international accounting standard 27 consolidatedand separate financial statements presented by:...

International Accounting Standard 27International Accounting Standard 27

CONSOLIDATED CONSOLIDATED AND AND

SEPARATE FINANCIAL SEPARATE FINANCIAL STATEMENTSSTATEMENTS

Presented By: Adeel Ahmed Chughtai

ACA, ACMA

ScopeScope

This Standard shall be applied in the preparation and This Standard shall be applied in the preparation and presentation of consolidated financial statements for a presentation of consolidated financial statements for a group of entities under the control of a parent.group of entities under the control of a parent.

This Standard shall also be applied in accounting for This Standard shall also be applied in accounting for investments in subsidiaries, jointly controlled entities investments in subsidiaries, jointly controlled entities and associates when an entity elects, or is required by and associates when an entity elects, or is required by local regulations, to present separate financial local regulations, to present separate financial statements.statements.

DefinitionsDefinitions Consolidated Financial StatementsConsolidated Financial Statements are the financial statements are the financial statements

of a group presented as those of a single economic entity.of a group presented as those of a single economic entity.

ControlControl is the power to govern the financial and operating is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.policies of an entity so as to obtain benefits from its activities.

The The cost methodcost method is a method of accounting for an investment is a method of accounting for an investment whereby the investment is recognized at cost. The investor whereby the investment is recognized at cost. The investor recognizes income from the investment only to the extent that recognizes income from the investment only to the extent that the investor receives distributions from accumulated profits of the investor receives distributions from accumulated profits of the investee arising after the date of acquisition. Distributions the investee arising after the date of acquisition. Distributions received in excess of such profits are regarded as a recovery of received in excess of such profits are regarded as a recovery of investment and are recognized as a reduction of the cost of the investment and are recognized as a reduction of the cost of the investment.investment.

A A groupgroup is a parent and all its subsidiaries. is a parent and all its subsidiaries.

DefinitionsDefinitions Minority InterestMinority Interest is that portion of the profit or loss and net assets is that portion of the profit or loss and net assets

of a subsidiary attributable to equity interests that are not owned, of a subsidiary attributable to equity interests that are not owned, directly or indirectly through subsidiaries, by the parent.directly or indirectly through subsidiaries, by the parent.

A A parentparent is an entity that has one or more subsidiaries. is an entity that has one or more subsidiaries.

Separate Financial Statements Separate Financial Statements are those presented by a parent, an are those presented by a parent, an investor in an associate or a venturer in a jointly controlled entity, investor in an associate or a venturer in a jointly controlled entity, in which the investments are accounted for on the basis of the in which the investments are accounted for on the basis of the direct equity interest rather than on the basis of the reported results direct equity interest rather than on the basis of the reported results and net assets of the investees.and net assets of the investees.

A A subsidiarysubsidiary is an entity, including an unincorporated entity such is an entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the as a partnership, that is controlled by another entity (known as the parent).parent).

Presentation of Consolidated Financial StatementsPresentation of Consolidated Financial Statements A parent shall present consolidated financial statements in A parent shall present consolidated financial statements in

which it consolidates its investments in subsidiaries in which it consolidates its investments in subsidiaries in accordance with this Standard, parent need not present accordance with this Standard, parent need not present consolidated financial statements if and only if:consolidated financial statements if and only if:

1.1. The parent is itself a wholly-owned subsidiary, or is a partially-The parent is itself a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners, owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting informed about, and do not object to, the parent not presenting consolidated financial statements;consolidated financial statements;

2.2. The parent’s debt or equity instruments are not traded in a public The parent’s debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets);counter market, including local and regional markets);

3.3. The parent did not file, nor is it in the process of filing, its The parent did not file, nor is it in the process of filing, its financial statements with a securities commission or other financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of regulatory organization for the purpose of issuing any class of instruments in a public market; andinstruments in a public market; and

4.4. The ultimate or any intermediate parent of the parent produces The ultimate or any intermediate parent of the parent produces consolidated financial statements available for public use that consolidated financial statements available for public use that comply with International Financial Reporting Standards.comply with International Financial Reporting Standards.

Scope of Consolidated Financial StatementsScope of Consolidated Financial Statements

Consolidated financial statements shall include Consolidated financial statements shall include all subsidiaries of the parent.all subsidiaries of the parent.

