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Consolidation of Accounts
CA Sandesh Mundra,
[email protected]
IAS - 27
October 30, 2010
CA Sandesh Mundra, Chartered
Accountants
1
Poser 1
• M/s Urea Corporation Ltd sold all its three
subsidiaries at different dates during the year.
Whether is it required to present CFS?
CA Sandesh Mundra,
Chartered Accountants
2
Poser 2
• M/s Bottles International Ltd has 100
subsidiaries. It is preparing CFS, would it be
still required to attach all subsidiaries FS as
per Section 212 of The Companies Act, 1956?
CA Sandesh Mundra,
Chartered Accountants
3
Poser 3
• M/s HLS Ltd and M/s LHS Ltd each hold 50%
equity in M/s HLHS Ltd. Each company
exercises control over the board every alternate
year.
CA Sandesh Mundra,
Chartered Accountants
4
Poser 4
• M/s ICAI Ltd owns more than 50% voting power
of M/s ICSI Ltd. However ICAI Ltd argues that
though it owns more than 50% voting power,
however it does not intend to control the
enterprise and thus does not want to
consolidated. Whether is it required to present
CFS?
CA Sandesh Mundra,
Chartered Accountants
5
Poser 5
• M/s Gujarat Ltd owns 60% in M/s Ahmedabad
Ltd. M/s Ahmedabad Ltd owns 60% in M/s AMC
Ltd. Thus indirectly M/s Gujarat Ltd owns 36%
shares in M/s AMC Ltd. Is M/s AMC Ltd
subsidiary of M/s Gujarat Ltd as per AS-21?
CA Sandesh Mundra,
Chartered Accountants
6
Poser 6
• M/s Sonia Ltd A has four wholly owned
subsidiaries which own 25% each in M/s
Manmohan Ltd. Whether equity accounting
would be required by the intermediary
subsidiaries and then consolidated by M/s
Sonia Ltd, or would it directly consolidate?
CA Sandesh Mundra,
Chartered Accountants
7
Poser 7
• M/s China Ltd acquired 60% equity in M/s
Hongkong Ltd on 31-03-2004. However due to
control restrictions it could not consolidate the
entity. But w.e.f 1-4-2008 all restrictions have
gone . How should be the goodwill calculation
be done?
CA Sandesh Mundra,
Chartered Accountants
8
Poser 8
• M/s ISI Ltd is completely funded by M/s
Pakistan Ltd, although it is not owning any
equity/control whether directly or indirectly as
per AS-21. Would it be required to consolidate
the same?
CA Sandesh Mundra,
Chartered Accountants
9
Consolidation - Combination
Acquisition
Merger
Hostile take-ove
Common Control
Joint Venture
De facto Control
Need for consolidated information
CA Sandesh Mundra,
Chartered Accountants
10
Important Definitions:Consolidated financial statements are the financial
statements of a group presented as those of a single
economic entity.
Control is the power to govern the financial and operating
policies of an entity so as to obtain benefits from its
activities.
Non-controlling interest is the equity in a subsidiary not
attributable, directly or indirectly, to a parent.
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.
A subsidiary is an entity, including an unincorporated entity
such as a partnership, that is controlled by another entity
(known as the parent).
CA Sandesh Mundra,
Chartered Accountants
11
CA Sandesh Mundra,
Chartered Accountants
12
CA Sandesh Mundra,
Chartered Accountants
13
GAAP Differences
IAS 27
AS 21
preparation of CFS is mandatory for Existing AS 21 does not mandate
a parent except where parent
the preparation of Consolidated
meets certain conditions.
Financial Statements by a parent.
Does not mandate
preparation of separate financial
statements.
Consolidated Financial Statements
are prepared in addition to separate
financial statements.
Deals with investments in jointly
Existing AS 21 does not deal with
controlled entities and associates to
the same.
be presented in the separate FS.
No exemption.
Subsidiary is excluded from
consolidation when control is
intended to be temporary or when
subsidiary operates under severe
long term restrictions.
CA Sandesh Mundra,
Chartered Accountants
14
GAAP Differences…..
