consolidation of accounts ifrs

CA Sandesh Mundra, Chartered Accountants

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Consolidation of AccountsCA Sandesh Mundra,[email protected]

IAS - 27October 30, 2010


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Poser 1

• M/s Urea Corporation Ltd sold all its three subsidiaries at different dates during the year. Whether is it required to present CFS?


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Poser 2

• M/s Bottles International Ltd has 100 subsidiaries. It is preparing CFS, would it be still required to attach all subsidiaries FS as per Section 212 of The Companies Act, 1956?


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Poser 3

• M/s HLS Ltd and M/s LHS Ltd each hold 50% equity in M/s HLHS Ltd. Each company exercises control over the board every alternate year.


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Poser 4

• M/s ICAI Ltd owns more than 50% voting power of M/s ICSI Ltd. However ICAI Ltd argues that though it owns more than 50% voting power, however it does not intend to control the enterprise and thus does not want to consolidated. Whether is it required to present CFS?


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Poser 5

• M/s Gujarat Ltd owns 60% in M/s Ahmedabad Ltd. M/s Ahmedabad Ltd owns 60% in M/s AMC Ltd. Thus indirectly M/s Gujarat Ltd owns 36% shares in M/s AMC Ltd. Is M/s AMC Ltd subsidiary of M/s Gujarat Ltd as per AS-21?


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Poser 6

• M/s Sonia Ltd A has four wholly owned subsidiaries which own 25% each in M/s Manmohan Ltd. Whether equity accounting would be required by the intermediary subsidiaries and then consolidated by M/s Sonia Ltd, or would it directly consolidate?


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Poser 7

• M/s China Ltd acquired 60% equity in M/s Hongkong Ltd on 31-03-2004. However due to control restrictions it could not consolidate the entity. But w.e.f 1-4-2008 all restrictions have gone . How should be the goodwill calculation be done?


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Poser 8

• M/s ISI Ltd is completely funded by M/s Pakistan Ltd, although it is not owning any equity/control whether directly or indirectly as per AS-21. Would it be required to consolidate the same?


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Consolidation - CombinationAcquisition

Common Control

Joint Venture

Hostile take-over

Merger

Need for consolidated information

De facto Control


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Important Definitions:-

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.

Non-controlling interest is the equity in a subsidiary not attributable, directly or indirectly, to a parent.

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).


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GAAP Differences

IAS 27 AS 21

preparation of CFS is mandatory for a parent except where parent meets certain conditions.

Existing AS 21 does not mandate the preparation of ConsolidatedFinancial Statements by a parent.

Does not mandatepreparation of separate financial statements.

Consolidated Financial Statements are prepared in addition to separate financial statements.

Deals with investments in jointlycontrolled entities and associates to be presented in the separate FS.

Existing AS 21 does not deal with the same.

No exemption.

Subsidiary is excluded from consolidation when control is intended to be temporary or when subsidiary operates under severe long term restrictions.


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IAS 27 AS 21

No explanation as not relevant.

Explains where an entity owns >50% of ownership and the shares are held as stock-in-trade, whether this amounts to temporary control. Also explains the term ‘near future’.

Control is the power to govern the fin. and opt. policies of an entity so as to obtain benefits from its activities.

Rule-based, > 50% voting power or control of BOD/governing body to obtain economic benefits from its activities.

No clarification as control of an entity could be with one entity only..

Provides clarification regarding consolidation in case an entity is controlled by two entities.

potential voting rights that are currently exercisable or convertible are considered when assessing whether an entity has control over the subsidiary

potential equity shares of the investee held by investor are not taken into account as per existing AS 21.

GAAP Differences…..


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IAS 27 AS 21

Minority interests shall bepresented in the CFS within equity separately from the parent’s equity.

Presented in CFS separately from liabilities and equity of the parent’s shareholders.

The length of difference in the reporting dates of the parent and the subsidiary should not be more than three months.

The difference between the reporting dates should not be more than six months.

Does not recognise the situation of impracticability.

If it is not practicable to use uniform accounting policies in preparing CFS, appropriate disclosures to be made.

The same to be treated in accordance with IFRS-3

Any goodwill arising on acquisition of a subsidiary is to be recognised as an asset in the consolidated financial statements.



