When assessing control, the purpose and design of the investee should be taken into account. An investee may be structured in such a way that voting rights are not the primary determinant of control (IFRS 10.B5-B8;B51-B54). This criterion is particularly applicable in assessing control over ‘special purpose entities’ or ‘structured entities‘, i.e., entities designed so that voting or similar rights do not primarily dictate who controls the entity.
The objective of this Standard is to lay down principles and procedures for preparation and presentation of consolidated financial statements. Consolidated financial statements are presented by a parent (also known as holding enterprise) to provide financial information about the economic activities of its group. These statements are intended to present financial information about a parent and its subsidiary(ies) as a single economic entity to show the economic resources controlled by the group, the obligations of the group and results the group achieves with its resources. IFRS 10 is applicable to all entities acting as a parent, except for those meeting the scope exemption criteria detailed in IFRS 10.4-4B.
EFRAG report on application issues of IFRS 10, IFRS 11, IFRS 12
Illustration (4)
Red Co acquired 80% of Blue Co’s 40,000 $1 ordinary share capital on 1 January 20X2 for a consideration of $3.50 cash per share. However, in this particular question, by reading the question carefully you will see that eliminating the unrealised profit was a red herring as we were simply being asked for the consolidated revenue. Where the carrying amount of the investment in the subsidiary is https://accounting-services.net/what-is-accounting-for-startups/ different from its cost, the carrying amount is considered for the purpose of above computations. When an investor holds decision-making rights but perceives itself as an agent, it should evaluate whether it has significant influence over the investee. These are amounts owing within the group rather than outside thegroup and therefore they must not appear in the consolidated statementof financial position.
Thus, company A has earned some revenue from selling, but the group as a whole did not make any profit out of that transaction. Until those goods are sold to an outsider company, the group has unrealised profit. The PUP is added back to cost of sales, which eliminates the unrealised profit.
AS 21 – Consolidated Financial Statements
However, ordinarily, the meaning of the words ‘near future’ is considered as not more than twelve months from acquisition of relevant investments unless a longer period can be justified on the basis of facts and circumstances of the case. When control (or significant influence) is shared among two or more investors, the investee is not a subsidiary, and other relevant IFRS standards should be applied (i.e., IFRS 11, IAS 28, or IFRS 9). Accounting for In-Kind Donations to Nonprofits IFRS 3 covers the accounting for business combinations (i.e., gaining control of one or more businesses). The presence of protective rights does not preclude another party from having control over an investee. For instance, if the veto pertains to modifications in relevant activities that significantly affect investee returns for the investor’s benefit, it could be considered as a source of power over the investee (IFRS 10.B15d).
- Financial consolidation software helps you create consolidated financial management reports.
- This criterion is particularly applicable in assessing control over ‘special purpose entities’ or ‘structured entities‘, i.e., entities designed so that voting or similar rights do not primarily dictate who controls the entity.
- Berkshire Hathaway Inc. (BRK.A, BRK.B) and Coca-Cola (KO) are two company examples.
- 5.7 Minority interest is that part of the net results of operations and of the net assets of a subsidiary attributable to interests which are not owned, directly or indirectly through subsidiary(ies), by the parent.
This situation commonly arises when evaluating control over entities encountering financial difficulties and entering bankruptcy proceedings. In such cases, creditors often acquire the right to direct the entity’s relevant activities for their benefit (i.e., debt repayment), which could lead to the conclusion that control over the investee has transferred to them. Potential voting rights, which could stem from convertible instruments, options, or other mechanisms, grant the holder the right to obtain voting rights of an investee.
Consolidated organisations
If we consider each component in turn, the first thing to identify is how much the parent company has paid to acquire control over the subsidiary. In this question, Red Co acquires control by paying $3.50 cash per share acquired. Consolidated financial statements are like most financial statements in that they report on the financial health of the company.
Consolidation procedures are typically executed via specialised software wherein subsidiaries input their data for consolidation. As per IFRS 10.B93, the period between the financial statement dates of the subsidiary and the group should not exceed three months. Consequently, if a subsidiary’s reporting date differs from that of the parent company, it needs to provide additional information to ensure that this time gap does not influence the . The presence of control should be reassessed whenever relevant facts or circumstances change (IFRS 10.8;B80-B85).
Conceptual Framework Phase D — Reporting entity
This article focuses on some of the main principles of consolidated financial statements that a candidate must be able to understand and gives examples of how they may be tested in objective test questions (OTs) and multi-task questions (MTQs). A separate financial statement reports on the finances of a single entity. A consolidated financial statement reports on the entirety of a company with detailed information about each subsidiary. Minority interests should be presented in the consolidated balance sheet separately from liabilities and the equity of the parent’s shareholders. Minority interests in the income of the group should also be separately presented. Goodwill is treated as an intangible asset in the consolidated statement of financial position.