IAS 27
AS 21
No explanation as not relevant.
Explains where an entity owns >50% of
ownership and the shares are held as stock-intrade, whether this amounts to temporary
control. Also explains the term ‘near future’.
Control is the power to govern the fin. and opt.
policies of an entity so as to obtain benefits
from its activities.
Rule-based, > 50% voting power or control of
BOD/governing body to obtain economic
benefits from its activities.
No clarification as control of an entity could be
with one entity only.
.
Provides clarification regarding consolidation in
case an entity is controlled by two entities.
potential voting rights that are currently
potential equity shares of the investee held by
exercisable or convertible are considered when
investor are not taken into account as per
assessing whether an entity has control over
existing AS 21.
the subsidiary
CA Sandesh Mundra,
15
Chartered Accountants
GAAP Differences…..
IAS 27
AS 21
Minority interests shall be
presented in the CFS within equity separately
from the parent’s equity.
Presented in CFS separately from liabilities
and equity of the parent’s shareholders.
The length of difference in the reporting dates
of the parent and the subsidiary should not be
more than three months.
The difference between the reporting dates
should not be more than six months.
Does not recognise the situation of
impracticability.
If it is not practicable to use uniform
accounting policies in preparing CFS,
appropriate disclosures to be made.
The same to be treated in accordance with
IFRS-3
Any goodwill arising on acquisition of a
subsidiary is to be recognised as an asset in
the consolidated financial statements.
CA Sandesh Mundra,
Chartered Accountants
16
GAAP Differences…..
IAS 27
AS 21
Detailed guidance in case of loss of control
over subsidiary.
Not much on the issue.
No clarification
Provides clarification regarding inclusion of
notes appearing in the separate FS of the
parent and its subsidiaries in CFS.
Not dealt in IAS 27 but in deferred taxes.
Provides clarification regarding accounting
for taxes on income in
CFS.
Not dealt
Provides clarification regarding disclosure of
parent’s share in post-acquisition reserves
of a subsidiary.
Concept of SPE
No guidance on consolidation of Special
Purpose Entities (SPEs)
CA Sandesh Mundra,
Chartered Accountants
17
Hope you are Ok!!!
CA Sandesh Mundra,
Chartered Accountants
18
Exemptions……
 the parent is itself a wholly/partially owned subsidiary of
another entity and its other owners do not object to the
entity presenting non-consolidated financial statements.
 the parent’s debt or equity instruments are not publicly
traded.
 the parent is not filing its statements for the purpose of
issuing any class of instruments in a public market.
 the ultimate parent (or any intermediate parent) of the
entity produces publicly available consolidated financial
statements that are IFRS compliant.
CA Sandesh Mundra,
Chartered Accountants
19
CA Sandesh Mundra,
Chartered Accountants
20
Special purpose entities
Features of SPE :• Auto-pilot arrangements that restrict the decision-making
capacity of the governing board or management
• Use of professional directors, trustees or partners.
• Thin capitalization, the proportion of ‘real’ equity is too small
to support the SPE’s overall activities.
• Absence of an apparent profit-making motive,
• Domiciled in ‘offshore’ capital havens.
• Have a specified life.
• Exists for financial engineering purposes.
• The creator or sponsor transfers assets to the SPE, as part
of a derecognition transaction involving financial assets
CA Sandesh Mundra,
Chartered Accountants
21
CA Sandesh Mundra,
Chartered Accountants
22
Accounting Principles
SIC 12 requires that an SPE should be consolidated when
the substance of the relationship indicates that the SPE is
a subsidiary.
For consolidation:-
• follow usual procedures
• elimination of inter-company activity
• presentation of minority interests.
IAS 27 requires specific disclosures for subsidiaries that
are consolidated for reasons other than majority of voting
power. These disclosure requirements apply to
subsidiaries consolidated under SIC 12.