Scope Of Consolidated Financial Scope Of Consolidated Financial StatementsStatements Control is presumed to exist when the parent owns, directly Control is presumed to exist when the parent owns, directly

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

1.1. Power over more than half of the voting rights by virtue of an Power over more than half of the voting rights by virtue of an agreement with other investors;agreement with other investors;

2.2. Power to govern the financial and operating policies of the entity Power to govern the financial and operating policies of the entity under a statute or an agreement;under a statute or an agreement;

3.3. Power to appoint or remove the majority of the members of the Power to appoint or remove the majority of the members of the board of directors or equivalent governing body and control of the board of directors or equivalent governing body and control of the entity is by that board or body; orentity is by that board or body; or

4.4. Power to cast the majority of votes at meetings of the board of 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 directors or equivalent governing body and control of the entity is by that board or body.that board or body.

Consolidation ProceduresConsolidation Procedures An entity may own share warrants, share call options, debt or equity An entity may own share warrants, share call options, debt or equity

instruments that are convertible into ordinary shares, or other similar instruments that are convertible into ordinary shares, or other similar instruments that have the potential, if exercised or converted, to give the instruments that have the potential, if exercised or converted, to give the entity voting power or reduce another party’s voting power over the entity voting power or reduce another party’s voting power over the financial and operating policies of another entity (potential voting rights). financial and operating policies of another entity (potential voting rights). The existence and effect of potential voting rights that are currently The existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by another exercisable or convertible, including potential voting rights held by another entity, are considered when assessing whether an entity has power to entity, are considered when assessing whether an entity has power to govern the financial and operating policies of another entity. Potential govern the financial and operating policies of another entity. Potential voting rights are not currently exercisable or convertible when, for voting rights are not currently exercisable or convertible when, for example, they cannot be exercised or converted until a future date or until example, they cannot be exercised or converted until a future date or until the occurrence of a future eventthe occurrence of a future event

In assessing whether potential voting rights contribute to control, the entity In assessing whether potential voting rights contribute to control, the entity examines all facts and circumstances (including the terms of exercise of examines all facts and circumstances (including the terms of exercise of the potential voting rights and any other contractual arrangements whether the potential voting rights and any other contractual arrangements whether considered individually or in combination) that effect potential voting considered individually or in combination) that effect potential voting rights, except the intention of management and the financial ability to rights, except the intention of management and the financial ability to exercise or convert.exercise or convert.

Consolidation ProceduresConsolidation Procedures

A subsidiary is not excluded from consolidation simply A subsidiary is not excluded from consolidation simply because the investor is a venture capital organization, mutual because the investor is a venture capital organization, mutual fund ,unit trust or a similar entity.fund ,unit trust or a similar entity.

A subsidiary is not excluded from consolidation because its A subsidiary is not excluded from consolidation because its business activities are dissimilar from those of the other business activities are dissimilar from those of the other entities within the group. Relevant information is provided by entities within the group. Relevant information is provided by consolidating such subsidiaries and disclosing additional consolidating such subsidiaries and disclosing additional information in the consolidated financial statements about the information in the consolidated financial statements about the different business activities of subsidiaries, For example, the different business activities of subsidiaries, For example, the disclosures required by IAS 14 disclosures required by IAS 14 Segment ReportingSegment Reporting help to help to explain the significance of different business activities within explain the significance of different business activities within the group.the group.


A parent loses control when it loses the power to A parent loses control when it loses the power to govern the financial and operating policies of an govern the financial and operating policies of an investee so as to obtain benefit from its activities. The investee so as to obtain benefit from its activities. The loss of control can occur with or without a change in loss of control can occur with or without a change in absolute or relative ownership levels. It could occur, absolute or relative ownership levels. It could occur, for example, when a subsidiary becomes subject to for example, when a subsidiary becomes subject to the control of a government, court, administrator or the control of a government, court, administrator or regulator. It could also occur as a result of contractual regulator. It could also occur as a result of contractual agreement.agreement.

Consolidation ProceduresConsolidation Procedures In preparing consolidated financial statements, an entity combines the In preparing consolidated financial statements, an entity combines the

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

(a) the carrying amount of the parent’s investment in each subsidiary and (a) the carrying amount of the parent’s investment in each subsidiary and the parent’s portion of equity of each subsidiary are eliminated.the parent’s portion of equity of each subsidiary are eliminated.

