Consolidated financial statements Session 6 – November 2016

INTRODUCTION Consolidation means presenting the results, assets and liabilities of a group of companies as if they were one company The central company, called the parent, generally owns most if not all of the shares in the other companies, which are called subsidiaries. Consolidation involves: Adding together Cancelling like items internal to the group Consolidate as if you owned everything then show the extent to which you do not own everything

DEFINITIONS Parent An entity that controls one or more entities Subsidiary An entity that is controlled by another entity ( known as the parent) GROUP A parent and all its subsidiaries

DEFINITIONS Control An investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee Power Existing rights that give the current ability to direct the relevant activities

DEFINITIONS CONSOLIDATED FINANCIAL STATEMENTS The financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity NON-CONTROLLING INTEREST The equity in a subsidiary not attributable, directly or indirectly, to a parent

DEFINITIONS ASSOCIATE Significant influence Is an entity over which another entity exerts significant influence. Significant influence The power to participate in the financial and operating policy decisions of the investee but which is not control or joint control of the policies TRADE INVESTMENT An investment in the shares of another entity, that is held for the accretion of wealth, and is not an associate or a subsidiary

ACCOUNTING STANDARDS The relevant IFRSs for consolidation are: IAS 27 Separate financial statements IAS 28 Investments in associates and joint ventures IFRS 3 Business combinations IFRS 10 Consolidated financial statements

Content of consolidated financial statements Parent company financial statements Consolidated statement of financial position Consolidated statement of profit and loss and other comprehensive income Consolidated statement of cash flows NOTE: Consolidated FSs do not replace the separate FSs of the individual group companies

Investment in subsidiaries Criteria (if any of the following apply) : Parent owns more than 50% of the shares in the subsidiary holds more than half the voting power has power over more than half the voting rights by virtue of an agreement with other investors Has power to govern the financial and operating policies of the entity under a statute or agreement Has power to appoint or remove the majority of the members of the board of directors Has power to cast the majority of votes at meetings of the board of directors

Accounting treatment of subsidiaries Ifrs requires a parent to present consolidated FSs (group accounts) in which the accounts of the parent and subsidiary are combined as a single entity. This presentation means that the substance, rather than the legal form, of the relationship between parent and subsidiary will be presented

Basic consolidation procedure Take the individual accounts of the parent company and each subsidiary and cancel out items which appear as an asset in one company and a liability in another Add together all the uncancelled assets and liabilities throughout the group on a line by line basis Items requiring cancellation may include: the asset ‘investment in subsidiary companies’ – parent company’s accounts will be matched with the liability ‘share capital’ in the subsidiaries’ accounts Intra-group trading within the group – receivables in one and payables in the other netted off

Non-controlling interests The non-controlling interest (NCI) shows the extent to which nets assets controlled by the group are owned by other parties. Disclosure in the equity section of the consolidated SoFP as follows: Non-controlling interest K Fair value of NCI at acquisition X Plus NCI’s share of post-acquisition retained earnings (and other reserves) X NCI at reporting date X

Non-controlling interests GROUP RETAINED EARNINGS Should only reflect the group’s share of the post-acquisition retained earnings of the subsidiary Proforma layout of the workings is as follows: Retained earnings P Co S Co K K Per question X X Pre-acquisition retained earnings (X) Y Group share of post acquisition retained earnings S Co (Y x % shareholding) X Group retained earnings X

Non-controlling interests Goodwill The consolidated accounts show 100% of goodwill even though the group does not ‘own’ all of it. Proforma layout of the workings is as follows: Goodwill K K Fair value of consideration transferred X Plus fair value of NCI at acquisition X Less net asset acquisition date fair value of identifiable assets acquired and liabilities assumed: Ordinary share capital X Share capital X Retained earnings at acquisition X Fair value adjustments at acquisition X (X) Goodwill X