T6 - CONSOLIDATED�FINANCIAL�STATEMENTS

DR MOHAMAD AZMI

NIAS AHMAD

1 WHAT WE GOING TO LEARN?

1. the basic requirements for the preparation of consolidated financial statements,
2. Non-controlling interest,
3. accounting treatment of goodwill in the consolidation of financial statements as well as associated companies and joint ventures.

2 RATIONALE FOR CONSOLIDATED FINANCIAL STATEMENTS

1. Reduced Paperwork
2. Complete Overview
3. Simplification
4. Standards for Consolidated Financial Statements
5. Provide Relevant Information to Investors
6. Provide Comparable Information
7. Ensure Accountability
8. Reporting Risks and Benefits

3 THE BASICS OF CONSOLIDATION

1. A subsidiary is an entity that is controlled by another entity known as the parent

​

• FRS 127 defines control as 'the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities’.

​

• Control is presumed to exist when the investor owns, directly or indirectly, more than one half of the voting power of an entity.

​

​

3a THE BASICS OF CONSOLIDATION Part 1

3b THE BASICS OF CONSOLIDATION Part 2

3c THE BASICS OF CONSOLIDATION Part 3

Situations where control is present even though the parent owns less than one half of the voting power of the entity.

​

1. Power over more than one half of the voting rights by virtue of an agreement with other investors;

​

• Power to govern the financial and operating policies of the company under statute or an agreement;

​

• 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.

4a PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS

• The parent or holding entity is required to prepare and present the consolidated financial statements.
• There are circumstances under which the parent is exempted from presenting the consolidated financial statements. They are:

(a) The parent itself is a wholly-owned subsidiary, or is a partially-owned subsidiary and the other owners are informed and do not object to the parent not presenting consolidated financial statements;

(b) The parent's debt or equity instruments are not traded in a public market (not a listed entity);

(c) The parent is not in the processes of issuing in a public market its debt or equity instruments by filing its financial statements with the regulatory authorities like the Securities Commission; and

(d) The ultimate or any other intermediate parent produces the consolidated financial statements.

5a THE STEPS FOR THE PREPARATION OF �CONSOLIDATED FINANCIAL STATEMENTS

1. Identify the Subsidiaries to be Included in the Group.
2. Collect Information from all the Companies
3. Align Accounting Periods
4. Generate Worksheets
5. Confirm Correctness of the Financial Statements
6. Produce a Consolidated Statement of Financial Position
7. Produce a Consolidated Income Statement

6a Consolidation Procedures (IFRS 10)

The International Financial Reporting Standards (IFRS) prescribed three simple stages:

assets, liabilities, equity, income, expenses and cash flows of the parent company with the subsidiary.

(i) The carrying amount of the parent companyÊs investment in each subsidiary; and

(ii) The parent companyÊs portion of equity in each subsidiary.

​

items such as assets and liabilities, equity, income, expenses and cash flows relating to transactions between entities of the group are to be eliminated in full.

7a ACQUISITION METHOD

When one company controls another company, the controlling company is called the parent

IFRS 3 requirement

It creates a component called non-controlling interest or minority interest in its equity section

the controlled company is called the subsidiary

Control What?

1. operating and
2. financing decisions

7b ACQUISITION METHOD - IFRS 3 Part 1/2

• IFRS 3 Business Combinations outlines the accounting when an acquirer obtains control of a business (e.g. an acquisition or merger).
• Such business combinations are accounted for using the 'acquisition method', which generally requires assets acquired and liabilities assumed to be measured at their fair values at the acquisition date.
• A revised version of IFRS 3 was issued in January 2008 and applies to business combinations occurring in an entity's first annual period beginning on or after 1 July 2009

7c ACQUISITION METHOD - IFRS 3 Part 2/2

The carrying value, or book value, is an asset value based on the company's balance sheet, which takes the cost of the asset and subtracts its depreciation over time.

​

The fair value of an asset is usually determined by the market and agreed upon by a willing buyer and seller, and it can fluctuate often.

7d ACQUISITION METHOD - IFRS 3 (STEPS)

(a) The entity transferring cash or assets;

(b) The entity that issues equity interests;

(c) The entity that is usually larger (though not always) and the relative size of the combining units;

(d) Voting rights in the combined entity after the combination (acquirer usually receives more voting rights); and

(e) The board of directors and senior management of the new combined entity (acquirer usually controls the board).

​

ACQUISITION METHOD - IFRS 3

8b How it works?

Non-controlling interest (NCI) or minority interest is that proportion of a subsidiary or company’s shares that the parent company cannot lay claim to and it is usually less than 50 per cent of the total shares of the former.

8c Intercompany Relationships

Goodwill

a need to pay more in order to acquire a company especially when it is envisaged that there will be cost savings in the future or circumstances that will cause the market value of the company to be acquired to be more than the fair value of the company’s net assets.

The purchased goodwill is an intangible asset

Pit Stop 1

1. What is non-controlling interest and how is it treated in the consolidation accounts?

​

• What is goodwill? Explain the accounting treatment of goodwill in relation to consolidated financial statements.

​

​

9d How is goodwill calculated? Part 1

control.

9e How is goodwill calculated? Part 2

9f How is goodwill calculated? Part 3

Given

Not Given

Given in Total

9g How is goodwill calculated? Part 4

80% x 40,000=32,000��* 32,000 x $3.50 = $112,000

Assignment

Not available

Given

Given in detail

9h Valuation Reports on Goodwill

Assignment

Summary

1. Know when a parent must present CFS and the key exemptions.�
2. Apply control rules to identify subsidiaries.�
3. Use the acquisition method (fair values at acquisition), compute goodwill, and present NCI in equity.�
4. Add line-by-line and eliminate all intra-group balances/transactions to avoid double counting.

​