Consolidated and Separate Financial Statements [IAS 27]

Consolidated Financial StatementsIAS 27 shall be applied in the preparation and presentation of consolidated financial statements for a group of entities under the control of a parent. This Standard does not deal with methods of accounting for business combinations and their effects on consolidation, including goodwill arising on a business combination. This Standard shall also be applied in accounting for investments in subsidiaries, jointly controlled entities and associates when an entity elects, or is required by local regulations, to present separate financial statements.

 

Important Definitions In IAS 27

  • The following terms are used in this Standard with the meanings specified:
  • Consolidated financial statements – are the financial statements of a group presented as those of a single economic entity.
  • Control – is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
  • A group – is a parent and all its subsidiaries.
  • Non-controlling interest – is the equity in a subsidiary not attributable, directly or indirectly, to a parent.
  • A parent – is an entity that has one or more subsidiaries.
  • Separate financial statements – are those presented by a parent, an investor in an associate or a venturer in a jointly controlled entity, in which the investments are accounted for on the basis of the direct equity interest rather than on the basis of the reported results and net assets of the investees.
  • A subsidiary – is an entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the parent).
  • A parent or its subsidiary may be an investor in an associate or a venturer in a jointly controlled entity – In such cases, consolidated financial statements prepared and presented in accordance with this Standard are also prepared so as to comply with IAS 28 Investments in Associates and IAS 31 Interests in Joint Ventures.
  • For an entity described in the above, separate financial statements – are those prepared and presented in addition to the financial statements. Separate financial statements need not be appended to, or accompany, those statements.
  • The financial statements of an entity that does not have a subsidiary, associate or venturer’s interest in a jointly controlled entity – are not separate financial statements.

 

 

Presentation Of Consolidated Financial Statements

A parent, other than a parent described on the next paragraph, shall present consolidated financial statements in which it consolidates its investments in subsidiaries in accordance with this Standard.

A parent need not present consolidated financial statements if and only if:

  • the parent is itself a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements;
  • the parent’s debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets);
  • the parent did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market; and
  • the ultimate or any intermediate parent of the parent produces consolidated financial statements available for public use that comply with International Financial Reporting Standards.

 

 
Scope Of Consolidated Financial Statements

Consolidated financial statements shall include all subsidiaries of the parent. Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than half of the voting power of an entity unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control. Control also exists when the parent owns half or less of the voting power of an entity when there is:

  • power over more than half of the voting rights by virtue of an agreement with other investors;
  • power to govern the financial and operating policies of the entity under a statute or an agreement;
  • power to appoint or remove the majority of the members of the board of directors or equivalent governing body and control of the entity is by that board or body; or
  • power to cast the majority of votes at meetings of the board of directors or equivalent governing body and control of the entity is by that board or body.

 

An entity may own share warrants, share call options, debt or equity instruments that are convertible into ordinary shares, or other similar instruments that have the potential, if exercised or converted, to give the entity voting power or reduce another party’s voting power over the financial and operating policies of another entity (potential voting rights).

The existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by another entity, are considered when assessing whether an entity has the power to govern the financial and operating policies of another entity. Potential voting rights are not currently exercisable or convertible when, for example, they cannot be exercised or converted until a future date or until the occurrence of a future event.

In assessing whether potential voting rights contribute to control, the entity examines all facts and circumstances (including the terms of exercise of the potential voting rights and any other contractual arrangements whether considered individually or in combination) that affect potential voting rights, except the intention of management and the financial ability to exercise or convert such rights. A subsidiary is not excluded from consolidation simply because the investor is a venture capital organization, mutual fund, unit trust or similar entity.`

A subsidiary is not excluded from consolidation because its business activities are dissimilar from those of the other entities within the group. Relevant information is provided by consolidating such subsidiaries and disclosing additional information in the consolidated financial statements about the different business activities of subsidiaries. For example, the disclosures required by IFRS 8 Operating Segments help to explain the significance of different business activities within the group.

 

Consolidation Procedures

In preparing consolidated financial statements, an entity combines the financial statements of the parent and its subsidiaries line by line by adding together like items of assets, liabilities, equity, income and expenses. In order that the consolidated financial statements present financial information about the group as that of a single economic entity, the following steps are then taken:

  • the carrying amount of the parent’s investment in each subsidiary and the parent’s portion of equity of each subsidiary are eliminated (see IFRS 3, which describes the treatment of any resultant goodwill);
  • non-controlling interests in the profit or loss of consolidated subsidiaries for the reporting period are identified; and
  • non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the parent’s ownership interests in them.

Non-controlling interests in the net assets consist of:

  • the amount of those non-controlling interests at the date of the original combination calculated in accordance with IFRS 3; and
  • the non-controlling interests’ share of changes in equity since the date of the combination.

 

When potential voting rights exist, the proportions of profit or loss and changes in equity allocated to the parent and non-controlling interests are determined on the basis of present ownership interests and do not reflect the possible exercise or conversion of potential voting rights.