CA Sandesh Mundra,
Chartered Accountants
23
Consolidation procedures
 Start consolidation – when control commences
 Combining the accounts of the parent and it’s
subsidiaries
•
•
•
•
•
Accounting Policy Adjustments
Line by Line Addition
Inter-company Transactions / Balances
Unrealised Profit Elimination
Other Adjustments
 Elimination of parent’s investment
 Disclose minority interests separately
 Base on present ownership interests
 Stop consolidation – when control ceases
CA Sandesh Mundra,
Chartered Accountants
24
Consolidation – Example
CA Sandesh Mundra,
Chartered Accountants
25
Consolidation – Elimination of inter-company
purchases and sales
CA Sandesh Mundra,
Chartered Accountants
26
Significant changes - goodwill
• Acquired business measured at fair value as a
whole
• 100% goodwill recognised
 Consistent with treatment of other assets
• Goodwill allocated between acquirer and noncontrolling interest (was minority interest)
• Allocation of goodwill to acquirer based on:
 Fair value of acquirer’s equity interest LESS
 Fair value of share of net assets acquired
 Balance to NCI
CA Sandesh Mundra,
Chartered Accountants
27
IFRS : Goodwill example
• P acquires 75% (750 000 shares) of S for CU7.5m
• Shares in S trading about $8 per share
 Expectation of synergies
• Independent valuation  value of S = CU9.7m
• Fair value of net assets acquired = CU8m
Current requirements AS 21
Consideration
Share of identifiable A+L (75%
8m)
Goodwill as per IFRS 3
Current requirements
7,5
(6,0)
1,5
Goodwill
1,5
Net assets
8,0
Minority interest
2,0
CA Sandesh Mundra,
Chartered Accountants
28
IFRS : Goodwill example
IFRS
Fair value of S
Fair value of net assets
Current requirements AS 21
Goodwill
1,5
Net assets
8,0
Minority interest (MI)
2,0
Goodwill
Share of identifiable A+L
(75% 8m)
Goodwill
1,7
Net assets
8,0
Non-controlling interest
(NCI)
2,2
(8,0)
1,7
IFRS - allocate to P
Consideration
IFRS
9,7
7,5
(6,0)
GW allocated to P
1,5
=> Balance to NCI
0,2
CA Sandesh Mundra,
Chartered Accountants
29
Step acquisitions
• Change in accounting for step acquisitions
• A owns an investment in B
• B = associated comp to A (i.e. A doesn’t control
B)
• If A increase its stake & gains control over B it
must
 Determine fair value of associate
 Recognise profit/loss in income statement
 Follow the provisions of IFRS 3
• Cost would include fair value of B
CA Sandesh Mundra,
Chartered Accountants
30
Step acquisition – illustration
• A owns 35% stake in B at 31 Dec 2007
• Book value at 31 Dec 2007 = CU2,500
• Buying additional 40% on 31 Dec 2007 at
CU4,000
• Fair value (FV) of total B = CU10,000
31 Dec 2007
• A recognise gain of CU1,000 [(35%*CU10,000)CU2,500]
• A accounts for 40% purchase under ED IFRS 3
 FV of all of B = CU10,000 and FV of 75% of B =
CU7,500
• Subsequent purchases = equity transaction
CA Sandesh Mundra,
Chartered Accountants
31
Loss of Control
A owns 60% of B On 1 January 20Y0 A
disposes of 20% of B for 400 and loses
control.
Carrying amount of NCI of B on 1 January
20Y0 is 700.
Carrying amount of net assets of B on 1
January 20Y0 is 1,750.
Fair value of remaining 40% is 800.
CA Sandesh Mundra,
Chartered Accountants
32
Loss of Control ………
Disposal of the 20% interest is recorded as follows
Dr. Cash 400
Dr. Non-controlling interest 700
Dr. Investment in B 800
Cr. Net assets of B (including goodwill) 1,750
Cr. Gain on disposal 150
Gain is based on the following calculation
Gain on 40% retained 100 (800 - (40% x 1,750))
Gain on 20% disposed of 50 (400 - (20% x 1,750))
Total gain 150
Assuming that the remaining 40% represents an
associate, the fair value of 800 represents cost on initial
recognition and IAS 28 applies going forward.
