[et_pb_section bb_built=”1″ admin_label=”Header – All Pages” transparent_background=”off” background_color=”#1e73be” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” padding_mobile=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″ custom_padding=”||0px|” next_background_color=”#ffffff” custom_padding_tablet=”50px|0|50px|0″ custom_padding_last_edited=”on|desktop” global_module=”1221″][et_pb_row admin_label=”row” global_parent=”1221″ background_position=”top_left” background_repeat=”repeat” background_size=”initial”][et_pb_column type=”4_4″][et_pb_post_title global_parent=”1221″ title=”on” meta=”off” author=”on” date=”on” categories=”on” comments=”on” featured_image=”off” featured_placement=”below” parallax_effect=”on” parallax_method=”off” text_orientation=”left” text_color=”light” text_background=”off” text_bg_color=”rgba(255,255,255,0.9)” module_bg_color=”rgba(255,255,255,0)” title_all_caps=”off” use_border_color=”off” border_color=”#ffffff” border_style=”solid” title_font=”|on|||” title_font_size=”35″ custom_padding=”10px|||” parallax=”on” background_color=”rgba(255,255,255,0)” /][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section bb_built=”1″ fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” custom_padding=”0px||0px|” padding_mobile=”on” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″ prev_background_color=”#1e73be” next_background_color=”#ffffff” custom_padding_tablet=”0px||0px|” global_module=”1228″][et_pb_row global_parent=”1228″ make_fullwidth=”off” use_custom_width=”off” width_unit=”on” use_custom_gutter=”off” gutter_width=”3″ custom_padding=”0px||0px|” padding_mobile=”off” allow_player_pause=”off” parallax=”off” parallax_method=”off” make_equal=”off” parallax_1=”off” parallax_method_1=”off” column_padding_mobile=”on” background_position=”top_left” background_repeat=”repeat” background_size=”initial”][et_pb_column type=”4_4″][et_pb_text global_parent=”1228″ background_layout=”light” text_orientation=”left” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid” background_position=”top_left” background_repeat=”repeat” background_size=”initial”]
[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section bb_built=”1″ fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” padding_mobile=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″ custom_padding_tablet=”0px||0px|” custom_padding_last_edited=”on|desktop” prev_background_color=”#ffffff” next_background_color=”#000000″][et_pb_row][et_pb_column type=”4_4″][et_pb_toggle admin_label=”Index” _builder_version=”3.0.106″ title=”Index” open=”off”]Section 9 – Consolidated and Separate Financial Statements
9.2 Requirement to present consolidated financial statements
9.2.1 Extract from FRS102: Section 9.2-9.3
9.2.2.1 No exception on the basis of activities being dissimilar or causing undue cost of effort
9.3 Definition of a subsidiary
9.3.1. Extract from FRS102: Section 9.4-9.6 and Section 9.8A
9.3.2.1 Definition of a parent
9.3.2.2 Definition of a subsidiary and control
9.3.2.2.1 Strategic, financial and operating decisions
9.3.2.2.2 Interpretation of benefits to be obtained as a result of power to control
9.3.2.2.3 Power to control even if not exercise
9.3.2.3 Potential voting rights
9.3.2.4 Less than 50% of share capital held but still have control
9.3.2.5 Greater than 50% of share capital owned but still not have control
9.3.2.6 Agreement entered into by a party with other shareholders
9.3.2.7 Shares held in bare trust
9.4 Subsidiaries excluded from consolidation
9.4.1 Extract from FRS102: Section 9.9-9.9B
9.4.2.1 a) Long term restrictions
9.4.2.1.1 Accounting policy choice
9.4.2.2 b) Subsidiary held with a view to a subsequent sale
9.4.2.2.1 Accounting requirements
9.5.1 Extract from FRS102: Section 9.10-9.12
9.6.1 Extract from FRS102: Section 9.13 – 9.14
9.6.2 OmniPro comment – The Subsidiary
9.6.2.1 Process of consolidation
9.6.2.3 Allocation to non-controlling interests where options are exercisable
9.7 Intragroup balances and transactions
9.7.1 Extract from FRS102: Section 9.15
9.7.2.3 Eliminating intra group transactions 100% owned – not in inventory at year end
9.7.2.4 Eliminating intra group transactions 100% owned – in inventory at year end
9.7.2.5 Eliminating intra group transactions not 100% owned – not in inventory at year end
9.7.2.6 Eliminating intra group transactions not 100% owned – some in inventory at year end
9.7.2.7 Year-end intra-group balance
9.7.2.8 Intra-group balances – sale of fixed assets within a group
9.7.2.9 Transactions between subsidiaries not consolidated
9.7.2.10 Elimination of notional amounts on intercompany/group loans not at market rates
9.7.2.11 Elimination of Intergroup dividends
9.7.2.12 Restatement of investment property to PPE for group purposes
9.8 Uniform reporting date and reporting period
9.8.1 Extract from FRS102: Section 9.16
9.9 Uniform accounting policies
9.9.1 Extract from FRS102: Section 9.17
9.10 Acquisition and disposal of subsidiaries
9.10.1 Extract from FRS102: Section 9.18-9.19D
9.10.2.2 Accounting for an acquisition where control is achieved in one transaction
9.10.2.3 Accounting for an acquisition where control is achieved in stages
9.10.2.4 Acquisitions where controlling interest is increased
9.10.2.5 Disposals where controlling interest is still retained
9.10.2.6 Disposal of a subsidiary where control is lost fully
9.10.2.6.1 Control lost but less than controlling interest still held
9.10.2.6.2 Indicators that control is lost
(see further details of how control is attained and by definition how control could be lost at 9.3.2)
9.11 Non-controlling interest in subsidiaries
9.11.1 Extract from FRS102: Section 9.20-9.22
9.12 Transferring a business within a group
9.13 Intermediate payment arrangements
9.13.1 Extract from FRS102: Section 9.33-9.38
9.14 Individual and separate financial statements
9.14.1 Extract from FRS102: Section 9.23A-9.26A
9.14.2.1 Overview and accounting policy choices
9.14.2.2 Fair Value through Profit and Loss Account
9.15.1 Disclosures in consolidated financial statements
9.15.1.1 Extract from FRS102: Section 9.23
9.15.1.2.1 Accounting Policies
9.15.1.2.1.1 Basis of consolidation
9.15.1.2.1.2 Subsidiary undertakings
9.15.1.2.1.3 Associates and joint ventures
9.15.1.2.1.4 Transactions eliminated on consolidation
9.15.1.2.1.5 Business combinations and goodwill
9.15.1.2.1.8 Intangible assets
9.15.1.2.1.9 Contingent acquisition consideration
9.15.1.2.2 Notes to the Financial Statements
9.15.1.2.2.1 Business combinations.
9.15.1.2.2.2 Financial assets – Group disclosure.
9.15.1.2.2.3 Financial assets note for the parent company in the consolidated financial statements.
9.15.1.2.2.4 Contingent consideration note.
9.15.2 Disclosures in separate financial statements.
9.15.2.1 Extract from FRS102: Section 9.27.
9.15.2.2.1 Accounting Policies.
9.15.2.2.1.1 Consolidated accounts.
9.15.2.2.1.5 Intangible assets.
9.15.2.2.1.6 Contingent acquisition consideration.
9.15.2.2.2. Notes to the financial statements.
9.15.2.2.2.1 Intangible assets.
9.15.2.2.2.3 Extract from the notes in the consolidated financial statements – negative goodwill.
9.15.2.2.3 Profit and Loss account.
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9.3 Definition of a Subsidiary
9.3.1. Extract from FRS102: Section 9.4-9.6 and Section 9.8A
9.4 A subsidiary is an entity that is controlled by the parent. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
9.5 Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than half of the voting power of an entity. That presumption may be overcome in exceptional circumstances if it can be clearly demonstrated that such ownership does not constitute control. Control also exists when the parent owns half or less of the voting power of an entity but it has:
(a) power over more than half of the voting rights by virtue of an agreement with other investors;
(b) power to govern the financial and operating policies of the entity under a statute or an agreement;
(c) power to appoint or remove the majority of the members of the board of directors or equivalent governing body and control of the entity is by that board or body; or
(d) power to cast the majority of votes at meetings of the board of directors or equivalent governing body and control of the entity is by that board or body.
