Produce consolidated Financial Statements for a Group Flashcards
When do Consolidated Financial Statements need to be prepared:
According to IFRS 10:
When the parent company controls the subsidiary, die to the number of shares it owns in the company. Usually this is when the parent owns more than 50% of ordinary shares and therefore more than 50% of voting rights.
Note, having exactly 50% does not give control.
4 types of Consolidated Financial Statements:
CSPLOCI - Consolidated Statement of Profit and Loss and Other Comprehensive Income
CSOFP - Consolidated Statement of Financial Position
CSOCIE - Consolidated Statement of Changes in Equity
CSCF - Consolidated statement of Cashflows
Why do consolidated statements need to be prepared (in accordance with IFRS10)
- The consolidation should show a true and fair view of the activities and performance of the group to stakeholders
What are Consolidated Financial Statements according to IFRS10:
The FS of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and the subsidiaries are presented as those of a single economic entity.
IFRS 10 - Exemptions:
- if it is a wholly or partially owned subsidiary of another entity and all its other owners, including the ones not allowed to vote, have been informed and do not object to, the parent not presenting consolidated FS.
- if it’s debt or equity instruments are not traded in a public market. (Except in the UK, where private companies over a certain size do still need to provide CFS)
- as long as it is not filing or in the process of filing its FS with a securities commission or other regulatory organisation for the purposes of issuing any class of instruments in a public market.
- if its ultimate or any intermediary parent produces FS that are available for public use and comply with IFRSs, in which subsidiaries are consolidated or are measured at fair value through profit and loss with this IFRS
Note:
Even though IFRS provides these exemptions, local law might still dictate otherwise.
What does Control mean, in a parent company controlling a subsidiary:
When the parent has ALL of the following:
- Power over the invested to direct relevant activities
- 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
Does an entity always need to own more than 50% in equity share capital to have control?
No, there are situations where the parent has power and therefore control with less than 50% equity share capital held. In this case consolidated accounts do need to be prepared.
For example:
- if the parent has the ability to appoint directors to the board
- if a management contract exists
- if the investor has the power to direct the investee’s activities.
What does IFRS 3 set out:
Business combinations
What does NCI stand for:
Non-controlling interest. In the consolidated FS this is the other entity that owns part of the subsidiary .
The proportion owned by the NCI is reflected in the equity section in the consolidated FS.
What and how to split the different items in the FS between the group and the NCI.
Everything is split in proportion:
Equity:
- Add up all items of equity:
Split the total between Owned by the group and Owned by the NCI
- Deduct NCI equity from total equity to show Group Equiry.
Profit:
- split in proportion to Owners of the group and NCI
- Add up to show total profit.
Total Comprehensive Income:
- split in proportion to Owners of the group and NCI
- Add up to show total CI
3 Types of Reserves in CFS and how they should be split:
Retained Earnings:
Accumulated profit and loss over its period of trading
Share premium:
Gains made on the issue of shares at a price above nominal value
Revaluation surplus:
Net gains and losses on property, plant and equipment.
These should all be split based on ownership between the parent and the NCI.
3 areas that need to match between parent and subsidiary:
These are often brought in line at the point of acquisition of the subsidiary:
- Reporting date: group and subsidiary should have the same reporting date. The difference should not be more than 3 months.
- Uniform Accounting Policies:
Adjustments need to be made by the subsidiary to make sure the parent is able to prepare CFS using uniform accounting policies. - Measurement:
The group includes income and expenses of a subsidiary in the CFS from the date it gains control until the date control ceases.
Income, expenses and depreciation for example are recognised at fair value at the acquisition date.
3 areas that need to match between parent and subsidiary:
These are often brought in line at the point of acquisition of the subsidiary:
- Reporting date: group and subsidiary should have the same reporting date. The difference should not be more than 3 months.
- Uniform Accounting Policies:
Adjustments need to be made by the subsidiary to make sure the parent is able to prepare CFS using uniform accounting policies. - Measurement:
The group includes income and expenses of a subsidiary in the CFS from the date it gains control until the date control ceases.
Income, expenses and depreciation for example are recognised at fair value at the acquisition date.
How to prepare CSPLOCI:
Step 1:
Add together 100% of income and expenses of Parent and Subsidiary.
Add 100% of:
Revenue (minus 100% of cost of sales)
= Gross Profit
Add 100% of Other Income
Minus 100% of Operatinf expenses
= Operating Profit
Add 100% of Finance Income
Minus 100% of Finance Costs
= Profit before tax
Minus 100% income tax expense
= Profit of the year
Calculate 100% of Other Comprehensive Income
= Total Compr Inc
PROFIT ATTRIBUTABLE TO:
Parent shareholders
NCI
= together Proft for the year
TOTAL COMPR INC ATTEIBUTABLE TO:
- Parent
- NCI
= together total Compr inc for the year
What is the aim of CSPLOCI:
To show the group as a single economic entity.
What to do with Dividend paid by the subsidiary to the parent:
All intra-group transactions need to be removed.
For dividends this means the part of the dividend paid to the parent company must be removed from the profit.
Because it’s already included in the group’s share of the subsidiary’s profit.
Dividend gets deducted in the CSPLOCI, from finance income to avoid double accounting.
How to recognise Goodwill and Goodwill impairment:
The impairment of goodwill is expenses and recorded as an operating expense (or sometimes as a cost of sale).
(The full amount is included at Operating Expense Level.)
If used Fair Value Method, then the expense goes in proportion:
- the NCI section, in ‘the Attributable to’ section
- And in the Group section
If the Proportionate share of net assets Method is used:
- No adjustment is required the NCI.
- The amount is fully charged to the group.
How to recognise Depreciation and Amortisation in the CSPLOCI:
Depreciation:
1) work out the Fair Value adjustment and divide that by the number of years of useful life.
2) Add this amount to the Cost of sales.
Amortisation:
1. Take the total amortisation and divide by the useful life.
2 Add this amount to the Operating Expense (like you’ve done for the Goodwill impairment)
How to eliminate intra-group transactions:
DR Group Revenue
CR Group cost of sales
Provision for Unrealised Profit (PUP). What is it and how does it get recognised:
This is when an entity sells goods to the other entity in the group, but the items have not been sold yet at the reporting date.
An adjustment needs to be made for unrealised profits.
No profit can be made at this stage. It needs to be eliminated, as the entities are seen as one entity in the CSPLOCI
Recognition of PUP - if the parent sold goods to the subsidiary:
Remove unrealised profit from the CSPLOCI by increasing the Cost of Sales.
First Eliminate the Intra-Group Sale
1) DR Group Revenue by the amount of the intra-group sale
2) CR Group Cost of Sale by same amount
Second Eliminate Unrealised Profit
DR Group Cost of Sales for the amount of profit that hasn’t been realised
CR Group Inventory by same amount
Recognition of PUP - if the subsidiary sold goods to the parent:
- Remove unrealised profit from the CSPLOCI:
- by increasing the cost of sales
- adjust the profit attributable to NCI for its share of the unrealsied profit.
How to recognise interest on a loan made between parent and subsidiary:
This needs to be eliminated upon consolidation, in the same way as intragroup sales, purchases and dividends.
Both the Finance Cost (interest paid) (by the subsidiary for example) needs to be eliminated, as it didn’t leave the group.
And the finance income (the same interest received by the parent) also needs to be eliminated.
What does TCI stand for:
Total Comprehensive Income
= the TCI generated by the group members collectively.
