OVERVIEW
Objective
¾
To describe the provisions of IAS 27 Consolidated and Separate Financial Statements.¾
To list the disclosure requirements of IAS 27 and IFRS 3 Business Combinations.INCLUSIONS
¾ Definitions
¾ Accounting for subsidiaries in separate financial statements ¾ Truth and fairness
RELATED STANDARDS INTRODUCTION
EXEMPTION FROM PREPARING GROUP
ACCOUNTS ¾ Parent and control
¾ Acquisition method
SUNDRY PROVISIONS OF
IAS 27 ¾ Results of
intra-group trading ¾ Accounting year
ends
¾ Accounting policies ¾ Date of acquisition
or disposal
¾ Rule ¾ Rationale
¾ IAS 24 Related Party Disclosures ¾ IFRS 8 Operating
1
INTRODUCTION
1.1
Definitions
¾
A business combination – a transaction or other event in which the acquirer obtains control of one or more businesses. Transactions sometimes referred to as “true mergers” or “mergers of equals” are also business combinations as that term is used in this standard.¾
Acquisition date – the date on the acquirer obtains control of the acquiree.¾
Control – the power to govern the financial and operating policies of anentity so as to obtain benefits from its activities.
¾
A subsidiary – an entity that is controlled by another entity (known as the parent).¾
A parent – an entity that has one or more subsidiaries.¾
A group – a parent and all its subsidiaries.¾
Consolidated financial statements – are the financial statements of a group presented as those of a single entity.¾
Non-controlling interest – the equity in a subsidiary not attributable, directly or indirectly, to a parent.¾
Goodwill – an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised.1.2
Accounting for subsidiaries in separate financial statements
¾
In a parent’s separate financial statements, investments in subsidiaries that are included in the consolidated financial statements should be either: Carried at cost;
Accounted for as described in IAS 39 Financial Instruments: Recognition and
Measurement (i.e. at fair value).
Commentary
1.3
Truth and fairness
¾
Group accounts aim to give a true and fair view to the owners of the parent company of what their investments represents (i.e. control and ownership of the net assets ofsubsidiary companies).
¾
Rules are needed to ensure that the consolidation includes all entities controlled by the parent company – the definition of subsidiaries attempts to do this (see next section).¾
On occasion no useful purpose is served by a parent company producing groupaccounts. Thus in certain circumstances parent companies are exempt from the general requirement.
2
INCLUSIONS
2.1
Parent and control
¾
Control is presumed to exist when the parent owns, directly or indirectly throughsubsidiaries, more than one half of the voting power of an entity unless, it can be clearly demonstrated that such ownership does not constitute control.
¾
If on acquisition a subsidiary meets the criteria to be classified as held for sale, in accordance with IFRS 5, it is accounted for at fair value less costs to sell.Commentary
If a large group of subsidiaries are acquired, the parent may intend to dispose of unwanted subsidiaries. These may fall within the definition of held for sale.
¾
Control also exists even when the parent owns one half or less of the voting power of an entity when there is power: over more than one half of the voting rights by virtue of an agreement with other
investors;
to govern the financial and operating policies of the entity under a statute or an
agreement;
to appoint or remove the majority of the members of the board of directors or
equivalent governing body; or
to cast the majority of votes at meetings of the board of directors or equivalent
governing body.
¾
When assessing whether control exists, the existence and effect of currently exercisable potential ordinary shares (i.e. options or convertibles) should be considered.Illustration 1
4. Basic principles of the consolidated financial statements(extract)
4.1 Scope of consolidation and consolidation methods
The consolidated financial statements include those companies in which Bayer AG directly or indirectly has a majority of the voting rights (subsidiaries) or from which it is able to derive the greater part of the economic benefit and bears the greater part of the risk by virtue of its power to govern corporate financial and operating policies, generally through an ownership interest greater than 50 percent. Inclusion of such companies’ accounts in the consolidated financial statements begins when Bayer AG starts to exercise control over the company and ceases when it is no longer able to do so.
Example 1
Identify the entities to be included in the group as defined by IAS 27, in each of the following situations:
(a)
A holds no shares in C but controls it A
through a contract with C’s owners C (b)
A 60% B
45% The holders of another 30% of the equity in C have a contract under which they vote
according to B’s direction C
(c)
A
60% 60%
B D
30% C 30%
(d)
Shareholders in common
100% 100%
A B
2.2
Acquisition method
¾
IFRS 3 requires that all business combinations be accounted for using the acquisition method of accounting.¾
This involves: identifying an acquirer;
determining the acquisition date;
recognising and measuring the identifiable assets acquired, the liabilities
assumed and any non-controlling interest in the acquiree; and
recognising and measuring goodwill or a gain from a bargain purchase.
Commentary
These issues will be considered in later sessions.