9.6 Control can also be achieved by having options or convertible instruments that are currently exercisable or by having an agent with the ability to direct the activities for the benefit of the controlling entity.
9.6A Control can also exist when the parent has the power to exercise, or actually exercises, dominant influence or control over the undertaking or it and the undertaking are managed on a unified basis.
9.8 A subsidiary is not excluded from consolidation because its business activities are dissimilar to those of the other entities within the consolidation. Relevant information is provided by consolidating such subsidiaries and disclosing additional information in the consolidated financial statements about the different business activities of subsidiaries.
9.3.2 OmniPro comment
9.3.2.1 Definition of a parent
Appendix I of FRS 102 defines a parent as ‘an entity that has one or more subsidiaries’. A subsidiary can be a company, a partnership, a trust or other unincorporated entity.
When determining whether consolidated financial statements are required to be prepared, the starting point is to assess if the parent has control over other entities and therefore there is a parent subsidiary relationship. If no control exists, then the entity is not a parent. For example, if an entity only owns shares which give an associate or joint venture interest and it holds no other shares consolidated statements are not required as the entity does not have control and therefore has no subsidiaries. So therefore is not defined as a parent entity.
9.3.2.2 Definition of a subsidiary and control
As per section 9.4 of FRS 102 in order for an entity to have control (and therefore for the entity to be classified as a parent with a parent subsidiary relationship) it must have:
- The power over the financial and operating policies (see 9.3.2.2.1); and
- Benefits must be obtained as a result of that power from the entities activities
Section 9.5 of FRS 102 makes it clear that control is presumed where greater than 50% of the voting power is held by an entity. However control can also exist when the parent owns 50% or less of the voting power but it has:
- power over more than half of the voting rights by virtue of an agreement with other investors; or
- power to govern the financial and operating policies of the entity under a statute or an agreement; or
- power to appoint or remove the majority of members of the board of directors or equivalent (i.e.a golden share agreement); or
- power to cast the majority of votes at meetings of the board of directors; or
- having options or convertible instruments which are exercisable at the date of acquisition.
9.3.2.2.1 Strategic, financial and operating decisions
Although FRS 102 does not define what the strategic, financial and operating decisions would cover, these are generally understood to include areas such as:
- budgeting
- capital expenditure
- treasury management
- dividend policy
- production
- marketing
- sales and human resources
- decisions of acquiring or disposal of significant assets
- a right to block customary or expected dividends
- decisions over liquidation of the company
- issuance and repurchase of equity shares.
The most important here is the control over distributions and the reinvestment decisions.
9.3.2.2.2 Interpretation of benefits to be obtained as a result of power to control
In relation to the benefit test, this does not specifically mean the benefits from ownership but also relates to other benefits such as brand related goodwill generating more customers, cost savings, access to new customers etc.
9.3.2.2.3 Power to control even if not exercised
In determining control, the key thing to consider is whether the entity has the power to govern the entity, it is irrelevant whether they exercise this control or not. Section 9.6 of FRS 102 refers
Example 1: Exercise of dominant influence
Company A owns 60% of the voting rights of Company B. However Company A allows the other investor who owns the remaining 40% to run Company B with little or no input from Company A. In this case although Company A is not getting involved in the financial and operating policies this is irrelevant when assessing control, as the key point is that they have the ability if Company A wanted to prevent the other investor from making decisions.
9.3.2.3 Potential voting rights
When assessing whether control exists, an entity should not only review all shares/rights held at that point in time but also options/rights which are exercisable at that point in time (Section 9.6 of FRS 102). If voting rights cannot be converted or exercised until a future date these are not considered in determining whether control exists.
Example 2: Potential voting rights
Company A owns 40% of the share capital and voting rights of Company B. It also hold 100% preference shares in Company B which provide a right to a dividend of 5% per annum. These preference shares can be converted at the option of Company A into ordinary shares after 3 years time which would result in the Company obtaining more than 50% of the voting rights (assume 70%).