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IAS 27 AS 21

Detailed guidance in case of loss of control over subsidiary.

Not much on the issue.

No clarificationProvides clarification regarding inclusion of notes appearing in the separate FS of the parent and its subsidiaries in CFS.

Not dealt in IAS 27 but in deferred taxes.Provides clarification regarding accounting for taxes on income inCFS.

Not dealtProvides clarification regarding disclosure of parent’s share in post-acquisition reserves of a subsidiary.

Concept of SPENo guidance on consolidation of Special Purpose Entities (SPEs)



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Hope you are Ok!!!


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Exemptions……

the parent is itself a wholly/partially owned subsidiary of another entity and its other owners do not object to the entity presenting non-consolidated financial statements.

the parent’s debt or equity instruments are not publicly traded.

the parent is not filing its statements for the purpose of issuing any class of instruments in a public market.

the ultimate parent (or any intermediate parent) of the entity produces publicly available consolidated financial statements that are IFRS compliant.


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Special purpose entities

Features of SPE :-

• Auto-pilot arrangements that restrict the decision-making capacity of the governing board or management

• Use of professional directors, trustees or partners.

• Thin capitalization, the proportion of ‘real’ equity is too small to support the SPE’s overall activities.

• Absence of an apparent profit-making motive,

• Domiciled in ‘offshore’ capital havens.

• Have a specified life.

• Exists for financial engineering purposes.

• The creator or sponsor transfers assets to the SPE, as part of a derecognition transaction involving financial assets


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Accounting Principles

SIC 12 requires that an SPE should be consolidated when the substance of the relationship indicates that the SPE is a subsidiary.

For consolidation:-

• follow usual procedures• elimination of inter-company activity• presentation of minority interests.

IAS 27 requires specific disclosures for subsidiaries that are consolidated for reasons other than majority of voting power. These disclosure requirements apply to subsidiaries consolidated under SIC 12.


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Consolidation proceduresStart consolidation – when control commencesCombining the accounts of the parent and it’s

subsidiaries • Accounting Policy Adjustments• Line by Line Addition• Inter-company Transactions / Balances• Unrealised Profit Elimination• Other Adjustments

Elimination of parent’s investmentDisclose minority interests separatelyBase on present ownership interestsStop consolidation – when control ceases


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Consolidation – Example

A + Not F-


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Consolidation – Elimination of inter-company purchases and sales


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Significant changes - goodwill• Acquired business measured at fair value as a

whole

• 100% goodwill recognised Consistent with treatment of other assets

• Goodwill allocated between acquirer and non-controlling interest (was minority interest)

• Allocation of goodwill to acquirer based on: Fair value of acquirer’s equity interest LESS Fair value of share of net assets acquired Balance to NCI


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IFRS : Goodwill example

• P acquires 75% (750 000 shares) of S for CU7.5m

• Shares in S trading about $8 per share Expectation of synergies

• Independent valuation value of S = CU9.7m

• Fair value of net assets acquired = CU8m

Current requirements AS 21

Consideration 7,5

Share of identifiable A+L

(75% 8m)(6,0)

Goodwill as per IFRS 3 1,5

Current requirements

Goodwill 1,5

Net assets 8,0

Minority interest 2,0


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IFRS : Goodwill example

Current requirements AS 21

Goodwill 1,5

Net assets 8,0

Minority interest (MI) 2,0

IFRS

Fair value of S 9,7

Fair value of net assets (8,0)

Goodwill 1,7

IFRS - allocate to P

Consideration 7,5

Share of identifiable A+L (75% 8m)

(6,0)

GW allocated to P 1,5

=> Balance to NCI 0,2IFRS

Goodwill 1,7

Net assets 8,0

Non-controlling interest (NCI)

2,2


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Step acquisitions

• Change in accounting for step acquisitions

• A owns an investment in B

• B = associated comp to A (i.e. A doesn’t control B)

• If A increase its stake & gains control over B it must Determine fair value of associate Recognise profit/loss in income statement Follow the provisions of IFRS 3

• Cost would include fair value of B


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Step acquisition – illustration

• A owns 35% stake in B at 31 Dec 2007• Book value at 31 Dec 2007 = CU2,500• Buying additional 40% on 31 Dec 2007 at

CU4,000• Fair value (FV) of total B = CU10,000

31 Dec 2007• A recognise gain of CU1,000 [(35%*CU10,000)-

CU2,500]• A accounts for 40% purchase under ED IFRS 3

FV of all of B = CU10,000 and FV of 75% of B = CU7,500

• Subsequent purchases = equity transaction


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A owns 60% of B On 1 January 20Y0 A disposes of 20% of B for 400 and loses control.

