Group

Group Financial
Financial Statements
Statements // Consolidation
Consolidation –– Chapters
Chapters 20
20 && 21
21

Syllabus
IFRS 3 Business Combinations
1. Describe the concept of a group as a single economic unit

2. Define subsidiary, parent and control by identifying simple examples

3. Describe situations when control is presumed to exist

4. Identify and describe circumstances in which an entity is required to prepare and present
consolidated financial statements.

5. Prepare simple consolidated Balance Sheet & Consolidated Profit & Loss involving single subsidiary
 What
What isis aa group?
group?
If one company owns more than 50% of ordinary shares of another company:

• this will give first company ‘control’ of second company

• first company (parent / holding company, P) has enough voting power to appoint majority
of directors of second company (subsidiary company, S)

• P is able to manage S as if it were merely a department of P, rather than a separate entity

• legally P & S remain distinct, but in economic substance, regarded as single unit (a ‘group’).
 Concept
Concept of
of Group
Group
Legally every company is a separate entity, from economic point of view both companies are
part of one group.

International accounting standards require a parent company to produce consolidated

financial statements showing position and results of whole group.

Section 228 – Companies Act 2017

Consolidated financial statements.— (1) There shall be attached to financial statements of a holding
company having a subsidiary or subsidiaries, at end of financial year at which the holding company’s
having financial statements are made out, consolidated financial statements of group presented as
those of a single enterprise.
PURPOSE
PURPOSE OF
OF GROUP
GROUPACCOUNTS
ACCOUNTS
Present financial information of parent and its subsidiary as a single economic unit

• show group results (P&L)

• show economic resources controlled by group (assets)

• show obligations of group (Liabilities)

Requirements
Requirements for
for Consolidated
Consolidated Financial
Financial Statements
Statements
IFRS 10 - Consolidated financial statements should be prepared when parent
company controls the subsidiary.
Exemption
Exemption from
from Consolidated
Consolidated Financial
Financial Statements
Statements
If parent itself is wholly / partially-owned subsidiary & its owners have been informed about parent
not preparing consolidated financial statements;

Parent's debt or equity instruments are not traded in public market;

Ultimate parent produces consolidated statements complying with IFRS & available publicly
 EXCLUDED
EXCLUDED SUBSIDIARIES
SUBSIDIARIES
IFRS 10 & IAS 27 do not specify circumstances when subsidiaries be excluded from consolidation.

Reason for Exclusion Accounting Treatment

Subsidiary held for resale Held as current asset at lower of carrying value & net realizable value

Materiality Accounting standards do not apply to immaterial items, therefore need not be
consolidated
NON-CO-TERMINOUS
NON-CO-TERMINOUS YEAR
YEAR ENDS
ENDS
Some companies in group may have differing accounting dates.

In practice such companies will prepare financial statements up to group accounting date for consolidation.

IFRS 10 states that where reporting dates of parent & subsidiary are different, then subsidiary should prepare
financial information as of same date as financial statements of parent unless it is impracticable to do so.

If it is impracticable to do so, IFRS 10 allows use of subsidiary financial statements of not more than three months
earlier or later than parent's reporting date, with due adjustment for significant transactions between the dates.
Net Worth of a Company
• Net Worth of a Company is:

• Net Worth = Assets – Liabilities

OR = Share Holders Equity

Because Assets – Liabilities = Capital

CONSOLIDATED
CONSOLIDATED STATEMENT
STATEMENT OF
OF FINAL
FINAL POSITION
POSITION
Basic Principle

RULE – 1 - Basic principle of a consolidated statement of financial position is that it shows all assets
& liabilities of parent and subsidiary.

Intra-group items are excluded.

e.g receivable/payable from parent to subsidiary or subsidiary to parent are excluded..

Investment in Subsidiary & Share Capital of Subsidiary are knocked off.

THE
THEPRICIPLE
PRICIPLEOF
OFCANCELLATION
CANCELLATION

In consolidation we club / add balance sheet of P with balance sheet of S

Intra-group items are cancelled.

If P Ltd had sold goods to S Ltd, its subsidiary, but S Ltd had not yet paid for them, then it is shown as
debtor in balance sheet of P Ltd & as creditor in balance sheet of S Ltd.

Shares in subsidiary by parent are shown as investment on assets side of parent’s balance sheet. In
balance sheet of subsidiary, exactly those same shares are shown as share capital.

Group financial statements show how group as a whole has dealt with world outside. Transactions
within group do not represent dealings with outside world.
METHOD
METHOD OF
OF PREPARING
PREPARING CONSOLIDATED
CONSOLIDATED STATEMENT
STATEMENT OF
OF FINAL
FINAL POSITION
POSITION

(1)Investment in subsidiary (S) shown in parent’s (P’s) statement of financial position is

replaced by net assets of S.

(2) Cost of investment in S is cancelled with ordinary share capital & reserves of subsidiary

This leaves a consolidated statement of financial position showing:

• net assets of the whole group (P + S)

• share capital of group which always equals share capital of P only and

• retained profits, comprising profits made by group (i.e. all of P’s historical profits + profits
made by S post-acquisition).
RULE – 2 is that like things cancel out each other.
RULE
RULE33––COMPUTE
COMPUTEGOOD
GOODWILL
WILLON
ONACQUISITION
ACQUISITION

Sometimes amount paid by parent is not same as subsidiary’s figure for share
capital.

In accounting, where amount paid for something exceeds stated value, difference
is known as goodwill; if consideration is less than stated value, it is known as
negative goodwill / cost of control.
• Less than 100% Shares of Subsidiary are Purchased
• Rule 4 - even if less than 100% shares of subsidiary have been
bought
• whole of assets of subsidiary will be shown in consolidated
balance sheet.

• It can be seen that both balance sheets show amount of assets which P
owns by virtue of its proportionate shareholding.
• On other hand second balance sheet gives a fuller picture, as it shows
that P has control of all of assets of S, although it does not own all of
them.
• The statements of financial position of H and S as at 31 December 2018 were as follows.
Non-current assets H S
• Property, plant & equipment 85,000 18,000
• Investments: Shares in S 60,000
––––––
145,000
• Current assets 160,000 84,000
305,000 102,000
Equity: –––––– ––––––
Ordinary Rs. 1 shares 65,000 20,000
Share premium 35,000 10,000
Retained earnings 70,000 25,000
–––––– ––––––
170,000 55,000
• Current liabilities 135,000 47,000
–––––– ––––––
305,000 102,000