With regard to the convertible rights here, these cannot be considered by Company A in the control test until after 3 years. So for the first three years assuming Company A does not have the ability to control the composition of the board, Company A would not control Company B and therefore it is not a subsidiary.
However after year 3, even if Company A does not exercise its right to convert at that time, in assessing whether control exists, these exercisable rights should be taken into account and therefore Company B would be a subsidiary of Company A from that date. Note if the option is not exercised after the three years in the consolidated financial statements 60% of the net assets would be allocated to non-controlling interests as that is what the NCI owns at that point in time as the options have not been exercised.
Where the rights are exercisable/convertible in the very near future they may be taken into account so if this is the case judgement will need to be exercised. In addition consideration should be given as to whether an entity will be able to exercise dominant influences i.e. do they have the financial resources etc. to convert rights into shares.
9.3.2.4 Less than 50% of share capital held but still have control
Example 3: Ability to control composition of the board
Company A owns 40% of Company B with the remaining 60% held by another party. However, Company A also holds one golden share which gives Company A the right to control the composition of the board of directors.
In this situation as the board of directors dictate the financial and operating policies of the company since Company A has the ability to appoint or force directors to resign this gives Company A control and therefore Company B is a subsidiary of Company A. In the consolidated financial statements 60% of the net assets would be allocated to non-controlling interests.
9.3.2.5 Greater than 50% of share capital owned but still not have control
Even where an entity owns greater than 50% of the ordinary shares, where an agreement is entered into whereby unanimous agreement is required from all shareholders, then this would indicate that an entity does not have control, instead this should be treated as a joint venture and be accounted for under Section 15 of FRS 102.
9.3.2.6 Agreement entered into by a party with other shareholders
Where agreements are entered into with other shareholders whereby the other shareholders give another shareholder their rights to vote, then in this instance all the voting rights given must be considered.
Example 3A: Agreements with other shareholders
Company A owns 40% of Company B. Company A has also entered into an agreement with other shareholders who own 20% of the shares whereby they agree that they will always vote in line with Company A.
As a result of this agreement Company A effectively has 60% voting rights and therefore has control of Company B. In the consolidated financial statements 60% of the net assets would be allocated to non-controlling interests.
9.3.2.7 Shares held in bare trust
Where shares in entity X are held by one entity (entity A) in trust for another entity (entity B) and entity A must act on the instruction of entity B when exercising the rights of the shares, then in this instance entity B exercises control over entity X through entity A and therefore entity B is the parent of entity X.
Example 4: Bare trust
Mr X acquired shares in Company B following instruction by Company A and a bare trust arrangement was put in place whereby Mr X must act in accordance with the instruction of Company A. In this case Company A is the parent of Company B and therefore Company B must be included in the Consolidated Accounts of Company A, as it controls Company B.
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Examples
Example 1: Exercise of dominant influence
Example 2: Potential voting rights
Example 3: Ability to control composition of the board
Example 5: Process of consolidation
Example 6: Eliminating intra group transactions 100% owned – not in inventory at year end
Example 7: Eliminating intra group transactions 100% owned – in inventory at year end
Example 8: Eliminating intra group transactions not 100% owned – not in inventory at year end
Example 9: Eliminating intra group transactions not 100% owned – some in inventory at year end
Example 10: Year-end intra-group balances
Example 11A: elimination of notional amounts on inter-company loans not at market rates
Example 11B: elimination of intergroup dividends
Example 11C: Restatement of investment property to property, plant and equipment
Example 13: Uniform accounting policies
Example 14: Business combination achieved in stages
Example 15: Acquiring a further controlling interest
Example 16A: Acquiring a further controlling interest but 100% interest still not attained
Example 17: Disposing of controlling interest but controlling interest retained
Example 18: Disposal of a subsidiary where control is lost
Example 21: Extract from notes to the financial statements – contingent consideration note..
Example 28: Extract from the notes in the consolidated financial statements – negative goodwill
Example 29: Profit and loss account
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