Typically this will involve calculating the figures for a consolidated statement of profit or loss or a consolidated statement of financial position. A $104,700 Consolidated financial statements reflect control, not ownership. Practising full length consolidation questions will help you grasp a better understanding of consolidation. A parent is exempt under the Companies Act from the requirement to prepare consolidated financial statements on any one of the following grounds. 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. Paragraph 4 of IFRS 10 provides relief whereby a parent need not present con­sol­i­dated financial state­ments if it meets par­tic­u­lar con­di­tions, including the re­quire­ment that “its ultimate or any in­ter­me­di­ate parent produces con­sol­i­dated financial state­ments that are available for public use and comply with IFRSs.” Statement (3): Don’t just look at the 45% holding and presume it is an associate without considering the other facts. Violet Co – by looking at the equity shares, Green Co has more than 50% of the voting shares – ie an 80% equity holding. Section 379(3) sets out two ways in which a holding company can be exempt from preparing consolidated financial statements: 1) if the holding company is a wholly owned subsidiary of another body corporate; or However, a parent need not present consolidated financial statements if the parent itself is a subsidiary, and its ultimate parent (or any intermediate parent) produces consolidated general purpose financial statements that comply with Malaysian Financial Reporting Standards or MPERS. Joint control is the contractually agreed sharing of control over an economic activity, and exists only when the strategic, financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control (the venturers). However, by reading the question stem carefully, you will see that eliminating the unrealised profit is a red herring, as we are being asked for consolidated revenue. Always start by reading the question requirement carefully to determine what is being asked for. It had not derived income of more than $30,000. Therefore, the correct answer is D, not A which completely omits the elimination of the intra-group balances, nor answer B which omits to cancel the corresponding payable within liabilities. B 2 only The Amendments confirm that the exemption from preparing consolidated financial statements is also available to a parent entity that is a subsidiary of an investment entity, in which all of its In particular, important simplifications are available for small companies and micro-entities when preparing and filing their annual accounts and reports. Under the PERS framework (MASB 11), there was no explicit mention on consolidating SPEs. -which financial statements components to prepare and / or file with the Registrar of Companies, -which consolidation exemptions remain available and on what conditions, -whether to prepare a directors’ report and what new requirements are to be included therein when applicable, If the reporting period of the subsidiary companies is different than the parent company, then the necessary adjustments need to be made by the subsidiary company . A parent with all its subsidiaries forms a group. It is important to determine the size of company in order to ensure that the relevant regulatory requirements for the preparation and filing of the annual accounts and reports are applied. In other MTQs, you may be expected to do more work on finding the fair value of the net assets at acquisition. (a) is not itself required to prepare or lodge any financial statements under any law administered by the Securities Commission or Bank Negara Malaysia; and (b) 1is not a subsidiary or associate of, or jointly controlled by, an entity which is required to prepare or lodge any financial statements under any law … Under the PERS framework, a parent is exempted from consolidating its subsidiary if it operates under severe long-term restrictions; however, such an exemption is not available under MPERS. Although Pink Co only owns 80% of Scarlett Co, it controls 100%. When answering OTs and MTQs, remember to: Written by a member of the FA examining team, Virtual classroom support for learning partners, Preparing simple consolidated financial statements, Less: fair value of net assets at acquisition, the power over more than 50% of the voting rights by virtue of agreement with other investors, the power to govern the financial and operating policies of the entity under statute or an agreement, the power to appoint or remove the majority of the members of the board of directors, or. This article was first published in the February 2017 Malaysia edition of Accounting and Business magazine. Statement (2): Despite only 18% of the ordinary share capital being held by Indigo Co, as we have already discussed, we do not just consider the percentage of equity shares held, but also look at whether there can be an exercise of significant influence. You learning providers question banks and revision material will also provide further practice. This is presented as ‘Share of profits of Associate’ as a new heading immediately before the consolidated profit before tax. Purple Co has made a profit of $1,000 (calculated as revenue of $5,000 – cost of $4,000). Payables         ($70,000 + $42,000 – $4,600) = $107,400. Scope of Consolidated Financial Statements (CFS) A Parent (Holding) Company which presents its consolidated financial statements must consolidate all of its subsidiaries, foreign as well as domestic. You should use the range 20-50% of voting shares in the exam as your main indicator of significant influence. Inventory (SoFP)             $500. 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). exemptions from preparing consolidated financial statements Source: A Dictionary of Accounting. Under section 14 of MPERS, an entity is given an accounting policy choice to account for its associates using either a cost model, fair value model or equity method. Under the Companies Act a parent company is not required to prepare consolidated financial statements for a financial year in which the group headed by that company qualifies as a small group or a medium-sized group. Had the question asked for the cost of the investment that would be recorded in the parent’s books this would be it – hence the inclusion of the distracter, and incorrect answer D. Secondly, once we have identified the amount of consideration transferred to acquire control over the subsidiary, the fair value of the non-controlling interest needs to be identified. C $42,000 However, a parent need not present consolidated financial statements if the parent itself is a subsidiary, and its ultimate parent (or any intermediate parent) produces consolidated general purpose financial statements that comply with Malaysian Financial Reporting Standards or MPERS. It does not attempt to cover every technical aspect of consolidation, but to give candidates the tools they need to prepare for the style and level of testing, they can expect to see in this paper. Which of the following investments are accounted for as subsidiaries in the consolidated accounts of Green Co Group? Under section 9 of MPERS, profit or loss and each component of other comprehensive income shall be attributed to the owners of the parent and to the non-controlling interest. Exemption from preparing consolidated financial statements Currently, IFRS 10 contains three situations under wh ich a parent company need not present consolidated financial statements. IFRS 10 states control arises when the investor (the parent) has: i. power over the investee (the subsidiary), ii. A number of simplifications are also available to … 17 An entity need not apply the equity method to its investment in an associate or a joint venture if the entity is a parent that is exempt from preparing consolidated financial statements by the scope exception in paragraph 4(a) of FRS 110 or if all the following apply: IFRS 10, Consolidated Financial Statements Please note the syllabus does not cover Joint Ventures but IAS 28 is applicable to Associates which are covered. Do any of the items remain in inventory at the end of the year? This is because, although we have used OTs to demonstrate how the consolidation principles could be examined, they could also be assessed using the MTQs in part B of the exam. re-read the question to ensure you understand it and check you are answering the question set if your initial calculation does not match any of the answer options. We began this article with consideration of how to identify a subsidiary, and we conclude it with consideration of a relationship between a parent and an associate. representation on the board of directors of the investee, participation in the policy-making process, material transactions between the investor and investee. An investor using the fair value model shall use the cost model for any investment in an associate for which it is impracticable to measure fair value reliably without undue cost or effort. However, by looking at the fact that Green Co has appointed five of the seven directors, effectively they have the power, and ability to use that power, to affect the decision making in the company which will impact on the returns to be made. When a venturer in a joint venture does not have joint control, it shall account for that investment in accordance with section 11 (ie as a financial instrument) or, if it has significant influence in the joint venture, in accordance with section 14 Investments in Associates. This exemption notice, issued with immediate effect on 18 June 2015 and will expire on 31 July 2020, the exemption applies also to accounting periods that commenced before the exemption was granted (e.g. At Paper FA level, it is assumed that control exists if the parent company has more than 50% of the ordinary (equity) shares – ie giving them more than 50% of the voting power. As Green Co only has 25% of the equity shares, they do not have control and, therefore, Amber Co is not a subsidiary. Half of these items remained in the inventory of Silver Co at the year end. 30% of the non-voting preference share capital in Yellow Co, 18% of the ordinary share capital in Blue Co with directors of Indigo Co having two of the five places on the board of Blue Co, 45% of the ordinary share capital of Red Co, with directors of Indigo Co having four of the six places on the board of Red Co, read the questions requirement carefully and understand what is being asked for, think about relevant consolidation workings or extracts that may help you, calculate what you think the correct figure is before you look at OT answer options – be careful not to let the distracters catch you out, so think carefully about your calculation. As at 31 December 20X2, extracts from their individual statements of financial position showed: As a result of trading during the year, Pink Co’s receivables balance included an amount due from Scarlett of $4,600. (Effectively what you are doing is adjusting the closing inventory that is part of the cost of sales figure). iii. Therefore, the consolidated revenue is calculated as: Had the question stem asked for the consolidated cost of sales figure, the answer would be correctly calculated as: $54,990 + $17,940 + $500 – $5,000 = $68,430. Therefore, answer B would not be selected as it incorrectly adds 100% of Purple Co and only 70% of Silver Co. This should mean that you immediately consider adding together 100% of Pink Co’s balances and Scarlett Co’s balances to reflect control. D $104,200. (1) How is a parent-subsidiary relationship identified? Cr. This  inflates the value of the inventory held by the group in the statement of position and the profit in the statement of profit or loss. The standard was published in May 2011 and is effective from 1 January 2013. If a Hong Kong company is owned by an individual, then a consolidated financial statement is mandatory. Illustration 1 shows an example of a typical group structure. the ability to use its power over the investee to affect the amount of the investors returns. If a reliable measure of fair value is no longer available, the entity shall disclose that fact. A parent is also exempted if it has no subsidiaries other than those ac… The parent isn't a 100% sub but the other owners don't mind the parent not preparing group accounts The parent's loans or shares are not traded in a public market The parent didn't file its accounts with a stock exchange (in order to issue shares) Note: in many Paper FA questions, you will be expected to calculate the profit made by using margins or mark-ups, which are not discussed here.). In the final part of the calculation, following on from the point just made, it is necessary to look at all (100%) of the fair value of net assets at acquisition. Please visit our global website instead, Can't find your location listed? Having two out of the five directors effectively gives Indigo Co influence, but not control, over decision making in the company and, therefore, Blue Co is an associate and would be equity accounted. If the subsidiary subsequently makes profits, the majority interest (ie the parent) is allocated all such profits until the minority’s share of losses previously absorbed by the majority has been recovered. From the question, we can see that Pink Co has control over Scarlett Co. It is calculated as the cost of the investment + parents