Chapter – 4 Holding Company Accounting Chapter outcomes: 1.Introduction – Company Groups 2.Rationale for group financial statement; 3.Current practices; 4.Acquisition Accounting; 5.Associated Companies; 6.Joint venture; 7.Practical exercises Dr. BALAMURUGAN MUTHURAMAN

Group Financial Statements Group Financial Statements are the financial statements of a set of two or more enterprises organised as an economic entity Group is defined according to concept of ‘control’ Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities

Group Companies Company group characteristics – Vertical group – Horizontal group – Conglomerate Group expansion – Development of new subsidiaries – Acquisition by takeover of other companies – Meger between companies

Membership rights :  Influence on management, voting power Equity rights:  Right to participate in distribution of profits + equivalent part of liquidation balance In principle: rights are proportional to capital share  Exceptions: preference shares, limitations to voting power, multiple votes per share,

Membership rights :  Influence on management, voting power Equity rights:  Right to participate in distribution of profits + equivalent part of liquidation balance In principle: rights are proportional to capital share  Exceptions: preference shares, limitations to voting power, multiple votes per share,

Rational for group financial statements Interdependent relationships within a group (patrimonial, contractual, personal ties) Loss of part of their independence of individual entities Common or unified management Economic interest of the group > individual interests of legal entities involved  It is economically more relevant to present the financial statement of the economic whole as an aggregate of all assets and liabilities under unified control

Current Practices IAS 27 Consolidated and Separate Financial Statements IFRS 3 Business Combinations IAS 28 Investments in Associates IAS 31 Investments in Joint Ventures Seventh EC Company law Directive

Purchase Accounting Purchase method of accounting Fair value adjustments of acquired assets and liabilities Subsequent measurement of goodwill Minority interests Merger accounting Group income statement

Acquisition Accounting 1.Purchase method of accounting 2.Fair Value Adjustments of acquired assets and liabilities; 3.Subsequent measurement of goodwill; 4.Minority interests; 5.Merger accounting; 6.Group income statement

Purchase method of accounting Purchse method Accounting Fair value ajustements of acquired assets and liabilities Subsequent measurement of goodwill Minority interests Merger accounting Group income statement

Purchase method of accounting Purchse method Accounting Fair value ajustements of acquired assets and liabilities Subsequent measurement of goodwill Minority interests Merger accounting Group income statement

Purchase method of accounting Purchse method Accounting Fair value ajustements of acquired assets and liabilities Subsequent measurement of goodwill Minority interests Merger accounting Group income statement

Purchase method of accounting Purchse method Accounting Fair value ajustements of acquired assets and liabilities Subsequent measurement of goodwill Minority interests Merger accounting Group income statement

Minority Interests Minority Interests (or non-controlling interests) appear if the group does not own 100% of the shares in a subsidiary They represent the part of the net assets and profit or loss of the subsidiary attributable to the equity interest that are not owned

Purchase method of accounting Purchse method Accounting Fair value ajustements of acquired assets and liabilities Subsequent measurement of goodwill Minority interests Merger accounting Group income statement

Merger Accounting Two companies can combine by merging their activities and managements without one of them acquiring the other; Two types of mers – Fusion and Pooling of interests IFRS 3 business combinations banned merger accounting methods

Group income statement In the group income statement, the effect of intra-group transactions has to be eliminated: Only income and expenses recognized with regard to parties outside the group will be retained; Follow-up effects of fair value adjustments over time have to be integrated; Amortization of goodwill or impairment losses on goodwill may also significantly impact the group income statement

Associated Companies Associated Companies are companies in which the investor company has ‘significant influence” Different types of relationships between investor company and investee company mainly according to voting rights under control; Accounting rules differ according to the type of relationship

Joint Ventures A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control; IFRS recognises three kinds of arrangement: Jointly controlled operations; Jointly controlled assets; Jointly controlled entities; IFRS recommends use of proportionate considation for jointly controlled entities