(b) minority interests in the profit or loss of consolidated subsidiaries for (b) minority interests in the profit or loss of consolidated subsidiaries for the reporting period are identified, andthe reporting period are identified, and

(c) minority interests in the net assets of consolidated subsidiaries are (c) minority interests in the net assets of consolidated subsidiaries are identified separately from the parent shareholder’s equity in them. identified separately from the parent shareholder’s equity in them. Minority interests in the net assets consist of: Minority interests in the net assets consist of:

(i) the amount of those minority interests at the date of the original (i) the amount of those minority interests at the date of the original combination calculated in accordance with IFRS 3.combination calculated in accordance with IFRS 3. (ii) the minority’s share of changes in equity since the date of the (ii) the minority’s share of changes in equity since the date of the combination.combination.

Consolidation ProceduresConsolidation Procedures When potential voting rights exist, the When potential voting rights exist, the

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

Intra-group balances, transactions, income and Intra-group balances, transactions, income and expenses shall be eliminated in full.expenses shall be eliminated in full.


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


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

Consolidation ProceduresConsolidation Procedures When the financial statements of a subsidiary used in When the financial statements of a subsidiary used in

the preparation of consolidated financial statements the preparation of consolidated financial statements are prepared as of a reporting date different from that are prepared as of a reporting date different from that of the parent, adjustments shall be made for the of the parent, adjustments shall be made for the effects of significant transactions or events that occur effects of significant transactions or events that occur between that date and the date of parent’s financial between that date and the date of parent’s financial statements. In any case, the difference between the statements. In any case, the difference between the reporting date of the subsidiary and that of the parent reporting date of the subsidiary and that of the parent shall be no more than shall be no more than THREE MONTHSTHREE MONTHS. The . The length of the reporting periods and any difference in length of the reporting periods and any difference in the reporting dates shall be the same from period to the reporting dates shall be the same from period to period.period.


Consolidated financial statements shall be prepared Consolidated financial statements shall be prepared using uniform accounting policies for like using uniform accounting policies for like transactions and other events in similar transactions.transactions and other events in similar transactions.

If a member of a group uses accounting policies other If a member of a group uses accounting policies other than those adopted in the consolidated financial than those adopted in the consolidated financial statements for like transactions and events in similar statements for like transactions and events in similar circumstances, appropriate adjustments are made to circumstances, appropriate adjustments are made to its financial statements in preparing consolidated its financial statements in preparing consolidated financial statements.financial statements.

Consolidation ProceduresConsolidation Procedures The income and expenses of a subsidiary are included in the The income and expenses of a subsidiary are included in the

consolidated financial statements from the acquisition date as consolidated financial statements from the acquisition date as defined in IFRS 3. The income and expenses of a subsidiary defined in IFRS 3. The income and expenses of a subsidiary are included in the consolidated financial statements until the are included in the consolidated financial statements until the date on which the parent ceases to control the subsidiary. The date on which the parent ceases to control the subsidiary. The difference between the proceeds from the disposal of the difference between the proceeds from the disposal of the subsidiary and its carrying amount as of the date of disposal, subsidiary and its carrying amount as of the date of disposal, including the cumulative amount of any exchange differences including the cumulative amount of any exchange differences that relate to the subsidiary recognized in equity in accordance that relate to the subsidiary recognized in equity in accordance with IAS 21, with IAS 21, The Effects of changes in Foreign Exchange The Effects of changes in Foreign Exchange Rates Rates ,is recognized in the consolidated income statement as ,is recognized in the consolidated income statement as the gain or loss on the disposal of the subsidiary.the gain or loss on the disposal of the subsidiary.

Consolidation ProceduresConsolidation Procedures An investment in an entity shall be accounted for in An investment in an entity shall be accounted for in

accordance with IAS 39,accordance with IAS 39, Financial Instruments: Financial Instruments: Recognition and Measurement, Recognition and Measurement, from the date that it from the date that it ceases to be a subsidiary, provided that it does not ceases to be a subsidiary, provided that it does not become an associate as defined in IAS 28 or a jointly become an associate as defined in IAS 28 or a jointly controlled entity as defined in IAS 31.controlled entity as defined in IAS 31.

Minority interests shall be presented in the Minority interests shall be presented in the consolidated balance sheet within equity, separately consolidated balance sheet within equity, separately from the parent shareholder’s equity. Minority from the parent shareholder’s equity. Minority interests in the profit or loss of the group shall also be interests in the profit or loss of the group shall also be separately disclosed.separately disclosed.

Consolidation ProceduresConsolidation Procedures The profit or loss is attributed to the parent shareholders and The profit or loss is attributed to the parent shareholders and

minority interests. Because both are equity, the amount minority interests. Because both are equity, the amount attributed to minority interests is not income or expense.attributed to minority interests is not income or expense.

