Consolidation of Group Accounts and Auditing

We will examine the Relevant Financial Reporting Standards for a Group of Companies in this series.

What is a Consolidated Financial Statement?

Consolidated financial statements are intended for the benefit primarily of the owners (including non-controlling interests) and creditors of the parent company. Assets, liabilities, equity, income, expenses, and cash flows of the parent company and subsidiaries are presented as if they were one economic entity. Including equity accounted associates / joint ventures, if applicable.

IFRS standards dealing with Group accounts and consolidation

The relevant IFRS standards that deals with group account are as follows;

IAS 27 Separate Financial statements	How an investor shall present investments in the individual or separate (non-consolidated) financial statements.
IAS 28 Investments in Associates / Joint Ventures	It prescribes the accounting treatment for associates, joint ventures or the entities in which the investor has significant influence (but not control).
IFRS 11 Joint Arrangements	It deals with the third type of investment – joint arrangement, which could be a joint operation or joint venture.  In both cases, one investor obtains joint control over some business with some other investor.
IFRS 12 Disclosure of Interests in Other Entities	IFRS 12 applies to any entity with an interest in a subsidiary, joint arrangement, associate or unconsolidated structured entity. The aim is to require the disclosure of information that allows users of financial statements to be able to evaluate: The effects of those interests on its financial position, financial performance, and cash flow.
IFRS 3 Business Combinations	IFRS 3 Business Combinations outlines the accounting when an acquirer obtains control of a business (e.g. an acquisition or merger). Such business combinations are accounted for using the ‘acquisition method’, which generally requires, identifying the acquirer, determine the acquisition date,   recognising / measurement of assets acquired and liabilities / any non controlling interest assumed to be measured at their fair values at the acquisition date. Recognising and measuring goodwill or a gain from a bargain purchase.
IFRS 10 Consolidated Financial Statements	Defines the control and gives a guidance to identify whether there is a control or not. Prescribes the consolidation procedures for preparing consolidated financial statements.

Accounting for Investments – Summary

Control: IFRS 10 defines control providing a link between

Subsidiaries

Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. 

Subsidiaries are fully consolidated from the date on which control is transferred to the Group and once control ceases, they are deconsolidated.

Control Assessment

While control cannot be solely determined by legal ownership, it is generally assumed that control exists if shareholdings exceed 50% [or through majority seats on the Board allowing control over its operating and financial policy and decision making. Control can also be derived through deemed control where there is a majority shareholder and the rest of the shareholders are widely dispersed.]

When assessing control over an investment, an investor should consider the following factors:

• The investees purpose and design;
• What the relevant activities are;
• How decisions about those relevant activities are made;
• Whether the rights of the investors give it the ability to direct the relevant activates;
• Whether the investor is exposed or has rights to variable returns from its involvement with the investees; and
• Whether the investor has the ability to use its power over the investee to affect the amount of the investors return

Significant influence and joint control (Associate or Joint venture)

Associate 

Associates are entities over which the Group has significant influence, (but not control) and which is neither a subsidiary nor an interest in joint venture. Basic indicator of significant influence is the investors share between 20% and 50%.

Significant influence is the power to participant in decision making but not control or joint control. 

An entity could demonstrate that it has significant influence over an entity in the following way;

• Representation on the board of directors or equivalent governing bodies;
• Participant in policy making process, including decision on dividends, or other distributions;
• Material transaction between the entity and the investee;
• Interchange of management personnel;
• Provision of essential technical information

Joint venture

A joint venture is an entity over which the Group has joint control based on contractual arrangements, as well as rights to the net assets of the entity.

Often, joint ventures are formed to pursue specific projects, and these can be either new projects with similar products or services, or they may be the creation of a new business with different core business activities.

Accounting for associate and joint ventures

Investments in joint ventures and associates are accounted for using the equity method.

The equity method of accounting recognises investments at cost and adjusts them thereafter to recognise its share of associates or joint ventures post-acquisition profits or losses of the investee in profit or loss, and its share of changes in its other comprehensive income. 

Dividends received or receivable from the associates or joint ventures are recognised as a reduction of the carrying amount of the investments.

Joint Operation

A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement (i.e. joint operators) have rights to the assets, and obligations for the liabilities, relating to the arrangement.

Joint operator recognises: 

• Its assets, including its share of any assets held jointly;
• Its liabilities, including its share of any liabilities incurred jointly;
• Its revenue from the sale of its share of the output of the joint operation;
• Its share of the revenue from sale of output by the joint operation;
• Its expenses, including its share of any expenses incurred jointly

Other Investment

Whenever an investor acquires any other investment that does not fall into any of the above categories, it is accounted for as a financial instrument under IAS 39 or IFRS 9.

The Group’s Investments in equity instruments are initially measured at fair value plus transaction costs subsequently measures all equity instruments at fair value and are not subject to impairment assessment.

Dividends from such investments are to be recognised in profit or loss when the Group’s right to receive payments is established.

If you require assistance in navigating the Consolidation requirements for your business, contact us for a personalised session today. 

Disclaimer: The information provided is general in nature and is not intended as professional advice. The information contained in this blog was collated as at October 2021 based on information available at that time.