding, principal place of business and country of incorporation
• the bases on which those investments listed above have been accounted for in its separate financial statements

Question 10

Reasons for wanting to exclude a subsidiary but it’s not permitted under IFRS Standards

Answer 10

• poor performance of the subsidiary
• poor financial position of the subsidiary
• differing activities of the subsidiary from the rest of the group

Question 11

Reasons for exclusion of subsidiaries and accounting treatment

Answer 11

Subsidiary held for resale - held as current asset investment at the lower of carrying amount and fair value less costs to sell
Materiality - accounting standards do not apply to immaterial items. Therefore an immaterial item need not be consolidated.

Question 12

Non-coterminous year ends

Answer 12

Differing accounting dates.
IFRS 10 allows use of subsidiary financial statements made up to a date of not more than three months earlier or later than the parent’s reporting date, with due adjustment for significant transactions or other events between the dates

Question 13

Uniform accounting policies

Answer 13

If a member of a group uses accounting policies other than those adopted in the consolidated financial statements for like transactions and events in similar circumstances, appropriate adjustments are made to that group member’s financial statements in preparing the consolidated financial statements to ensure conformity with the group’s accounting policies