CONSOLIDATED FS
Overview
IAS 27 Consolidated and Separate Financial Statements outlines when an
entity must consolidate another entity, how to account for a change in
ownership interest, how to prepare separate financial statements, and
related disclosures. Consolidation is based on the concept of 'control' and
changes in ownership interests while control is maintained are accounted for
as transactions between owners as owners in equity.
IAS 27 was reissued in January 2008 and applies to annual periods
beginning on or after 1 July 2009, and is superseded by IAS 27 Separate
Financial Statements and IFRS 10 Consolidated Financial Statements with
effect from annual periods beginning on or after 1 January 2013.
Summary of IAS 27
Objectives of IAS 27
IAS 27 has the twin objectives of setting standards to be applied:
in the preparation and presentation of consolidated financial
statements for a group of entities under the control of a parent; and
in accounting for investments in subsidiaries, jointly controlled
entities, and associates when an entity elects, or is required by local
regulations, to present separate (non-consolidated) financial
statements.
Key definitions [IAS 27.4]
Consolidated financial statements: the financial statements of a group
presented as those of a single economic entity.
Subsidiary: an entity, including an unincorporated entity such as a
partnership, that is controlled by another entity (known as the parent).
Parent: an entity that has one or more subsidiaries.
Control: the power to govern the financial and operating policies of an
entity so as to obtain benefits from its activities.
Identification of subsidiaries
Control is presumed when the parent acquires more than half of the voting
rights of the entity. Even when more than one half of the voting rights is not
acquired, control may be evidenced by power: [IAS 27.13]
over more than one half of the voting rights by virtue of an agreement
with other investors, or
to govern the financial and operating policies of the entity under a
statute or an agreement; or
to appoint or remove the majority of the members of the board of
directors; or
to cast the majority of votes at a meeting of the board of directors.
SIC-12 provides other indicators of control (based on risks and rewards) for
Special Purpose Entities (SPEs). SPEs should be consolidated where the
substance of the relationship indicates that the SPE is controlled by the
reporting entity. This may arise even where the activities of the SPE are
predetermined or where the majority of voting or equity are not held by the
reporting entity. [SIC-12]
Presentation of consolidated financial statements
A parent is required to present consolidated financial statements in which it
consolidates its investments in subsidiaries [IAS 27.9] with the following
exception:
A parent is not required to (but may) present consolidated financial
statements if and only if all of the following four conditions are met: [IAS
27.10]
1. the parent is itself a wholly-owned subsidiary, or is a partially-owned
subsidiary of another entity and its other owners, including those not
otherwise entitled to vote, have been informed about, and do not
object to, the parent not presenting consolidated financial statements;
2. the parent's debt or equity instruments are not traded in a public
market;
3. the parent did not file, nor is it in the process of filing, its financial
statements with a securities commission or other regulatory
organisation for the purpose of issuing any class of instruments in a
public market; and
4. the ultimate or any intermediate parent of the parent produces
consolidated financial statements available for public use that comply
with International Financial Reporting Standards.
The consolidated accounts should include all of the parent's subsidiaries,
both domestic and foreign: [IAS 27.12]
There is no exemption for a subsidiary whose business is of a different
nature from the parent's.
There is no exemption for a subsidiary that operates under severe
long-term restrictions impairing the subsidiary's ability to transfer
funds to the parent. Such an exemption was included in earlier
versions of IAS 27, but in revising IAS 27 in December 2003 the IASB
concluded that these restrictions, in themselves, do not preclude
control.
There is no exemption for a subsidiary that had previously been
consolidated and that is now being held for sale. However, a
subsidiary that meets the IFRS 5 criteria as an asset held for sale shall
be accounted for under that Standard.
Special purpose entities (SPEs) should be consolidated where the substance
of the relationship indicates that the SPE is controlled by the reporting entity.
This may arise even where the activities of the SPE are predetermined or
where the majority of voting or equity are not held by the reporting entity.
[SIC-12]
Once an investment ceases to fall within the definition of a subsidiary, it
should be accounted for as an associate under IAS 28, as a joint venture
under IAS 31, or as an investment under IAS 39, as appropriate. [IAS
27.31]
Consolidation procedures
Intragroup balances, transactions, income, and expenses should be
eliminated in full. Intragroup losses may indicate that an impairment loss on
the related asset should be recognised. [IAS 27.24-25]
The financial statements of the parent and its subsidiaries used in preparing
the consolidated financial statements should all be prepared as of the same
reporting date, unless it is impracticable to do so. [IAS 27.26] If it is
impracticable a particular subsidiary to prepare its financial statements as of
the same date as its parent, adjustments must be made for the effects of
significant transactions or events that occur between the dates of the
subsidiary's and the parent's financial statements. And in no case may the
difference be more than three months. [IAS 27.27]
Consolidated financial statements must be prepared using uniform
accounting policies for like transactions and other events in similar
circumstances. [IAS 27.28]
Minority interests should be presented in the consolidated balance sheet
within equity, but separate from the parent's shareholders' equity. Minority
interests in the profit or loss of the group should also be separately
disclosed. [IAS 27.33]
Where losses applicable to the minority exceed the minority interest in the
equity of the relevant subsidiary, the excess, and any further losses
attributable to the minority, are charged to the group unless the minority
has a binding obligation to, and is able to, make good the losses. Where
excess losses have been taken up by the group, if the subsidiary in question
subsequently reports profits, all such profits are attributed to the group until
the minority's share of losses previously absorbed by the group has been
recovered. [IAS 27.35]
Partial disposal of an investment in a subsidiary
The accounting depends on whether control is retained or lost:
Partial disposal of an investment in a subsidiary while control
is retained. This is accounted for as an equity transaction with
owners, and gain or loss is not recognised.
Partial disposal of an investment in a subsidiary that results in
loss of control. Loss of control triggers remeasurement of the
residual holding to fair value. Any difference between fair value and
carrying amount is a gain or loss on the disposal, recognised in profit
or loss. Thereafter, apply IAS 28, IAS 31, or IAS 39, as appropriate, to
the remaining holding.
Acquiring additional shares in the subsidiary after control is
obtained
Acquiring additional shares in the subsidiary after control was obtained is
accounted for as an equity transaction with owners (like acquisition of
'treasury shares'). Goodwill is not remeasured.
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.
The parent/investor shall apply the same accounting for each category of
investments. Investments that are classified as held for sale in accordance
with IFRS 5 shall be accounted for in accordance with that IFRS. [IAS 27.37]
Investments carried at cost should be measured at the lower of their
carrying amount and fair value less costs to sell. The measurement of
investments accounted for in accordance with IAS 39 is not changed in such
circumstances. [IAS 27.38] An entity shall recognise a dividend from a
subsidiary, jointly controlled entity or associate in profit or loss in its
separate financial statements when its right to receive the dividend is
established. [IAS 27.38A]
Disclosure
Disclosures required in consolidated financial statements: [IAS 27.40]
the nature of the relationship between the parent and a subsidiary
when the parent does not own, directly or indirectly through
subsidiaries, more than half of the voting power,
the reasons why the ownership, directly or indirectly through
subsidiaries, of more than half of the voting or potential voting power
of an investee does not constitute control,
the reporting date of the financial statements of a subsidiary when
such financial statements are used to prepare consolidated financial
statements and are as of a reporting date or for a period that is
different from that of the parent, and the reason for using a different
reporting date or period, and
the nature and extent of any significant restrictions on the ability of
subsidiaries to transfer funds to the parent in the form of cash
dividends or to repay loans or advances.
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 financial
statements; 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.
