Group Consolidations

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Group Consolidations

A Group is a parent and all its subsidiaries.Parent is an entity that has one or more subsidiaries.

Subsidiary is an entity, including an unincorporated entity such as a

partnership that is controlled by another entity (known as the parent).

IAS 27 states:-

Consolidated financial statements shall include the accounts of allthe subsidiaries of the financial statements it is necessary toidentify the subsidiary companies by examining them against

certain test of control.

The following subsidiaries cannot be excluded from theconsolidation process:- A subsidiary whose business activities are dissimilar from those

of the other entities within the group.- Subsidiaries of venture capital organization, mutual funds, unit

trust or any similar entity.

- Subsidiaries held for sale. i.e. investments by a parent in anentity only for the purpose of selling it.

The financial statements of the parent and its subsidiaries used inthe preparation of the consolidated financial statements shall be

prepared as of the same date. When it is not possible for the parentand subsidiaries to have the same reporting date IAS 27 requiresthe subsidiary to prepare for consolidation purpose additionalfinancial statements as of the same date as the financial

statements of the parent unless it is impracticable to do so. The financial statements of a subsidiary are to be included in

consolidated financial statements from the date of acquisitionthedate on which the parent acquires control.

The financial statements of the subsidiary are to be included inconsolidated

Test of control:Direct Controlwhen any shareholder owns more than 50% of theshares (voting rights) to appoint the directors to manage the affairs of thecompany.

Control is the power t govern the financial and operating policies of an

entity so as to benefit from its activities. A co. controls another when itacquires more than 50% of the voting rights of another entity.


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Control by direct influencewhen one party has the ability toinfluence the financial and operating policies of another even though it is

not a majority shareholder there.

This happens when:

- The parent acquires the power to govern the financial andoperating policies of the entityby virtue ofan agreement withother investors.

- The parent acquires the power to govern the financial andoperating policies of the other entity by virtue of statute oragreement.

- The parent acquires the power to appoint or remove a majorityof directors or equivalent governing body of the other entity.

- The parent acquires the power to cast a majority of votes at themeeting of the members of the board of directors or equivalent

governing body of the other entity.

Control due to existence and effect of potential voting rights Anentity may own share warrants, share call options, debt or equityinstruments that can be converted into ordinary shares of another

company.

Indirect controlto pass the test of indirect control it is necessary tolook beyond the factual holding of shares and to ascertain the actualholding of shares via intermediaries.

Exclusion of a subsidiary from consolidated financial statements:

The accounts of a subsidiary need not be included in a consolidatedfinancial statements, only if all the four conditions are fulfilled:

The parent itself is a wholly or partially-owned subsidiary ofanother entity, and its other owners (including those who arenot otherwise entitled to vote) have been informed and do notobject to, the parent not presenting consolidated financialstatements.

The ultimate or any intermediate parent of the parent producesconsolidated financial statements available for public use thatcomply with IFRS.

The parents debt or equity instruments are not traded in apublic market

The parent has not filed, nor is it in the process of filing, itsfinancial statements with a securities commission or otherregulatory organization for the purpose of issuing any class ofinstruments in a public market.


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Coterminous year endsCoterminous year ends means that the financial year end of to or more

entities is the same. It follows that the financial year used for recordingfinancial statements by two or more entities is the same.

Where a subsidiary accounts used for consolidation purposes are drawnup to a different year end adjustments should be made for the effects ofsignificant transactions or events that occur between the reporting datesof the subsidiary and parent. There can be a gap of no more than threemonths between the reporting date of the parent and the subsidiary.

Tenure for Inclusion in group accountsIAS 27 states:

The financial statements of a subsidiary are to be included inconsolidated financial statements from the date on which the parentacquires control.

The financial statements of a subsidiary are to be included inconsolidated financing financial statements up to the date ofdisposal meaning the date the parent relinquishes control.

Need for using uniform accounting policies

Accounting policies are the specific principles, bases, conventions,rules and practices applied by an entity in preparing and presentingfinancial statements.

IAS 27 requires that consolidated financial statements shall be prepared

using uniform accounting policies for like transactions and other events in

similar circumstances.

IAS 27 requires that where a subsidiary uses different accounting policies,for like transactions and other events in similar circumstances, thenadjustments should be made to make its accounts suitable forconsolidation.