Losses applicable to the minority in a consolidated subsidiary Losses applicable to the minority in a consolidated subsidiary may exceed the minority interest in the subsidiary’s equity. may exceed the minority interest in the subsidiary’s equity. The excess, and any further losses applicable to the minority , The excess, and any further losses applicable to the minority , are allocated against the majority interest except to the extent are allocated against the majority interest except to the extent that the minority has a binding obligation and is able to make that the minority has a binding obligation and is able to make an additional investment to cover the losses. If the subsidiary an additional investment to cover the losses. If the subsidiary subsequently reports profits, such profits are allocated to the subsequently reports profits, such profits are allocated to the majority interest until the minority’s share of losses previously majority interest until the minority’s share of losses previously absorbed by the majority has been recovered.absorbed by the majority has been recovered.


If a subsidiary has outstanding cumulative If a subsidiary has outstanding cumulative preference shares that are held by minority preference shares that are held by minority interests and classified as equity, the parent interests and classified as equity, the parent computes its share of profits or losses after computes its share of profits or losses after adjusting for the dividends on such shares, adjusting for the dividends on such shares, whether or not dividends have been declaredwhether or not dividends have been declared

Case StudyCase Study FactsFacts

There are currently severe restrictions on the There are currently severe restrictions on the repatriation of dividends from a subsidiary located in repatriation of dividends from a subsidiary located in Country A. As a result, the directors of the parent Country A. As a result, the directors of the parent entity wish to deconsolidate the subsidiary as they entity wish to deconsolidate the subsidiary as they feel that this restriction may be in place for several feel that this restriction may be in place for several years. Two subsidiaries located in the country are years. Two subsidiaries located in the country are individually immaterial but collectively material. The individually immaterial but collectively material. The directors also wish to deconsolidate these entities.directors also wish to deconsolidate these entities.

RequiredRequiredCan the results of these subsidiaries be Can the results of these subsidiaries be deconsolidated? deconsolidated?

Case StudyCase Study

SolutionSolution

Control must be lost for deconsolidation to occur, and Control must be lost for deconsolidation to occur, and the impairment of the ability to transfer funds is not the impairment of the ability to transfer funds is not sufficient reason. Therefore, the subsidiary should be sufficient reason. Therefore, the subsidiary should be consolidated. Also, IFRS do not apply to immaterial consolidated. Also, IFRS do not apply to immaterial items, but the two subsidiaries should be taken items, but the two subsidiaries should be taken together and in this instance are material. Hence this together and in this instance are material. Hence this is also not a reason for deconsolidation. is also not a reason for deconsolidation.

Accounting for investments in subsidiaries, jointly Accounting for investments in subsidiaries, jointly controlled entities and associates in separate controlled entities and associates in separate financial statementsfinancial statements When separate financial statements are prepared, When separate financial statements are prepared,

investments in subsidiaries, jointly controlled investments in subsidiaries, jointly controlled entities and associates that are not classified as held entities and associates that are not classified as held for sale (or included in a disposal group that is for sale (or included in a disposal group that is classified as held for sale) in accordance with IFRS classified as held for sale) in accordance with IFRS 5 shall be accounted for wither:5 shall be accounted for wither:

1.1. At cost; orAt cost; or2.2. In accordance with IAS 39.In accordance with IAS 39.

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


FactsFactsA French parent entity uses a revaluation method to A French parent entity uses a revaluation method to value its property, but an American subsidiary uses value its property, but an American subsidiary uses the cost basis for valuation. The directors feel that it the cost basis for valuation. The directors feel that it is not practical to keep revaluing the property of the is not practical to keep revaluing the property of the American subsidiary and wish to discontinue American subsidiary and wish to discontinue revaluing the property on consolidation.revaluing the property on consolidation.

RequiredRequiredMust uniform accounting policies be used under IAS Must uniform accounting policies be used under IAS 27? 27?


SolutionSolution

Uniform accounting policies must be used by Uniform accounting policies must be used by the group. There are no exceptions under IAS the group. There are no exceptions under IAS 27, even if it is not practical to use uniform 27, even if it is not practical to use uniform policies. policies.

DisclosureDisclosure The following disclosures shall be made in the consolidated financial The following disclosures shall be made in the consolidated financial

statements:statements:1.1. The nature of the relationship between the parent and a subsidiary The nature of the relationship between the parent and a subsidiary

when the parent does not own, directly or indirectly through when the parent does not own, directly or indirectly through subsidiaries, more than half of the voting power;subsidiaries, more than half of the voting power;

2.2. The reasons why the ownership, directly or indirectly through The reasons why the ownership, directly or indirectly through subsidiaries, of more than half of the voting or potential voting subsidiaries, of more than half of the voting or potential voting power of an investee does not constitute control;power of an investee does not constitute control;

3.3. The reporting date of the financial statements of a subsidiary when The reporting date of the financial statements of a subsidiary when such financial statements are used to prepare consolidated financial such financial statements are used to prepare consolidated financial statements and are as of a reporting date or for a period that is statements and are as of a reporting date or for a period that is different from that of the parent, and the reason for using a different different from that of the parent, and the reason for using a different reporting date or period; andreporting date or period; and

4.4. The nature and extent of any significant restrictions on the ability of The nature and extent of any significant restrictions on the ability of subsidiaries to transfer funds to the parent in the form of cash subsidiaries to transfer funds to the parent in the form of cash dividends or to repay loans or advances.dividends or to repay loans or advances.

DisclosureDisclosure When separate financial statements are prepared for a parent When separate financial statements are prepared for a parent

that elects not to prepare consolidated financial statements, that elects not to prepare consolidated financial statements, those separate financial statements shall disclose:those separate financial statements shall disclose:

1.1. The fact that the financial statements are separate financial The fact that the financial statements are separate financial statements; that the exemption from consolidation has been used; the statements; that the exemption from consolidation has been used; the name and country of incorporation or residence of the entity whose name and country of incorporation or residence of the entity whose consolidated financial statements that comply with International consolidated financial statements that comply with International Financial Reporting Standards have been produced for public use; Financial Reporting Standards have been produced for public use; and the address where those consolidated financial statements are and the address where those consolidated financial statements are obtainable;obtainable;

2.2. A list of significant investments in subsidiaries, jointly controlled A list of significant investments in subsidiaries, jointly controlled entities and associates, including the name, country of incorporation entities and associates, including the name, country of incorporation or residence, proportion of ownership interest and, if different, or residence, proportion of ownership interest and, if different, proportion of voting power held; andproportion of voting power held; and

3.3. A description of the method used to account for the investments A description of the method used to account for the investments listed above in Para 2.listed above in Para 2.

DisclosureDisclosure When a parent, venturer with an interest in a jointly When a parent, venturer with an interest in a jointly

controlled entity or an investor in an associate prepares controlled entity or an investor in an associate prepares separate financial statements, those separate financial separate financial statements, those separate financial statements shall disclose:statements shall disclose:

1.1. The fact that the statements are separate financial The fact that the statements are separate financial statements and the reasons why those statements are statements and the reasons why those statements are prepared if not required by law;prepared if not required by law;

2.2. A list of significant investments in subsidiaries, jointly A list of significant investments in subsidiaries, jointly controlled entities and associates, including the name, controlled entities and associates, including the name, country of incorporation or residence, proportion of country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting ownership interest and, if different, proportion of voting power held; andpower held; and

3.3. A description of the method used to account for the A description of the method used to account for the investment listed above in Para 2.investment listed above in Para 2.

Case StudyCase Study FactsFacts

Entity X is preparing its group accounts for the year ended December 31, 20X4, and has Entity X is preparing its group accounts for the year ended December 31, 20X4, and has acquired investments in three companies. The details are set out next.acquired investments in three companies. The details are set out next.

A.A. Entity YEntity YThe whole of the share capital of Y was acquired on July 1, 20X4, with a view to selling the The whole of the share capital of Y was acquired on July 1, 20X4, with a view to selling the subsidiary within a year. At the date of acquisition, the estimated fair value less cost to sell of subsidiary within a year. At the date of acquisition, the estimated fair value less cost to sell of Y is $27 million. (The fair value of the liabilities is $8 million.) At year-end, (December 31, Y is $27 million. (The fair value of the liabilities is $8 million.) At year-end, (December 31, 20X4), the estimated fair value less costs to sell is $26 million. (The fair value of the liabilities 20X4), the estimated fair value less costs to sell is $26 million. (The fair value of the liabilities is $7 million.)is $7 million.)

B.B. Entity ZEntity ZX has acquired, on August 1, 20X4, 48% of Z, which is a major supplier of X. X has a written X has acquired, on August 1, 20X4, 48% of Z, which is a major supplier of X. X has a written agreement with another major shareholder, which owns 30% of the share capital of Z, agreement with another major shareholder, which owns 30% of the share capital of Z, whereby X can receive as much of Z’s production as it wishes. X has also made a substantial whereby X can receive as much of Z’s production as it wishes. X has also made a substantial loan to Z, which is repayable on demand. If repaid currently, Z would be insolvent.loan to Z, which is repayable on demand. If repaid currently, Z would be insolvent.

C.C. Entity WEntity WX has acquired 45% of the voting shares of W on September 1, 20X4. The other shares are X has acquired 45% of the voting shares of W on September 1, 20X4. The other shares are owned by V (25%) and T (30%). V and T are both institutional investors and have owned by V (25%) and T (30%). V and T are both institutional investors and have representation on the board of directors. X can appoint four members of the board; V and T representation on the board of directors. X can appoint four members of the board; V and T appoint three each. The effective power to set W’s operating policies lies with the four appoint three each. The effective power to set W’s operating policies lies with the four directors appointed by X. However, if there is to be any change in the capital structure of the directors appointed by X. However, if there is to be any change in the capital structure of the company, then the full board (10 directors) must vote in favor of the proposal.company, then the full board (10 directors) must vote in favor of the proposal.RequiredRequiredDiscuss how these three investments should be treated in the consolidated financial statements Discuss how these three investments should be treated in the consolidated financial statements of X group for year ended December 31, 20X4. of X group for year ended December 31, 20X4.

Case StudyCase Study SolutionSolution

Entity Y, which was acquired on July 1, 20X4, will have to be accounted for under IFRS 5. It will Entity Y, which was acquired on July 1, 20X4, will have to be accounted for under IFRS 5. It will meet the criteria as being held for sale and, therefore, must be accounted for in this way.meet the criteria as being held for sale and, therefore, must be accounted for in this way.

Initially, the fair value of the assets would be recorded at $27 million plus $8 million, which is $35 Initially, the fair value of the assets would be recorded at $27 million plus $8 million, which is $35 million. The fair value of the liabilities would be recorded at $8 million. At the first balance sheet million. The fair value of the liabilities would be recorded at $8 million. At the first balance sheet date, X will have to re-measure the investment in entity Y at the lower of its cost and fair value less date, X will have to re-measure the investment in entity Y at the lower of its cost and fair value less cost to sell, which will be $26 million. The assets and liabilities will have to be presented separately cost to sell, which will be $26 million. The assets and liabilities will have to be presented separately in the consolidated financial statements from any other assets and liabilities. The total assets at year-in the consolidated financial statements from any other assets and liabilities. The total assets at year-end December 31 will be shown separately as $33 million and the total liabilities will be shown end December 31 will be shown separately as $33 million and the total liabilities will be shown separately as $7 million. Obviously the subsidiary is not consolidated as such. separately as $7 million. Obviously the subsidiary is not consolidated as such.

X owns 48% of the voting shares and has the power to control who has access to the operating X owns 48% of the voting shares and has the power to control who has access to the operating capacity of Z by virtue of a written agreement with another shareholder that owns 30% of the share capacity of Z by virtue of a written agreement with another shareholder that owns 30% of the share capital. There will be a presumption that X will have significant influence over Z through its ability capital. There will be a presumption that X will have significant influence over Z through its ability to demand repayment of a substantial loan. Therefore, X should consolidate Z. X has the power to to demand repayment of a substantial loan. Therefore, X should consolidate Z. X has the power to govern the financial and operating policies of the entity through agreement and through its govern the financial and operating policies of the entity through agreement and through its relationship with Z.relationship with Z.

Regarding entity W, X has 45% of the voting power, V has 25%, and T has 30%, but V and T are Regarding entity W, X has 45% of the voting power, V has 25%, and T has 30%, but V and T are

institutional investors, and the directors who represent these investors have no effective power. institutional investors, and the directors who represent these investors have no effective power. Substantial power lies with the four directors of W. Although the full board retains some powers, Substantial power lies with the four directors of W. Although the full board retains some powers, these powers are limited. The four directors representing W have effective control over most of the these powers are limited. The four directors representing W have effective control over most of the financing and operating policies, which would represent a significant part of the decision making. X financing and operating policies, which would represent a significant part of the decision making. X has effective control over V through its control over the board of directors and decision making. has effective control over V through its control over the board of directors and decision making. Therefore, W should be consolidated. Therefore, W should be consolidated.

