1. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 1 IAS 27 Subsidiaries AUDIT Presented by: Tony Boutros

2. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 2 Agenda Classification Definitions Accounting for subsidiaries Classification Definitions Accounting for subsidiaries

3. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 3 Four scenarios Possible methods of accounting for investments IFRS 3 IAS 27 Control Consolidate IAS 31IAS 28 Significant influence Proportionate consolidation Equity accounting IAS 39 Other Fair value or cost Joint control

4. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 4 Levels of control of an investment Level of control 100 % 20 % 50 % 0 % Control Joint control Significant influence No influence It is possible to have control even if you own less that 50 % of the outstanding shares if there are other means than the majority of voting rights that give power to control

5. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 5 Control Rebuttable presumption: more than half of voting power Control also exists even when the investor (the Parent) owns less than half of the voting rights of an investee: Power over more than half of the voting rights by virtue of agreement with other investors Power to govern financial and operating policies under a statute or agreement Power to appoint/remove majority of directors Power to cast majority of votes at directors’ meetings or other governing body The power to govern the financial and operating policies of an entity so as to obtain benefits from its activities

6. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 6 Control (continued) Potential voting power ( ie an entity may own share warrants, share call options, debt or equity instruments that if converted into ordinary shares gives the entity voting power or reduce another party’s voting power. The existence and effect of potential voting rights that are currently exercisable are considered when assessing whether the an entity has the power to govern the financial and operating policies of another entity. So in deciding whether to classify an entity as a subsidiary, the issue is to focus on power to control rather than actual (“de facto”) control. So consolidation is based on the power to control (ie ability of one entity to control another) regardless of whether the power is exercised in practice. The power to govern the financial and operating policies of an entity so as to obtain benefits from its activities

7. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 7 Significant influence – associates Significant influence may arise when an investor: Holds 20% -50% in a Company Holds less than 20% and this influence can be clearly demonstrated. For example, if someone were to own 10 – 15% of the shares of Siemens or GE this person probably would be considered to exercise significant influence since these companies are for the most part owned by a large number of smaller shareholders. The power to participate in the financial and operating policy decisions of the investee but not to control them

8. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 8 Significant influence – associates (continued) Indications Representation on the board of directors Participation in policy making process Material transactions between investor and investee Interchange of managerial personnel The final decision is, however, subject to professional judgment and based on substance over form. All facts and circumstances should be considered when deciding The power to participate in the financial and operating policy decisions of the investee but not to control them

9. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 9 Joint venture AB Joint venture

10. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 10 Joint venture (continued) Joint ventures can be jointly controlled… Operations where each venturer uses its own assets (ie building a ship, where each party uses its own assets, and bears its own costs, but the sales revenue from the activity will be shared. Assets (ie an oil pipeline that is jointly controlled by two oil producing companies) Entities (ie jointly-controlled oil pipeline may be transferred into a separate, jointly controlled entity.)

11. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 11 Joint venture – definitions Joint Venture - contractual arrangement in which two or more parties undertake an economic activity subject to joint control Joint Control - contractually agreed sharing of the power to govern the financial and operating policies of an economic activity. Joint control does require each party to have equal voting power. Joint control can be created between more than two venturers and with various proportionate holdings. For example, three parties with holdings in the ratio 40:30:30 can exercise joint control if there is a contractual agreement that requires unanimous consent for all key decisions.

12. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 12 Establishes joint control. No single venturer can control activities unilaterally Joint venture – contractual arrangement Evidenced by Contract between venturers (signed) Minutes of discussions between venturers Incorporated in the articles (by-laws of a jointly controlled entity) Usually in writing

13. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 13 Agenda Classification Definitions Accounting for subsidiaries Classification Definitions Accounting for subsidiaries

14. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 14 Definitions Consolidated financial statements are the financial statements of a Group presented as those of a single entity The Cost method is a method of accounting for an investment wherebey the investment is recognized at cost. The investor recognizes income from investment only to the extent that the investor receives distributions from accumulated profits of the investee arising after the date of acquisition. Distribution received in excess of such profits are regarded as a recovery of investment and are recognized as a reduction of the cost of investment.

15. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 15 Definitions (Continued) A Parent is and entity that has one or more subsidiaries. Separate financial statements are those presented by a parent, an investor in an associate or a venturer in a jointly controlled entity, in which the investments are accounted for on the basis of the direct equity interest rather than on the basis of the reported results and net assets of the investees. The financial statements of an entity that does not have a subsidiary, associate or venturer’s interest in a jointly controlled entity are not separate financial statements.

16. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 16 Accounting for subsidiaries In group financial statements: Consolidation of all subsidiaries Including: Acquired and held exclusively with view to its subsequent disposal (one year from the date of classification) based on IFRS 5.6.11 issued in March 2004 by IASB Operating under severe long-term restrictions No exemption Venture capital organisations (Holding) Mutual funds Because subsidiaries activities are dissimilar. Additional disclosure are required (Segment reporting IAS 14)

17. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 17 Exemption from consolidation Conditions changed for exemption to not prepare consolidated FS: Entity is a wholly owned subsidiary, or a partially owned subsidiary and all owners do not object No debt or equity instruments traded in a public market Not in process of filing its FS with a regulatory organisation to issue any class of instruments The ultimate or any intermediate parent of the parent produces consolidated FS that comply with IFRS and are available for public use

18. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 18 Why consolidate? Subsidiary Holding Subsidiary Holding Before After Substantial amount of information disappears from the parent Financial statements

19. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 19 Consolidation weak points 20 % GM GM is n/a 50 % GM M - SegmentF - Segment R - Segment Financial Services Unit Retail Units Manufacturing Unit HOLDING Consolidated financial statements may be less satisfactory as a basis for Financial analysis in a diverse group because of the averaging effect of the consolidation on financial ratios IAS 14 Segment reporting solve this weakness through extensive disclosure for the primary and secondary segments

20. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 20 Example – consolidation Company A Company B Company C EliminationsGroup PPE1005030180 Shares in subsidiaries 500---500- Intercompany receivables 100---100- Receivables-400300700 Intercompany debt --100-100- Debt-100-50-130-280 Equity-600-300-200500-600 Group consists of entity A and its subsidiaries B and C B has a loan with A of 100

21. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 21 Typical eliminations Income statement Inter-company purchases and sales Inter-company dividends Inter-company interest Balance sheet Inter-company loans Inter-company receivables/payables

22. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 22 Consolidation – elimination of inter-company dividends A B Dividend $ 10 Dividend Income Equity$ 10

23. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 23 Consolidation – elimination of inter-company dividends What happened? SP 120 Cost 60 GM 60 A C B 3rd party Sale 100 Cost 60 GM 40 Sale 90 Cost 55 GM 35 Sale 120 Cost 100 GM 20

24. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 24 Minority interest “Minority interest is that portion of the profit or loss and net assets of a subsidiary attributable to equity interests that are not owned, directly or indirectly through subsidiaries, by the parent.” Loss applicable to the minority in a consolidated subsidiary may exceed the minority interest in the subsidiary’s equity. The excess, and any further losses applicable to the minority, are allocated against the majority interest except to the extent that the minority has a binding obligation and is able to make an additional investments to cover the losses. If the subsidiary subsequently reports profits, such profits are allocatd to the majority interest until the minority’s share of losses absorbed by the majority has been recovered

25. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 25 Presentation of minority interest Group financial statements Income statement Profit and loss should be allocated to the parent and minority interest on the face of income statement Balance sheet Minority interest within equity, but separate from parent shareholders’ equity

26. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 26 Example – minority interest Entity A (parent) – excluding entity B Entity B Revenue10050 Expenses-50-30 Profit5020 Assets324200 Liabilities20070 Equity124130 A Group consists of entity A and its subsidiary B. A owns 80% of the shares in B, that were acquired on formation of B for 24 (at that point equity was 30). Since then the B has made profits of 100. A accounts for B at cost in its own financial statements Inter-company transactions are not considered. Comparative figures are not presented

27. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 27 Example – minority interest Parent financial statements Group financial statements Revenue100150 Expenses-50-80 Profit for the period5070 Attributable to Parent shareholders’ equity5066 Minority interest-4 Presentation of the income statement

28. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 28 Example – minority interest Parent financial statements Group financial statements Shares in subsidiary24- Other assets300500 Total assets324500 Liabilities200270 Total liabilities200270 Equity - parent’s share124204 - minority interest-26 Presentation of the balance sheet

29. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 29 Issues Different reporting dates: In any case, the difference between the reporting date of the subsidiary and that of the parent shall be no more than three months. In case the financial statements of a subsidiary used in the preparation of consolidated financial statements are prepared as of a reporting date different from that of the parent. Adjustments shall be made for the effects of significant transactions that occur between that date and the date of the parents financial statements. Different accounting policies: Consolidated financial statements shall be prepared using uniform accounting policies for like transactions

30. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 30 Immaterial subsidiaries Must have insignificant impact Monitor Disclosure No disclosure

31. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 31 Separate financial statements When separate financial statements are prepared, investments in subsidiaries, jointly controlled entities and associate that are not classified as held for sale in accordance with IFRS 5 shall be accounted for either: At cost In accordance with IAS 39 An investments in an entity shall be accounted for in accordance with IAS 39 from the date that it ceases to be a subsidiary, provided that it does not become an associate as defined in IAS 28 or a jointly controlled entity as described in IAS 31. The carrying amount of the investment at the date the entity ceases to be a subsidiary shall be regarded as the cost on initial measurement of a financial asset in accordance with IAS 39

32. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 27, 28 and 31 - 32 Disclosure requirement More disclosures required Nature of relationship when parent does not own more than half of the voting power in a subsidiary Reasons why owning more than half of voting power of an investee does not constitute control Reporting date of the FS of a subsidiary if different from the parent

33. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. Contact details KPMG IFRG Limited +44 (0)20 7694 8871 www.kpmgifrg.com Contact details KPMG IFRG Limited +44 (0)20 7694 8871 www.kpmgifrg.com