CHAPTER
BLUE NOTES
51 S
L
Consolidated Financial Statement
Under Appendix A of PFRS 10, consolidated financial statements are defined as “the financial statements of a group in
which the assets, liabilities, equity, expenses and cash flows of the parent and its subsidiaries are presented as those of
a single economic unit”.
The core principle for consolidation of financial statements.
PFRS 10, paragraph 4, provides that an entity s a parent shall present consolidated financial statements. This means
that consolidated financial statements shall include all subsidiaries of the parent.
A subsidiary is not excluded from consolidation:
even if having dissimilar business activities from the group.
because the investor is a venture capital organization, mutual fund, unit trust or similar entity.
A subsidiary is excluded from consolidation:
the parent itself is a subsidiary
The parent’s debt and equity instruments are not traded in public market
The parent did not file or is not the process of filing its financial statements with a securities commission or
other regulatory body for the purpose of issuing any class of instruments in a public market.
The ultimate or any intermediate parent produces consolidated financial statements available for public use
that comply with PFRS.
Control
The power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
Investor controls an investee if the investor has all the following:
The power over the investee.
Exposure or rights to variable returns from its involvement with the investee.
The ability to use its power over the investee to affect the amount of the investor’s returns.
Note: investor has power over the investee when the investor has existing rights that gives it the current ability to direct the relevant activities of
the investee.
Paragraph B15 provides the rights that can give power of an investor over the investee include but are not limited to
the following:
Rights in the form of voting rights or potential voting rights of an investor.
Rights to appoint, reassign or remove key management personnel who have the ability to direct the relevant
activities.
Rights to appoint or remove another entity that directs the relevant activities.
Rights to direct the investee to enter into or veto any changes to transactions for the benefit of the investor.
Other rights, such as “decision making rights” specified in a management contract that give the holder the
ability to direct the relevant activities.
Control exists when the parent owns half or less of the voting power of an entity when there is:
Theory of Accounts Practical Accounting 1
190 USL Blue Notes Chapter 51 – Consolidation
Power more than half of the voting rights by virtue of a contractual agreement with other investor.
Power to govern the financial and operating policies of the entity under a statute.
Power to appoint or remove the majority of the members of the board of directors or equivalent governing
body.
Power to cast the majority of votes at meetings of the board of directors or equivalent governing body
Parent lose control over a subsidiary
A parent can lose control of a subsidiary with or without change in absolute or relative ownership level.
PFRS 10, paragraph 25, provides the following treatment if a parent losses control of a subsidiary:
a. The assets and liabilities of the former subsidiary shall be derecognized at carrying from the consolidated
statement of financial position.
b. The gain or loss associated with the loss of control shall be recognized in profit or loss.The gain or loss is the
difference between the consideration received and the carrying amount of the carrying amount of the
investment lost.
Treatment of any investment retained in the subsidiary when control is lost.
PFRS 10, paragraph 25, provides that an entity shall recognize any investment retained in the subsidiary at fair value at
the date when control is lost.
Treatment where there is a change in a parent’s ownership interest in a subsidiary that does not result in a
loss of control.
PFRS 10, paragraph 23, provides that where a change in a parent’s ownership interest in a subsidiary does not result in
a loss of control, the change shall be accounted for as an equity transaction, the carrying amounts of the controlling
and noncontrolling interest shall be adjusted to reflect the change in the level of ownership. Any difference between
the consideration received and the amount of the adjustment of the controlling interests shall be recognized directly in
equity.
Procedures for preparing consolidated financial statements
1. The financial statements of the parent and its subsidiaries are combined on a line by line basis by adding
together like items of assets, liabilities, equity, income and expenses.
2. Intragroup balances, transactions, income and expenses shall be eliminated in full.
3. The financial statements of the parent and its subsidiaries used in the preparation of consolidated financial
statements shall be prepared as of the same reporting date.
4. When the reporting dates of the parent and a subsidiary are different, the subsidiary shall prepare for
consolidation purposes additional financial statements as of the parent unless it is impracticable to do so.
In any case, the difference between reporting dates shall be no more than three months.
5. Consolidated financial statements shall be prepared using uniform accounting policies
for like transactions and other events in similar circumstances.
Presentation of noncontrolling interests in the consolidated statement of financial position
PFRS 10, paragraph 22, provides that controlling interests shall be presented in the consolidated statement of
financial position within equity, separately from the equity of the owners of the parent.
Profit or loss and each component of other comprehensive income shall be attributed to the owners of the
Practical Accounting 1 Theory of Accounts
Chapter 51 – Consolidation USL Blue Notes 191
parent and to the noncontrolling interests.
Total comprehensive income is also attributed to the owners of the parent and to the noncontrolling interests
even if this results in the noncontrolling interests having a deficit balance.
If a subsidiary has outstanding cumulative preference shares that are classified as equity and are held by
noncontrolling interest and classified as equity, the parent computes its share of profits or losses after
adjusting for the subsidiary’s preference dividends, whether or not dividends have been declared.
separate financial statements
PAS 27, paragraph 10, provides that when separate financial statements are prepared, investments in subsidies, joint
ventures and associates shall be accounted for either:
a. At cost
b. In accordance with PFRS 9
Note: investments accounted for cost shall be accounted for in accordance with PFRS 5 when classified as held for sale
Cost method of accounting for investment in subsidiary
The cost method is a method of accounting for an investment whereby the investment is recognized at cost.
The cost method is usually applied with respect to investment in unquoted equity instrument or
nonremarketable equity security.
In applying the cost method, dividends received from a subsidiary, joint venture or an associate are recognized
as dividend income, regardless of whether the dividends originated from preacquisition retained earnings or
postacquisition retained earnings.
Relation to the preparation of consolidated financial statements
The entity concept means that the “group” consists of all of tmhe assets and liabilities of the parent and its
subsidiaries.
The “noncontrolling interest” is classified as part of equity.
This is the concept required in preparing consolidated financial statements.
The parent entity concept is the same as the entity concept except that the noncontrolling interest is classified
as liability.
The proprietary concept or proportional consideration means that the “group” consists of the assets and
liabilities of the parent and the parent’s proportional share of the assets and liabilities of the subsidiary.
Note: The consolidated financial statements do not include all of the net assets of a subsidiary, only the parent’s share. Since the “noncontrolling
interest” is outside the group, the noncontrolling interest share of subsidiary equity is not disclosed.
Theory of Accounts Practical Accounting 1