share of post-acquisition retained profits (ie the profits the associate has earned since the parent has had significant influence). The effect of equity accounting was only disclosed in the notes to the financial statements. Section 129 (3) of the Act mandates that the Consolidated financial Statements must be prepared in the same structure as the separate financial statements of the parent companies. This is why we need to include the fair value of the non-controlling interest in our goodwill calculation. For claiming exemptions, the subsidiary companies are required to comply with conditions mentioned under Second Proviso to Rule 6 of Companies (Accounts) Rules, 2014. And the financial reporting framework serves as a guideline to ensure each criterion that is needed is being fulfilled. Has there been any intra-group trading during the year, irrespective of whether the goods are still included in inventory at the year end? B $45,000 It would be a fundamental mistake in any consolidation question to ever pro-rate a subsidiaries statement of financial position where there is less than 100% ownership. The fair value of the non-controlling interest was $30,000 and the fair value of the net assets acquired was $125,000. the expenses that it incurs and its share of the income that it earns from the sale of goods or services by the joint venture. When its immediate parent is established under the law of an EEA State (Section 400 of the Act): (a) The parent is a wholly-owned subsidiary. A Violet only It also incurs its own expenses and liabilities and raises its own finance, which represent its own obligations. The following extracts are from the individual statements of profit or loss of the two companies for the year ended 30 September 20X2: Purple Co had made sales to Silver Co during the year of $5,000. Dr. When these balances are eliminated, the consolidated figures become: Receivables     ($50,000 + $30,000 – $4,600) = $75,400 There are four sizes of company to consider when preparing and filing accounts and reports: micro-entity, small, medium-sized and large. Note although we refer to this as a provision, it is not a liability but an adjustment to the asset, inventory. financial statements in which all of its subsidiaries are measured at fair value through profit or loss in accordance with HKFRS 10. Answer C is incorrect as, despite calculating the cost of investment correctly as $112,000 + non controlling interest of $30,000 = $142,000, it incorrectly deducts (80% x $125,000) as the share of net assets at acquisition giving goodwill of $42,000. The global body for professional accountants, Can't find your location/region listed? Section 9 also requires consolidation of special-purpose entities (SPE), which a reporting entity controls. However, if the investor did not present any consolidated financial statements, the investment is accounted for under the cost method or at revalued amount in its financial statements. the power to cast the majority of the votes at meetings of the board of directors. The global body for professional accountants, Can't find your location/region listed? Another typical FA exam question will require you to calculate goodwill. This must be eliminated, irrespective of whether the items remain unsold at the year end. But just like associates, a venturer shall measure its investments in jointly controlled entities for which there is a published price quotation using the fair value model. (6) Concluding exam tips A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control – the cornerstone in accounting for joint ventures. Again this figure is given in this question and just requires slotting into our goodwill working. Goodwill can be tested in a variety of different ways (see above). Answer Let’s consider each of the investments in turn to determine if control exists and, therefore, if they should be accounted for as a subsidiary. Which of the following investments owned by Indigo Co should be accounted for using the equity method in the consolidated financial statements? However, there are examples where a holding of less than 50% of the ordinary shares can still lead to control existing. Section 9 of MPERS requires a parent entity to present consolidated financial statements in which it consolidates its investments in subsidiaries. However, the difference arises when it comes to investments in jointly controlled entities (JCE). In the consolidated statement of financial position, the investment in the associate is shown as a single figure in non-current assets. Illustration 2 is an example of a typical question. Joint ventures can take the form of jointly controlled operations, jointly controlled assets or jointly controlled entities: Jointly controlled operations (JCO) This arrangement involves the use of the assets and other resources of the venturers rather than the establishment of a corporation, partnership or other entity, or a financial structure that is separate from the venturers themselves. However, if it is owned by a body corporate – there are some exemptions. However, when it comes to the measurement of non-controlling interests (minority interests under the PERS framework), there is a significant difference. Control requires exposure or rights to variable returns and the ability to affect those returns through power over an investee. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. Note: Answer B ignores that Red Co only acquired 80% of the shares and calculates the cost of investment incorrectly as 40,000 x $3.50 = $140,000 – therefore, goodwill of $140,000 + $30,000 – $125,000 = $45,000. An associate is defined by IAS 28, Investments in Associates and Joint Ventures as ‘an entity over which the investor has significant influence’. What should be shown as the consolidated figure for receivables and payables? Investment in jointly controlled entities (JCE)The accounting treatment for investment in JCE under the MPERS framework is similar to investment in associates, as discussed earlier, whereby a venturer has a policy choice in using either cost model, equity method or fair value model. Ramesh Ruben Louis FCCA is a professional trainer and consultant in audit and assurance, risk management and corporate governance, corporate finance and public practice advisory, "There is no prohibition on the equity method if there are no consolidated financial statements presented", Contact information for your local office, Virtual classroom support for learning partners. While preparing the consolidated statement, it should take into account that the date of reporting the financial statements of the parent company and subsidiary companies is the same. 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