Intragroup balances, transactions, income and expenses shall be eliminated in full. Intragroup balances and transactions, including income, expenses and dividends, are eliminated in full. Profits and losses resulting from intragroup transactions that are recognised in assets, such as inventory and fixed assets, are eliminated in full. Intragroup losses may indicate an impairment that requires recognition in the consolidated financial statements. IAS 12 Income Taxes applies to temporary differences that arise from the elimination of profits and losses resulting from intragroup transactions.

The financial statements of the parent and its subsidiaries used in the preparation of the consolidated financial statements shall be prepared as of the same date. When the end of the reporting period of the parent is different from that of a subsidiary, the subsidiary prepares, for consolidation purposes, additional financial statements as of the same date as the financial statements of the parent unless it is impracticable to do so.

Financial statements of a subsidiary used in the preparation of consolidated financial statements are prepared as of a date different from that of the parent’s financial statements, adjustments shall be made for the effects of significant transactions or events that occur between that date and the date of the parent’s financial statements. In any case, the difference between the end of the reporting period of the subsidiary and that of the parent shall be no more than three months. The length of the reporting periods and any difference between the ends of the reporting periods shall be the same from period to period. Consolidated financial statements shall be prepared using uniform accounting policies for like transactions and other events in similar circumstances.

If a member of the 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 its financial statements in preparing the consolidated financial statements.

The income and expenses of a subsidiary are included in the consolidated financial statements from the acquisition date as defined in IFRS 3. Income and expenses of the subsidiary shall be based on the values of the assets and liabilities recognized in the parent’s consolidated financial statements at the acquisition date. For example, depreciation expense recognized in the consolidated statement of comprehensive income after the acquisition date shall be based on the fair values of the related depreciable assets recognized in the consolidated financial statements at the acquisition date. The income and expenses of a subsidiary are included in the consolidated financial statements until the date when the parent ceases to control the subsidiary.

Non-controlling interests shall be presented in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent.

Profit or loss and each component of other comprehensive income are attributed to the owners of the parent and to the non-controlling interests. Total comprehensive income is attributed to the owners of the parent and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.

If a subsidiary has outstanding cumulative preference shares that are classified as equity and are held by non-controlling interests, the parent computes its share of profit or loss after adjusting for the dividends on such shares, whether or not dividends have been declared.

Changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions (ie transactions with owners in their capacity as owners).

In such circumstances the carrying amounts of the controlling and non-controlling interests shall be adjusted to reflect the changes in their relative interests in the subsidiary. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received shall be recognized directly in equity and attributed to the owners of the parent.

 

Loss Of Control

A parent can lose control of a subsidiary with or without a change in absolute or relative ownership levels. This could occur, for example, when a subsidiary becomes subject to the control of a government, court, administrator or regulator. It also could occur as a result of a contractual agreement.

A parent might lose control of a subsidiary in two or more arrangements (transactions). However, sometimes circumstances indicate that the multiple arrangements should be accounted for as a single transaction. In determining whether to account for the arrangements as a single transaction, a parent shall consider all of the terms and conditions of the arrangements and their economic effects.

One or more of the following may indicate that the parent should account for the multiple arrangements as a single transaction:

  • They are entered into at the same time or in contemplation of each other.
  • They form a single transaction designed to achieve an overall commercial effect.
  • The occurrence of one arrangement is dependent on the occurrence of at least one other arrangement.
  • One arrangement considered on its own is not economically justified, but it is economically justified when considered together with other arrangements. An example is when one disposal of shares is priced below market and is compensated for by a subsequent disposal priced above market.

 

If a parent loses control of a subsidiary, it:

  • derecognizes the assets (including any goodwill) and liabilities of the subsidiary at their carrying amounts at the date when control is lost;
  • derecognizes the carrying amount of any non-controlling interests in the former subsidiary at the date when control is lost (including any components of other comprehensive income attributable to them);
  • recognizes: (i) the fair value of the consideration received, if any, from the transaction, event or circumstances that resulted in the loss of control; and (ii) if the transaction that resulted in the loss of control involves a distribution of shares of the subsidiary to owners in their capacity as owners, that distribution;
  • recognizes any investment retained in the former subsidiary at its fair value at the date when control is lost;
  • reclassifies to profit or loss, or transfers directly to retained earnings if required in accordance with other IFRSs, the amounts identified in paragraph 35; and
  • recognizes any resulting difference as a gain or loss in profit or loss attributable to the parent.

 

If a parent loses control of a subsidiary, the parent shall account for all amounts recognized in other comprehensive income in relation to that subsidiary on the same basis as would be required if the parent had directly disposed of the related assets or liabilities. Therefore, if a gain or loss previously recognized in other comprehensive income would be reclassified to profit or loss on the disposal of the related assets or liabilities, the parent reclassifies the gain or loss from equity to profit or loss (as a reclassification adjustment) when it loses control of the subsidiary. For example: if a subsidiary has cumulative exchange differences relating to a foreign operation and the parent loses control of the subsidiary, the parent shall reclassify to profit or loss the gain or loss previously recognized in other comprehensive income in relation to the foreign operation. Similarly, if a revaluation surplus previously recognized in other comprehensive income would be transferred directly to retained earnings on the disposal of the asset, the parent transfers the revaluation surplus directly to retained earnings when it loses control of the subsidiary.

