1. Consolidated financial statements
Session 6 – November 2016

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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