3
SUNDRY PROVISIONS OF IAS 27
3.1
Results of intra-group trading
¾
Intra-group balances and intra-group transactions and resulting unrealised profits should be eliminated in full.3.2
Accounting year ends
3.2.1
Co-terminous year ends
¾
The financial statements of the parent and its subsidiaries used in the preparation of the consolidated financial statements are usually drawn up to the same date.3.2.2
Different reporting dates
¾
Either the subsidiary must prepare special statements as at the same date as the group.¾
Or, if it is impracticable to do this, financial statements drawn up to different reportingdates may be used if:
the difference is no greater than three months; and
adjustments are made for the effects of significant transactions or other events that
occur between those dates and the date of the parent’s financial statements.
3.3
Accounting policies
¾
Consolidated financial statements should be prepared using uniform accounting policies for similar transactions and events.3.4
Date of acquisition or disposal
¾
The results of operations of a subsidiary are included in the consolidated financial statements as from the date of acquisition.¾
The date of acquisition is the date on which control of the acquired subsidiary is effectively obtained (IFRS 3 Business Combinations).¾
The date of acquisition and the date of disposal are based on when control passes not necessarily the legal date of acquisition or date of disposal.¾
The results of operations of a subsidiary disposed of are included in the consolidated statement of comprehensive income until the date of disposal, which is the date on which the parent ceases to have control of the subsidiary.4
EXEMPTION FROM PREPARING GROUP ACCOUNTS
4.1
Rule
¾
A parent need not present consolidated financial statements if: it is a wholly-owned or partially-owned subsidiary;
Non-controlling shareholders must give their consent.
the parent’s debt or equity instruments are not traded on a public market; the parent has not filed its financial statements with a recognised stock market; the ultimate (or intermediate) parent presents consolidated financial statements in
accordance with IFRSs.
Commentary
“Partially owned” is usually taken to mean 90% in many countries.
Commentary
4.2
Rationale
¾
Users of the financial statements of a parent are usually concerned with, and need to be informed about, the financial position, results of operations and changes in financial position of the group as a whole.¾
This need is served by consolidated financial statements, which present financial information about the group as that of a single entity without regard for the legal boundaries of the separate legal entities.¾
A parent that is wholly owned by another entity may not always present consolidated financial statements since such statements may not be required by its parent and the needs of other users may be best served by the consolidated financial statements of the ultimate parent.5
RELATED STANDARDS
¾
The F7 syllabus excludes IAS 24 Related Party Disclosure and IFRS 8 Operating Segments, however the syllabus does require knowledge of the fact the two standards exist and have an impact on the disclosures that a group will have to make in its consolidated financial statements.5.1
IAS 24 Related Party Disclosures
¾
The objective of the standard is to ensure that an entity’s financial statements contain the disclosures necessary to draw attention to the possibility that its financial position and performance may have been affected by the existence of a related party.¾
Under the definitions of related parties, a subsidiary would be a related party of its parent, and vice versa.¾
Wherever a relationship exists then the standard requires that certain disclosures are made regarding the relationship. These disclosures will include: Information regarding transactions between the related parties; Any outstanding balances between parties;
Any provisions made in respect of doubtful debts between parties, and the impact
upon the statement of comprehensive income of bad debt charges.
¾
The disclosures will enable users to form a view about the effects of any related party relationships and transactions upon the consolidated financial statements.5.2
IFRS 8 Operating Segments
¾
Financial statements must disclose information regarding the revenue, costs and assets of the various operating segments that make up the entity.¾
It is very likely that a subsidiary would meet the definition of an operating segment under IFRS 8. The consolidated financial statements will therefore include disclosure regarding the results and position of each subsidiary, presuming the definition is met.¾
Users of financial statements will therefore be able to see which part of the group isprofitable or loss making and what each segment is returning in terms of capital employed.
FOCUS
You should now be able to:
¾
describe the concept of a group as a single economic unit;¾
explain and apply the definition of subsidiary companies within relevant accounting standards;¾
describe why directors may not wish to consolidate a subsidiary and the circumstances where this is permitted;¾
explain the need for using coterminous year ends and uniform accounting policies when preparing consolidated financial statements;¾
indicate the effect that the related part relationship between a parent and subsidiary may have on the subsidiary’s entity statements and the consolidated financial statements;¾
recognise how related party relationships have the potential to mislead users.EXAMPLE SOLUTION
Solution 1 — Entities in the group
(a) A is not the parent of C as A does not hold any equity and therefore the relationship is excluded from the scope of IFRS 3. However, if C is a Special Purpose Entity (SPE) created for the benefit of A, and if A has control of the SPE then SIC 12 states that even though there are no voting rights held by A the SPE should be consolidated into the consolidated accounts.
(b) A is the parent of B. A is also the parent of C as it has control of 75% of the voting rights of C.
(c) A is the parent of B and D. A may therefore appear to control C through a 60% indirect shareholding. In which case A would be the parent. However, A effectively owns only a 36% interest in C. The substance of this relationship would therefore require scrutiny. (d) There is no group in this situation as A and B fall within the ownership of shareholders