Multiple Choice QuestionsMultiple Choice Questions X has control over the composition of Y’s board of directors. X owns 49% X has control over the composition of Y’s board of directors. X owns 49%

of Y and is the largest shareholder. X has an agreement with Z, which of Y and is the largest shareholder. X has an agreement with Z, which owns 10% of Y, whereby Z will always vote in the same way as X. Can X owns 10% of Y, whereby Z will always vote in the same way as X. Can X exercise control over Y?exercise control over Y?

a.a. X cannot exercise control because it owns only 49% of the voting rights.X cannot exercise control because it owns only 49% of the voting rights.b.b. X cannot exercise control because it can control only the makeup of the X cannot exercise control because it can control only the makeup of the

board and not necessarily the way the directors vote.board and not necessarily the way the directors vote.c.c. X can exercise control solely because it has an agreement with Z for the X can exercise control solely because it has an agreement with Z for the

voting rights to be used in whatever manner X wishes.voting rights to be used in whatever manner X wishes.d.d. X can exercise control because it controls more than 50% of the voting X can exercise control because it controls more than 50% of the voting

power, and it can govern the financial and operating policies of Y through power, and it can govern the financial and operating policies of Y through its control of the board of directors. its control of the board of directors.

Multiple Choice QuestionsMultiple Choice Questions

SolutionSolution

d.d. X can exercise control because it X can exercise control because it controls controls more than 50% of the voting more than 50% of the voting power, and it power, and it can govern the financial and can govern the financial and operating operating policies of Y through its control of policies of Y through its control of the the board of directors. board of directors.

Multiple Choice QuestionsMultiple Choice Questions X owns 50% of Y’s voting shares. The board of directors X owns 50% of Y’s voting shares. The board of directors

consists of six members; X appoints three of them and Y consists of six members; X appoints three of them and Y appoints the other three. The casting vote at meetings always appoints the other three. The casting vote at meetings always lies with the directors appointed by X. Does X have control lies with the directors appointed by X. Does X have control over Y?over Y?

a.a. No, control is equally split between X and Z.No, control is equally split between X and Z.b.b. Yes, X holds 50% of the voting power and has the casting Yes, X holds 50% of the voting power and has the casting

vote at board meetings in the event that there is not a majority vote at board meetings in the event that there is not a majority decision.decision.

c.c. No, X owns only 50% of the entity’s shares and therefore No, X owns only 50% of the entity’s shares and therefore does not have control.does not have control.

d.d. No, control can be exercised only through voting power, not No, control can be exercised only through voting power, not through a casting vote. through a casting vote.


SolutionSolution

b.b. Yes, X holds 50% of the voting power Yes, X holds 50% of the voting power and and has the casting vote at board meetings in has the casting vote at board meetings in

the event that there is not a majority the event that there is not a majority decision.decision.

Multiple Choice QuestionsMultiple Choice Questions Z has sold all of its shares to the public. The Z has sold all of its shares to the public. The

company was formerly a state-owned entity. The company was formerly a state-owned entity. The national regulator has retained the power to appoint national regulator has retained the power to appoint the board of directors. An overseas entity acquires the board of directors. An overseas entity acquires 55% of the voting shares, but the regulator still 55% of the voting shares, but the regulator still retains its power to appoint the board of directors. retains its power to appoint the board of directors. Who has control of the entity?Who has control of the entity?

a.a. The national regulator.The national regulator.b.b. The overseas entity.The overseas entity.c.c. Neither the national regulator nor the overseas Neither the national regulator nor the overseas

entity.entity.d.d. The board of directors. The board of directors.


SolutionSolution

c.c. Neither the national regulator nor the Neither the national regulator nor the overseas entity.overseas entity.

Multiple Choice QuestionsMultiple Choice Questions A has acquired an investment in a subsidiary, B, with the A has acquired an investment in a subsidiary, B, with the

view to dispose of this investment within six months. The view to dispose of this investment within six months. The investment in the subsidiary has been classified as held for investment in the subsidiary has been classified as held for sale and is to be accounted for in accordance with IFRS 5. sale and is to be accounted for in accordance with IFRS 5. The subsidiary has never been consolidated. How should the The subsidiary has never been consolidated. How should the investment in the subsidiary be treated in the financial investment in the subsidiary be treated in the financial statements?statements?

a.a. Purchase accounting should be used.Purchase accounting should be used.b.b. Equity accounting should be used.Equity accounting should be used.c.c. The subsidiary should not be consolidated but IFRS 5 should The subsidiary should not be consolidated but IFRS 5 should

be used.be used.d.d. The subsidiary should remain off balance sheet. The subsidiary should remain off balance sheet.


SolutionSolution

c.c. The subsidiary should not be The subsidiary should not be consolidated consolidated but IFRS 5 should be used.but IFRS 5 should be used.

