Introduction to presentation of consolidated financial statements according to IFRS 10
Sunday, oo no, tomorrow is work. Why?. But first we had to go and visit my cousin, I was a little bit excited but the thought of having to go to work the next day was taunting me. So we set off, the destination was very far, and it took like two hours to get there. On getting there, I was sad to find out that my beautiful older cousin had been down with malaria.
We did the little we could do to take care of her, and my sister being a doctor did her thing…lol…but she was getting better and her temperature was going down. We still had fun though, and we left at 8.30. The traffic was light so we got home at around 9.30. I still had to read, iron my clothes and prepare for work.
So I randomly picked an ifrs statement which was ifrs 10( presentation of consolidated financial statements),and this was what I learnt about the disclosures because I already have knowledge of group accounts, I didnt go deep into it.
A consolidated financial statement of a group is one in which the assets, liabilities, equity, income, expenses and cashflows of the parents and its subsidiaries are presented as those of a single economic entity. A company is considered the subsidiary of another company when the company (parent) has more than 50% share holdings and can control the relevant activities of the subsidiary, and also the composition of the board of directors.
A parent company is an entity that controls one or more entities, a subsidiary is an investee company in which a single investor company has more than 50% share holdings and controls the activities of the subsidiary. An investor determines whether it is a parent by assessing whether it controls one or more investees. An investor considers all relevant facts and circumstances when assessing whether it controls an investee.
An investor controls an investee when it is exposed, or has right to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.(IFRS 10: 5-6, IFRS 10:8).
IFRS 10:7 states that an investor controls an investee if and only if the investor has all of the following elements :
a) Power over the investee Ie the investor has existing rights that give it the ability to detect the relevant activities. i.e activities that significantly affects the investee returns
b) Exposure or right to variable returns from its involvement with the investee.
C) The ability to use its power over the investee to affect the amount of the investor’s returns.
To qualify to have controlling interests over an investee, an investor must be exposed or have rights to variable returns from its involvement with an investee to control the investee. Such returns must have the potential to vary has a result of the investee’s performance and can be positive, negative or both (IFRS 10:45)
I learnt that some companies have protective rights designed to protective rights which are rights designated to protect the interest of the party holding those rights without giving the party power over the entity to which those rights relate. An investor that holds only protective rights cannot have power over an investee and so cannot control an investee ( Ifrs 10:11, Ifrs 10:14 )
A parent must also have the power over an investee to affect its return from its involvement with the investee (Ifrs 10:17)
Preparation of Consolidated Financial Statements
A parent need not prepare a consolidated financial statement if it meets all of the following conditions.
It is a wholly owned subsidiary or partially owned subsidiary of another entity and its other owners including those not otherwise entitled to vote, have been informed and do not object the parent not presenting consolidated financial statements.
b) Its debt equity instruments are not trade in a public market
c) It did not file or does not intend to file its financial statement with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market.
d) Its ultimate or any intermediate parent of the company produces consolidated financial statements available for public use that complies with ifrs.
e) Post employment benefits plans or other long term employee benefit plans to which IAS 19 employee benefit applied are not required to apply the requirements of IFRS 10 ( Ifrs 10:4 ).
To prepare a consolidated financial statement, follow these simple steps.
1. Combine like items of assets, liabilities equity income, expenses and cash flows of the parent with those of the subsidiaries.
2. Offset (eliminate) the carrying amount of the parent’s investment in each subsidiary and parent’s portion of equity in each subsidiary
3. Eliminate in full intra group transactions between entities of the group ( Profits or losses resulting from intra-group transactions that are recognized in assets, such as inventory and fixed assets are eliminated in full.
The parent and subsidiaries are required to have the same reporting dates or consolidation based on additional financial information prepared by subsidiary unless impracticable. In a case where it is impracticable for a subsidiary and a parent company to have the same coterminous end of year account, the most recent financial statements of the subsidiaries are used, and transactions or events are pro rated between the reporting dates of the subsidiary and consolidated financial statements.
The difference between the date of the subsidiary’s financial statements and that of the consolidated financial statements shall be no more than three months.
Non Controlling Interests
Non controlling interest in the case of a partial subsidiary refers to the interest on a subsidiary which constitutes less than 50% of the shareholdings of the company.
A parent presents Non-controlling interests in its consolidated statements of financial position within equity, separately from the equity of the owners of the subsidiary (IFRS 10;22)
A reporting entity attributes the profit or loss and each component of other comprehensive income to the parent and to the Non-controlling interests. The proportion allocated to the parents and non controlling interests are determined on the basis of present ownership interests (IFRS 10;B94, IFRS 10:B89)
The reporting entity is to attribute total comprehensive income to the parent company and the non controlling interest, even if it is a deficit balance.
Losing Control of a Subsidiary
If a parent looses control of a subsidiary, the parent should:
a) Derecognize the assets and liabilities of the former subsidiary from the consolidated statement of financial position
b) Recognize any investment retained in the former subsidiary at its fair value when control is lost and subsequently account for it and for any amounts owed by or to the former subsidiary in accordance with relevant IFRS
c) Recognize the gain or loss associated with the loss of control attributable to the former controlling interest.
There are no specific disclosures in Ifrs 10, Ifrs 12 (Disclosure of interests in other entities) outlines the disclosures required.
Abbas A Mirza., Graham Holt., Liesel Knorr., Wiley IFRS: Practical Implementation Guide and Workbook
Dieter Christian., Nobert Ludenbach., IFRS Essentials