Intra-group transactionsIntra-group transactions are commercial transactions which take placebetween companies belonging to the same group, in the ordinary courseof business.When accounting for intra-group transactions in their individualaccounts, the companies do not make any distinction between groupcompanies and other companies.


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Process:Consolidated Balance Sheet are prepared by combining the financial

statements of the parent and the subsidiary line by line by addingtogether like items of assets, liabilities, equity, income and expenses.

IAS 27 requires that all intra-group balances and transactions ,including income and expenses are eliminated in full.

This is because: If they are not eliminated, the consolidated financial statements

will show an inflated and hence misleading picture of the financialstatus of the group.

It will be against the very definition of consolidated financialstatements which states that the group is to be considered as onesingle economic unit. One single economic unit cannot transact

with itself.

The Concept of Consolidated Financial Statements Each entity in the group prepares its own financial statements in

which investments in/by the other entity are reported. Consolidated financial statements are prepared by combining the

financial statements of all the group entities in order to determinethe financial status of the group as if it were one single entity.

Importance of Consolidated financial statements:They safeguard the interest of the ordinary shareholders of the

parent company.They show the full earnings on a parent companys investment.

The parents individual accounts show only the dividend received,if any, from subsidiaries.

They help management of the parent company form a picture ofthe group as a whole.

They help prevent companies from indulging in malpractice andmanipulation to avoid taxes, to smooth profits etc.

Related PartiesIAS 24 lists all possible cases by which a party can be related to another.

Related Partya party is related to an entity if directly, or indirectlythrough one or more intermediaries the party:

Controls, is controlled by, or is under common control with, theentity. (includes parents, subsidiaries and fellow subsidiaries)

Has an interest in the entity that gives it significant influence overthe entity; or


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Has joint control over the entityBecause the parent and the subsidiary are related they would have tomake the related party disclosures as laid down by IAS 24 whenpreparing their individual financial statements.

A related party transaction is a transfer of resources, services orobligations between related parties regardless of whether a price ischarged.

IAS 24 requires that:1. Relationships between parents and subsidiaries shall be disclosed

irrespective of whether there have been transactions between therelated parties.

2. If there have been transactions between related parties, then for anunderstanding of the potential effect of the relationship on the

financial statements, an entity shall disclose:- The nature of the related party relationship;- The amount of the transactions;- The terms and conditions, including whether they are secure- The nature of the consideration to be provided in settlement;- Details of any guarantee given or received;

The provisions for doubtful debts related to the amount ofoutstanding balances; and

The amounts written off as bad or doubtful debts due from relatedparties

3.The entity shall also disclose key management personnelcompensations (salaries plus benefits)

Who constitutes key management personnel?Key Management personnel are those having authority and responsiblefor planning, directing and controlling the activities of the entity, directlyor indirectly, including any director of that entity.

The Need for Related Party Disclosures Related party disclosures help outsiders ascertain whether the

related parties exploit their relationship to give each other anunfair advantage compared to arms length transactions with third

parties. Related parties disclosures help shareholders of group assess the

impact of related party transactions on the financial status of theirrespective entities.

RP disclosures help minority shareholders decide whether anyunfair advantage has been given to group companies. They canalso access


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How this has been advantageous/disadvantageous to their ownentity.

RP disclosures help government agencies decide whether therehave been any transactions specifically meant to avoid taxes or to

bypass regulations.

RP disclosures help financial institutions, banks etc. decidewhether there has been a misuse of loans given to group entities.Reasons why intra-group transactions are eliminated:

If such transactions are not eliminated then the consolidatedfinancial statements will show an inflated picture of the financialstatus of the group, which will be misleading.

It will also be against the definition of consolidated financialstatements, which states that the group is to be considered as one

single economic unit and so it cannot trade with itself.

The IASBs conceptual framework states that financial statements fulfilltwo purposes:

The assessment of stewardship; and The provision of information for economic decision-making

IFRS 3 requires that all business combinations shall be accounted for by

applying the purchase method.

Applying the purchase method involves the following steps:

Identifying an acquirer Measuring the cost of the business combinations; and Allocating, at the acquisition date, the cost of the business

combinations to the assets acquired and liabilities and contingentliabilities assumed.

The acquirer shall measure the cost of a business combination as theaggregate of:

The fair values, at the date of exchange of assets given, liabilitiesincurred or assumed, and equity instruments issued by

Group Consolidations

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