FINANCIAL REPORTING FOR GROUP ENTITIES UNDER IFRS - Conf.univ.dr. Victor-Octavian Müller victor.muller@econ.ubbcluj.ro www.econ.ubbcluj.ro/~victor.muller

Aspects regarding evaluation and attendance The final grade will be computed as follows: Active participation in discussing and solving case studies during the courses and seminars (30%) Written exam at the end of the semester (multiple choice and case study) (70%) The students’ attendance is: Optional for the courses Obligatory for the seminars www.econ.ubbcluj.ro/~victor.muller

Course structure Introduction Business combinations according to IFRS 3 Consolidated financial statements according to IFRS 10 Investments in associates according to IAS 28 Joint arrangements according to IFRS 11 Disclosure of interests in other entities according to IFRS 12

Introduction (1) At international level company groups represent a reality just as important as companies. The core of developed economies consists of major multinational industrial, commercial, banking or insurance groups, listed on the world’s major stock exchanges The group structure is adopted increasingly also by small and medium sized entities, who acknowledge the economic (and other) benefits of this form of capital concentration As an economic concept, the group of companies does not have a unique (standardized) definition

Introduction (2) The views expressed in the literature, international organizations and accounting regulatory bodies revolve around the same idea: bringing together a number of legally independent companies under the unified management (control) of a company The polarity “economic unity/legal diversity” represents the central issue for groups of companies in general, and for group financial statements in particular The shortest definition of a group (and its constituents) is provided by the IASB in IFRS 10: group = the parent and its subsidiaries parent = an entity that controls one ore more entities subsidiary = an entity that is controlled by another entity

Introduction (3) The accounting literature (and practice) refers to a stepwise approach towards the group concept: The core is represented by the parent company The first step are the subsidiaries (controlled companies) The second step are joint ventures (jointly controlled companies) The third step consists of associates (companies over which the investor has significant influence) A group of companies, as it constitutes an economic entity, has to be presented in its wholeness (as one single entity). Therefore group (consolidated) financial statements must be presented, besides individual financial statements of the group members.

Introduction (4) Publishing group statements has a fairly long history at international and European level, starting in the United States ever since the beginning of the 20th century. In the accounting literature it is often mentioned that the IASB philosophy regarding accounting regulation nowadays is mainly centered on consolidated accounts (Malciu & Feleagă, 2004) There are five IFRS standards dealing particularly with group accounts: IFRS 3 Business Combinations IFRS 10 Consolidated Financial Statements IAS 28 Investments in Associates and Joint Ventures IFRS 11 Joint Arrangements IFRS 12 Disclosures of Interests in Other Entities

Introduction (5) IFRS 3 Business Combinations outlines the accounting when an acquirer (the investor) obtains control of a business – its investment (e.g. an acquisition or merger). such business combinations are accounted for using the 'acquisition method', which generally requires assets acquired and liabilities assumed to be measured at their fair values at the acquisition date. defines the business combination, prescribes how to account for it at the recognition (but not when performing consolidation afterwards), how to measure goodwill, noncontrolling interest and assets and liabilities acquired. IFRS 10 Consolidated Financial Statements  outlines the procedures for the preparation and presentation of consolidated financial statements, requiring entities to consolidate entities it controls. defines the control and gives a guidance to identify whether there is a control or not. Control requires exposure or rights to variable returns and the ability to affect those returns through power over an investee.

Introduction (6) IAS 28 Investments in Associates and Joint Ventures prescribes how to apply the equity method to investments in associates and joint ventures. defines an associate by reference to the concept of "significant influence", which requires power to participate in financial and operating policy decisions of an investee (but not joint control or control of those polices). FRS 11 Joint Arrangements  outlines the accounting by entities that jointly control an arrangement. Joint control involves the contractually agreed sharing of control and arrangements subject to joint control are classified as either a joint venture (representing a share of net assets and equity accounted) or a joint operation (representing rights to assets and obligations for liabilities, accounted for accordingly). IFRS 12 Disclosure of Interests in Other Entities  requires a wide range of disclosures about an entity's interests in subsidiaries, joint arrangements, associates and unconsolidated 'structured entities'. Disclosures are presented as a series of objectives, with detailed guidance on satisfying those objectives.

Home assignment The Conceptual Framework for Financial Reporting IAS 1 Presentation of Financial Statements