Carrying amount of NCI of B on 1 January 20Y0 is 700.

Carrying amount of net assets of B on 1 January 20Y0 is 1,750.

Fair value of remaining 40% is 800.

Loss of Control


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Disposal of the 20% interest is recorded as follows

Dr. Cash 400Dr. Non-controlling interest 700Dr. Investment in B 800 Cr. Net assets of B (including goodwill) 1,750 Cr. Gain on disposal 150

Gain is based on the following calculation

Gain on 40% retained 100 (800 - (40% x 1,750))Gain on 20% disposed of 50 (400 - (20% x 1,750))Total gain 150

Assuming that the remaining 40% represents an associate, the fair value of 800 represents cost on initial recognition and IAS 28 applies going forward.

Loss of Control ………


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Separate Financial Statements of the Parent or Investor in an Associate orJointly Controlled Entity

In the parent's/investor's individual financial statements, investments in subsidiaries,

Associates, and jointly controlled entities should be accounted for either: [IAS 27.37]

· at cost; or· in accordance with IAS 39.

Such investments may not be accounted for by the equity method in the parent's/investor's separate statements.


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Disclosures.• the nature of the relationship when the parent owns < 50% Voting Power,

• the reasons why the ownership > 50% Voting Power does not constitute control,

• the reporting date of the financial statements of a subsidiary that is different from that of the parent with reasons,

• the nature and extent of significant restrictions to transfer funds to the parent.

• Disclosures required in separate financial statements that are prepared for a parent that is permitted not to prepare consolidated financial statements: [IAS 27.41]

• the fact that the financial statements are separate; that the exemption from consolidation has been used; the name and country of incorporation or residence of the entity whose consolidated financial statements that comply with IFRS 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, and

• a description of the method used to account for the foregoing investments.

• Disclosures required in the separate financial statements of a parent, investor in a jointly controlled entity, or investor in an associate: [IAS 27.42]

• 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 foregoing investments.


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IAS 28 - Associates• Associate: an entity in which an investor has significant influence but not control

or joint control. A holding of 20% or more of the voting power (directly or through subsidiaries) will indicate significant influence.

Applying the Equity Method of Accounting

• Basic principle. Under the equity method of accounting, an equity investment is initially recorded at cost and is subsequently adjusted to reflect the investor's share of the net profit or loss of the associate. [IAS 28.11]

• Distributions Distributions received from the investee reduce the carrying amount of the investment.

• Implicit goodwill and fair value adjustments. Any difference between the cost of acquisition and the investor's share of the fair values of the net identifiable assets of the associate is accounted for like goodwill in accordance with IFRS 3 Business Combinations.

• Appropriate adjustments to the investor's share of the profits or losses after acquisition are made to account for additional depreciation or amortisation of the associate's depreciable or amortisable assets based on the excess of their fair values over their carrying amounts at the time the investment was acquired. [IAS 28.23]

http://www.iasplus.com/standard/ifrs03.htm

http://www.iasplus.com/standard/ifrs03.htm


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IAS 31 – Joint Ventures

• Joint control: the contractually agreed sharing of control over an economic activity. Joint control exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the venturers.

• Jointly Controlled Operations involve the use of assets and other resources of the venturers rather than a separate entity.

• Jointly Controlled Assets involve the joint control, and often the joint ownership, of assets dedicated to the joint venture. Each venturer may take a share of the output from the assets and each bears a share of the expenses incurred.

• Jointly Controlled Entity is a corporation, partnership, or other entity in which two or more venturers have an interest, under a contractual arrangement that establishes joint control over the entity. [IAS 31.24]

IAS 31 allows two treatments of accounting for an investment in jointly controlled entities – except as noted below:

• proportionate consolidation [IAS 31.30]

• equity method of accounting [IAS 31.38]


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Time for an exercise….


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Any Questions……..


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