In this session we shall look at IFRS 10 Consolidated Financial Statements and the requirement of a parent company to prepare Group Accounts (also known as Consolidated Financial Statements) when one company controls another company.
Groups of companies
A group of companies (or group) exists where one company controls one or more other companies.
- A Parent Company is the company that controls one or more other companies
- A Subsidiary Company is a company that is controlled by a parent company
- A Group is a parent company and its subsidiaries
Consolidated financial statements
A parent company must prepare consolidated financial statements each year. The consolidated financial statements (or “group accounts”) present the assets, liabilities, income and expenses of the group of companies as if they were a single entity.
[NB. There are a some exceptions to this requirement to produce consolidated financial statements. For example, a parent company that is itself a subsidiary and whose shares and debt are not publicly traded, does not have to prepare consolidated statements though its parent company will.]
Control over another company
A group of companies exist where one company controls one or more other companies. In order to determine whether a group exists, we must assess whether control exists.
An investor controls an investee when it has all of the following:
Power over the investee
Power over the investee means that the parent company has the ability to direct the activities of the investee (i.e. it can tell them what to do).
Power usually exists when a parent company owns a majority of the voting rights in the subsidiary (i.e. it owns more than half of the voting shares of the company). This is because an investor that owns a majority of the voting rights is normally in a position to appoint its own directors to run the company.
In rarer circumstances, power can arise from contractual or other rights. For example, it would be possible for a shareholder who owns 50% or less of the voting shares to have control if they had been given other shareholders’ voting rights under a contract, or if there was an agreement that they had the right to appoint the majority of the company’s directors.
Returns
Control also requires the investor to be able to benefit from the investee. In general this means that the parent company is entitled to receive dividends from its subsidiary according to the number of shares it owns.
Control also means that the investor is able to affect the amount received from the investee. A parent company, for example, would be able to instruct the directors of its subsidiary to declare or propose dividends and thereby control the timing and amounts that are paid to the shareholders.
Examples of control
Question
a) Company A owns 276 ordinary shares in Company B. Company B’s issued share capital consists of 505 ordinary shares
Does Company A control Company B?
Clicker here to reveal the answer
Yes, Company A controls Company B as it owns 54.7% of the voting shares of B.
b) Company X has issued share capital of 1,000 ordinary shares of £1 each and 500 ordinary non-voting shares of £1 each. Company Y owns 600 ordinary shares of £1 each in Company X.
Does Company Y control Company X?
Click here to reveal the answer
Yes, Company Y controls Company X. Whilst Company Y owns less than half of all of Company X’s share capital, it does own 60% of Company X’s voting shares. It will therefore be able to remove and appoint the directors of Company X and thereby control its decisions.
c) Company D has issued share capital consisting of 3,100 ordinary shares. Company C owns 1,531 ordinary shares in Company D
Does Company C control Company D?
Click here to reveal the answer
No, Company C does not control Company D. Company C owns 49.4% of Company D’s voting shares and therefore does not own a majority of D’s shares
Consolidated financial statements
A parent company’s financial statements will include:
- The parent’s individual Statement of Financial Position
- A Consolidated Statement of Financial Position
- A Consolidated Statement of Profit or Loss and Other Comprehensive Income
- A Consolidated Statement of Changes in Equity
- A Consolidated Statement of Cash Flows
- Notes to the Financial Statements
In this course we will look at how to prepare the Consolidated Statement of Financial Position and the Consolidated Statement of Profit or Loss and Other Comprehensive Income.
The Consolidation Process
As mentioned previously, consolidated financial statements treat the group companies as if they were a single entity. This is achieved by following a consolidation process described below.
Accounting requirements: accounting policies
When consolidated financial statements are prepared we must ensure that the figures used in the consolidation have been calculated using the same accounting policies.
So for example, if a parent company measures the value of its land using the Cost Model but its subsidiary uses the Revaluation Model, the group will have to decide which model will be used when preparing the consolidated financial statements. This is one reason why companies within a group tend to adopt the same accounting policies when they prepare their individual financial statements.
Accounting requirements: non-controlling interests
Non-controlling interests are that part of the subsidiary’s equity that are not controlled by the parent company. These will be shown in the Consolidated Statement of Financial Position in the Equity section but separately from the equity of the owners of the parent.
In the rest of section 6, we shall look at how goodwill is calculated and how consolidated statements of profit or loss and other comprehensive income and statements of financial position are prepared