Multiple Choice QuestionsMultiple Choice Questions A manufacturing group has just acquired a controlling A manufacturing group has just acquired a controlling

interest in a football club that is listed on a stock exchange. interest in a football club that is listed on a stock exchange. The management of the manufacturing group wishes to The management of the manufacturing group wishes to exclude the football club from the consolidated financial exclude the football club from the consolidated financial statements on the grounds that its activities are dissimilar. statements on the grounds that its activities are dissimilar. How should the football club be accounted for?How should the football club be accounted for?

a.a. The entity should be consolidated as there is no exemption The entity should be consolidated as there is no exemption from consolidation on the grounds of dissimilar activities.from consolidation on the grounds of dissimilar activities.

b.b. The entity should not be consolidated using the purchase The entity should not be consolidated using the purchase method but should be consolidated using equity accounting.method but should be consolidated using equity accounting.

c.c. The entity should not be consolidated and should appear as an The entity should not be consolidated and should appear as an investment in the group accounts.investment in the group accounts.

d.d. The entity should not be consolidated; details should be The entity should not be consolidated; details should be disclosed in the financial statements. disclosed in the financial statements.


SolutionSolution

a.a. The entity should be consolidated as The entity should be consolidated as there there is no exemption from consolidation is no exemption from consolidation on the on the grounds of dissimilar activities.grounds of dissimilar activities.


In the separate financial statements of a In the separate financial statements of a parent entity, investments in subsidiaries that parent entity, investments in subsidiaries that are not classified as held for sale should be are not classified as held for sale should be accounted foraccounted for

a.a. At cost.At cost.

b.b. In accordance with IAS 39.In accordance with IAS 39.

c.c. At cost or in accordance with IAS 39.At cost or in accordance with IAS 39.

d.d. Using the equity method. Using the equity method.


SolutionSolution

c.c. At cost or in accordance with IAS 39.At cost or in accordance with IAS 39.

Multiple Choice QuestionsMultiple Choice Questions Which of the following is Which of the following is not not a valid condition that a valid condition that

will exempt an entity from preparing consolidated will exempt an entity from preparing consolidated financial statements?financial statements?

a)a) The parent entity is a wholly owned subsidiary of The parent entity is a wholly owned subsidiary of another entity.another entity.

b)b) The parent entity’s debt or equity capital is not The parent entity’s debt or equity capital is not traded on the stock exchange.traded on the stock exchange.

c)c) The ultimate parent entity produces consolidated The ultimate parent entity produces consolidated financial statements available for public use that financial statements available for public use that comply with IFRS.comply with IFRS.

d)d) The parent entity is in the process of filing its The parent entity is in the process of filing its financial statements with a securities commission. financial statements with a securities commission.


SolutionSolution

d.d. The parent entity is in the process of The parent entity is in the process of filing filing its financial statements with a its financial statements with a securities securities commission. commission.

Multiple Choice QuestionsMultiple Choice Questions Entity X controls an overseas entity Y. Because of exchange Entity X controls an overseas entity Y. Because of exchange

controls, it is difficult to transfer funds out of the country to controls, it is difficult to transfer funds out of the country to the parent entity. X owns 100% of the voting power of Y. the parent entity. X owns 100% of the voting power of Y. How should Y be accounted for?How should Y be accounted for?

a.a. It should be excluded from consolidation and the equity It should be excluded from consolidation and the equity method should be used.method should be used.

b.b. It should be excluded from consolidation and stated at cost.It should be excluded from consolidation and stated at cost.c.c. It should be excluded from consolidation and accounted for in It should be excluded from consolidation and accounted for in

accordance with IAS 39.accordance with IAS 39.d.d. It is not permitted to be excluded from consolidation because It is not permitted to be excluded from consolidation because

control is not lost. control is not lost.


SolutionSolution

d.d. It is not permitted to be excluded from It is not permitted to be excluded from consolidation because control is not lost.consolidation because control is not lost.


Where should minority interests be presented Where should minority interests be presented in the consolidated balance sheet?in the consolidated balance sheet?

a.a. Within long-term liabilities.Within long-term liabilities.

b.b. In between long-term liabilities and current In between long-term liabilities and current liabilities.liabilities.

c.c. Within the parent shareholders’ equity.Within the parent shareholders’ equity.

d.d. Within equity but separate from the parent Within equity but separate from the parent shareholders’ equity. shareholders’ equity.


SolutionSolution

d.d. Within equity but separate from the Within equity but separate from the parent parent shareholders’ equity.shareholders’ equity.