CA Sandesh Mundra,
Chartered Accountants
33
Separate Financial Statements of the Parent
or Investor in an Associate or
Jointly Controlled Entity
In the parent's/investor's individual financial statements,
investments in subsidiaries,
Associates, and jointly controlled entities should be
accounted for either: [IAS 27.37]
· at cost; or
· in accordance with IAS 39.
Such investments may not be accounted for by the
equity method in the parent's/investor's separate
statements.
CA Sandesh Mundra,
Chartered Accountants
34
Disclosures.
•
the nature of the relationship when the parent owns < 50% Voting Power,
•
the reasons why the ownership > 50% Voting Power does not constitute control,
•
the reporting date of the financial statements of a subsidiary that is different from that of the
parent with reasons,
•
the nature and extent of significant restrictions to transfer funds to the parent.
•
Disclosures required in separate financial statements that are prepared for a parent that is
permitted not to prepare consolidated financial statements: [IAS 27.41]
•
the fact that the financial statements are separate; that the exemption from consolidation has
been used; the name and country of incorporation or residence of the entity whose
consolidated financial statements that comply with IFRS have been produced for public use;
and the address where those consolidated financial statements are obtainable,
•
a list of significant investments in subsidiaries, jointly controlled entities, and associates,
including the name, country of incorporation or residence, proportion of ownership interest
and, if different, proportion of voting power held, and
•
a description of the method used to account for the foregoing investments.
•
Disclosures required in the separate financial statements of a parent, investor in a jointly
controlled entity, or investor in an associate: [IAS 27.42]
•
the fact that the statements are separate financial statements and the reasons why those
statements are prepared if not required by law,
•
a list of significant investments in subsidiaries, jointly controlled entities, and associates,
including the name, country of incorporation or residence, proportion of ownership interest
and, if different, proportion of voting power held, and
•
a description of the method used to account for the foregoing investments.
CA Sandesh Mundra,
Chartered Accountants
35
IAS 28 - Associates
•
Associate: an entity in which an investor has significant influence but not control or
joint control. A holding of 20% or more of the voting power (directly or through
subsidiaries) will indicate significant influence.
Applying the Equity Method of Accounting
•
Basic principle. Under the equity method of accounting, an equity investment is
initially recorded at cost and is subsequently adjusted to reflect the investor's
share of the net profit or loss of the associate. [IAS 28.11]
•
Distributions Distributions received from the investee reduce the carrying
amount of the investment.
•
Implicit goodwill and fair value adjustments. Any difference between the cost
of acquisition and the investor's share of the fair values of the net identifiable
assets of the associate is accounted for like goodwill in accordance with IFRS 3
Business Combinations.
•
Appropriate adjustments to the investor's share of the profits or losses after
acquisition are made to account for additional depreciation or amortisation of the
associate's depreciable or amortisable assets based on the excess of their fair
values over their carrying amounts at the time the investment was acquired. [IAS
28.23]
CA Sandesh Mundra,
Chartered Accountants
36
IAS 31 – Joint Ventures
•
Joint control: the contractually agreed sharing of control over an economic
activity. Joint control exists only when the strategic financial and operating
decisions relating to the activity require the unanimous consent of the
venturers.
•
Jointly Controlled Operations involve the use of assets and other resources
of the venturers rather than a separate entity.
•
Jointly Controlled Assets involve the joint control, and often the joint
ownership, of assets dedicated to the joint venture. Each venturer may take
a share of the output from the assets and each bears a share of the
expenses incurred.
•
Jointly Controlled Entity is a corporation, partnership, or other entity in
which two or more venturers have an interest, under a contractual
arrangement that establishes joint control over the entity. [IAS 31.24]
IAS 31 allows two treatments of accounting for an investment in jointly
controlled entities – except as noted below:
•
proportionate consolidation [IAS 31.30]
•
equity method of accounting [IAS 31.38]
CA Sandesh Mundra,
Chartered Accountants
37
Time for an exercise….
CA Sandesh Mundra,
Chartered Accountants
38
Any Questions……..
CA Sandesh Mundra,
Chartered Accountants
39
40
CA Sandesh Mundra,
Chartered Accountants
40
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