On the loss of control of a subsidiary, any investment retained in the former subsidiary and any amounts owed by or to the former subsidiary shall be accounted for in accordance with other IFRSs from the date when control is lost. The fair value of any investment retained in the former subsidiary at the date when control is lost shall be regarded as the fair value on initial recognition of a financial asset in accordance with IFRS 9 Financial Instruments or, when appropriate, the cost on initial recognition of an investment in an associate or jointly controlled entity.

When an entity prepares separate financial statements, it shall account for investments in subsidiaries, jointly controlled entities and associates either:

  • at cost; or
  • in accordance with IFRS 9 and IAS 39.

 

The entity shall apply the same accounting for each category of investments. Investments accounted for at cost shall be accounted for in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, when they are classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with IFRS 5. The accounting for investments in accordance with IFRS 9 and IAS 39 is not changed in such circumstances. An entity shall recognize a dividend from a subsidiary, jointly controlled entity or associate in profit or loss in its separate financial statements when its right to receive the dividend is established.

When a parent reorganizes the structure of its group by establishing a new entity as its parent in a manner that satisfies the following criteria:

  • the new parent obtains control of the original parent by issuing equity instruments in exchange for existing equity instruments of the original parent;
  • the assets and liabilities of the new group and the original group are the same immediately before and after the reorganization; and
  • the owners of the original parent before the reorganization have the same absolute and relative interests in the net assets of the original group and the new group immediately before and after the reorganization and the new parent accounts for its investment in the original parent in accordance with paragraph 38(a) in its separate financial statements, the new parent shall measure cost at the carrying amount of its share of the equity items shown in the separate financial statements of the original parent at the date of the reorganization.

 

Investments in jointly controlled entities and associates that are accounted for in accordance with IFRS 9 and IAS 39 in the consolidated financial statements shall be accounted for in the same way in the investor’s separate financial statements.

 

Disclosure

The following disclosures shall be made in consolidated financial statements:

  • The nature of the relationship between the parent and a subsidiary when the parent does not own, directly or indirectly through subsidiaries, more than half of the voting power;
  • The reasons why the ownership, directly or indirectly through subsidiaries, of more than half of the voting or potential voting power of an investee does not constitute control;
  • The end of the reporting period of the financial statements of a subsidiary when such financial statements are used to prepare consolidated financial statements and are as of a date or for a period that is different from that of the parent’s financial statements, and the reason for using a different date or period;
  • The nature and extent of any significant restrictions (e.g. resulting from borrowing arrangements or regulatory requirements) on the ability of subsidiaries to transfer funds to the parent in the form of cash dividends or to repay loans or advances;
  • A schedule that shows the effects of any changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control on the equity attributable to owners of the parent; and
  • If control of a subsidiary is lost, the parent shall disclose the gain or loss, if any, recognized in accordance with paragraph 34, and:
  • The portion of that gain or loss attributable to recognizing any investment retained in the former subsidiary at its fair value at the date when control is lost; and the line item(s) in the statement of comprehensive income in which the gain or loss is recognized (if not presented separately in the statement of comprehensive income).

 

When separate financial statements are prepared for a parent, elects not to prepare consolidated financial statements, those separate financial statements shall disclose:

  • The fact that the financial statements are separate financial statements; that the exemption from consolidation has been used; the name and IAS 27 country of incorporation or residence of the entity whose consolidated financial statements that comply with International Financial Reporting Standards have been produced for public use; and the address where those consolidated financial statements are obtainable;
  • A list of significant investments in subsidiaries, jointly controlled entities and associates, including the name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held.

 

When a parent, venturer with an interest in a jointly controlled entity or an investor in an associate prepares separate financial statements, those separate financial statements shall disclose:

  • The fact that the statements are separate financial statements and the reasons why those statements are prepared if not required by law;
  • A list of significant investments in subsidiaries, jointly controlled entities and associates, including the name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held; and
  • A description of the method used to account for the investments listed under (b); and shall identify the financial statements prepared in accordance with paragraph 9 of this Standard or IAS 28 and IAS 31 to which they relate.

Author: Lie Dharma Putra

Putra is a CPA. His last position, in the corporate world, was a controller for a corporation in Costa Mesa, CA. After spending 15 years as a nine-to-five employee, he decided to serve more companies, families and even individuals, as a trusted business advisor. He blogs about accounting, finance and tax, during his spare time, and helps accounting students (around the globe) to understand the subject matter easier , faster. Follow him on twitter @LieDharmaPutra or add him to your circle at Google Plus Lie+

One thought on “Consolidated and Separate Financial Statements [IAS 27]”

  1. “”Changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions (ie transactions with owners in their capacity as owners). “”

    If I capitalized the profit on share purchases in a subsidiary after control has been obtained as reserve,under what conditions the reserve can be released ?

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