Chapter 8: Introduction to Groups

IAS 27 (revised): Separate Financial Statements

IRFS 3: Business Combinations

IFRS 10: Consolidated Financial Statements

IFRS 13: Fair Value Measurement

IAS 28: Investments in Associates

1/ Definitions

• Control. An investor controls an investee when the investor is exposed, or has rights, to variable
returns from its involvement with the investee and has the ability to affect those returns through power
over the investee. (IFRS 10)
• Power. Existing rights that give the current ability to direct the relevant activities of the investee. (IFRS
10)
• Subsidiary. An entity that is controlled by another entity. (IFRS 10)
• Parent. An entity that controls one or more subsidiaries (IFRS 10)
• Group. A parent and all its subsidiaries (IFRS 10)
• Associate. An entity over which an investor has significant influence and which is neither a subsidiary
nor an interest in a joint venture (IFRS 10)
• Significant influence. The power to participate in the financial and operating policy decisions of an
investee but is not control or joint control over these policies (IAS 28)
• Non-controlling interest. The equity in a subsidiary not attributable, directly or indirectly, to a parent.
(IFRS 3, IAS 27)

Required treatment in group

Investment Criteria
accounts
Subsidiary Control (>50% rule) Full consolidation (IFRS 10
Associate Significant influence (20%+ Equity accounting (IAS 28)
rule)
Investment Asset held for accretion of As for single company accounts
(which is none of the above) wealth (IFRS 9)

2/ An investor controls an investee if and only if it has all of the following:

a) Power over the investee

b) Exposure to, or rights to, variable returns from its involvement with the investee, and
c) The ability to use its power over the investee to affect the amount of the investor’s returns
3/ The existence of significant influence is evidenced in one or more of the following ways:

a) Representation on the board of directors (or equivalent) of the investee

b) Participation in the policy making process
c) Material transactions between investor and investee
d) Interchange of management personnel
e) Provision of essential technical information

4/ Exemption from preparing group accounts

A parent need not present consolidated financial statements if and only if all of the following hold:

a) The parent is itself a wholly-owned subsidiary or it 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
b) Its securities are not publicly traded
c) It is not in the process of issuing securities in public securities markets; and
d) The ultimate or intermediate parent publishes consolidated financial statements that comply with
IFRS.

5/ Potential voting rights

An entity may own share warrants, share call options, or other similar instruments that are convertible into
ordinary shares in another entity. If these are exercised or converted they may give the entity voting power or
reduce another party's voting power over the financial and operating policies of the other entity (potential
voting rights). The existence and effect of potential voting rights, including potential voting rights held
by another entity, should be considered when assessing whether an entity has control over another entity
(and therefore has a subsidiary).

6/ Exclusion of a subsidiary from consolidation

The rules on exclusion of subsidiaries from consolidation are necessarily strict, because this is a common
method used by entities to manipulate their results. If a subsidiary which carries a large amount of debt can be
excluded, then the gearing of the group as a whole will be improved. In other words, this is a way of taking
debt out of the consolidated statement of financial position.
IAS 27 did originally allow a subsidiary to be excluded from consolidation where control is intended to be
temporary. This exclusion was then removed by IFRS 5.
Subsidiaries held for sale are accounted for in accordance with IFRS 5 Non-current assets held for sale and
discontinued operations.
The previous version of IAS 27 permitted exclusion where the subsidiary operates under severe long-term
restrictions and these significantly impair its ability to transfer funds to the parent. This exclusion has now
been removed. Control must actually be lost for exclusion to occur.

7/ Different reporting dates

• In most cases all group companies will prepare accounts to the same reporting date.
• If the subsidiary prepares the accounts to a different reporting date from the parent, the subsidiary
may prepare additional statements to the reporting date of the parent for consolidation purpose.
• If this is not possible, the subsidiary’s accounts may still be used for the consolidation, provided that
the gap between the reporting dates is three months or less.
• Where a subsidiary’s accounts are drawn up to a different accounting date, adjustment should be
made for the effects of significant transactions or other events that occur between tat date and the
parent’s reporting date.

8/ Uniform of accounting policies

Consolidated financial statements should be prepared using the same accounting policies for like
transactions and other events in similar circumstances.
Adjustments must be made where members of a group use different accounting policies, so that their
financial statements are suitable for consolidation.

9/ Date of inclusion/exclusion
The results of subsidiary undertakings are included in the consolidated financial statements from:
(a) the date of 'acquisition', ie the date on which the investor obtains control of the investee, to
(b) the date of 'disposal', ie the date the investor loses control of the investee.
Once an investment is no longer a subsidiary, it should be treated as an associate under IAS 28 (if applicable)
or as an investment under IFRS 9 (see Chapter 14).

10/ The parent’s separate financial statements

A parent’s single company financial statements and should be prepared in accordance with IAS
27(revised) Separate financial statements. In these statements, investments in subsidiaries and associates
included in the consolidated financial statements should be either:
 (a) Accounted for at cost, or
(b) In accordance with IFRS 9 (see Chapter 14).
Where subsidiaries are classified as held for sale in accordance with IFRS 5 they should be accounted for in
accordance with IFRS 5 in the parent’s separate financial statements.
11/ Disclosures:
Where a parent chooses to take advantage of the exemptions from preparing consolidated financial
statements under IAS 27 the separate financial statements must disclose:
(a) The fact that the financial statements are separate financial statements; that the exemption from
consolidation has been used; the name and country of incorporation of the entity whose consolidated
financial statements that comply with IFRSs have been published; and the address where those
consolidated financial statements are obtainable
(b) A list of significant investments in subsidiaries, jointly controlled entities and associates, including
the name, country of incorporation, proportion of ownership interest and, if different, proportion of
voting power held
(c) A description of the method used to account for the investments listed under (b)
When a parent prepares separate financial statements in addition to consolidated financial statements, the
separate financial statements must disclose:
(a) The fact that the statements are separate financial statements and the reasons why they have
been prepared if not required by law
(b) Information about investments and the method used to account for them, as above.

12/ Group structure:

• Parent company has only direct interest in shares of its subsidiary companies.
Example:
• Parent company has indirect holding in its subsidiary companies.
Example: