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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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9.14 Individual and separate financial statements
9.14.1 Extract from FRS102: Section 9.23A-9.26A
Preparation of individual and separate financial statements
9.23A The requirements for the preparation of individual financial statements are set out in the Act or other statutory framework.
9.24 Separate financial statements are those prepared by a parent in which the investments in subsidiaries, associates or jointly controlled entities are accounted for either at cost or fair value rather than on the basis of the reported results and net assets of the investees. Separate financial statements are included within the meaning of individual financial statements.
9.25 An entity that is not a parent shall account for any investments in associates and any interests in jointly controlled entities in accordance with paragraph 14.4 or 15.9, as appropriate in its individual financial statements.
Accounting policy election in separate financial statements
9.26 When a parent prepares separate financial statements, it shall select and adopt a policy of accounting for its investments in subsidiaries, associates and jointly controlled entities in those separate financial statements either:
(a) at cost less impairment;
(b) at fair value with changes in fair value recognised in other comprehensive income (or profit or loss) in accordance with paragraphs 17.15E and 17.15F; or
(c) at fair value with changes in fair value recognised in profit or loss.
The Appendix to Section 2 Concepts and Pervasive Principles provides guidance on determining fair value.
An entity shall apply the same accounting policy for all investments in a single class (for example investments in subsidiaries that are held as part of an investment portfolio, those that are not so held, associates or jointly controlled entities), but it can elect different policies for different classes.
This also applies to entities preparing individual financial statements.
9.26A A parent that is exempt in accordance with paragraph 9.3 from the requirement to present consolidated financial statements, and presents separate financial statements as its only financial statements, shall account for its investments in subsidiaries, associates and jointly controlled entities in accordance with paragraph 9.26.
9.14.2 OmniPro comment
9.14.2.1 Overview and accounting policy choices
As detailed in Section 9.26 of FRS 102 The options for a holder of an investment in a subsidiary, associate or joint venture who is not an entity that prepares consolidated financial statements (as the exemption in Section 9.3 applies as detailed at 9.2.2) can choose to:
- carry the investment at cost less impairment; or
- fair value through the profit and loss ; or
- fair value through other comprehensive income
Although equity accounting is permitted under company law for parent entity accounts, it is not permitted under FRS 102
An entity should apply the accounting policy chosen consistently for all investments of the same type i.e. an entity may apply fair value to associates but does not have to apply it to joint ventures and subsidiaries etc.
The fair value is determined in line with Section 11 i.e. first where available, the value from a quoted market, if this is not available then based on an identical transaction which was entered into within the recent past and if this is not available a valuation technique which uses the most of the external data and very little of entity data. See further details at 11.7.2.1.2
Where the valuation cannot be measured reliably then the investment must be carried at cost less impairment. Where fair value is used deferred tax must be considered.
9.14.2.2 Fair Value through Profit and Loss Account
Example 18A: Adoption of fair value through profit and loss on transition
Company A in its individual financial statements has adopted a policy of fair valuing investments in subsidiaries through the profit and loss. The subsidiary was acquired at the start of year 1 and original cost was CU100,000. The fair value of the investment at 31 December 2015 and 31 December 2016 was CU95,000 and CU125,000 respectively. Assume a deferred tax rate of 10% (assuming the investment is held for future dividends that will be taxable on receipt). The adjustments required to reflect the fair value policy and the related deferred tax are:
Journals required in the 31 December 2015 year
| CU | CU | |
| Dr Fair Value on Movement in Subsidiaries in P&L | 5,000 | |
|
Cr Investments in Subsidiaries (CU100,000-CU95,000) |
5,000 |
Being journal to reflect fall in value at 31 December 2015
| CU | CU | |
| Dr Deferred Tax Liability | 500 | |
|
Cr Deferred Tax in P&L ((CU5,000)*10%) |
500 |
Being journal to reflect deferred tax on the downward valuation. The movement of CU95,000 to CU100,000 is recognised on the basis that the entity believes there will be taxable profits to utilise this in the future.
Journals required in the 31 December 2016 year assuming the above journals are posted to reserves
| CU | CU | |
|
Dr Investments in Subsidiaries (CU125,000-CU95,000) |
30,000 | |
| Cr Fair Value on Movement in subsidiaries in P&L | 30,000 |
Being journal to reflect uplift in value from 2015 to 2016
| CU | CU | |
|
Dr Deferred Tax in P&L ((CU125,000-CU95,000)*10%) |
3,000 | |
| Cr Deferred Tax Liability | 3,000 |
Being journal to reflect deferred tax on the uplift.
9.14.2.3 Fair Value through Other Comprehensive Income
Example 18B: Adoption of fair value through other comprehensive income on transition
Company A in its individual financial statements has adopted a policy of fair valuing investments in subsidiaries through other comprehensive income. Previously the entity had adopted a cost policy. The subsidiary was acquired at the start of year 1 and original cost was CU100,000. The fair value of the investment at 31 December 2015 and 31 December 2016 and 31 December 2017 was CU120,000 and CU95,000 and CU125,000 respectively. Assume a deferred tax rate of 10%. The adjustments required to reflect the fair value policy and the related deferred tax are:
Journals required in the 31 December 2015 year
| CU | CU | |
|
Dr Investments in Subsidiaries (CU120,000-CU100,000) |
20,000 | |
| Cr Revaluation Reserve | 20,000 |
Being journal to reflect uplift in value on transition to show fair value
| CU | CU | |
|
Dr Deferred Tax in Revaluation Reserve (CU20,000*10%) |
2,000 | |
| Cr Deferred Tax Liability | 2,000 |
Being journal to reflect deferred tax on the uplift
Journals required in the 31 December 2016 year
| CU | CU | |
| Dr Fair Value Movement in Profit and Loss | 5,000 | |
| Dr Fair Value Movement in Subsidiaries in OCI/Revaluation reserve | 20,000 | |
| Cr Investments in Subsidiaries (CU120,000-CU95,000) | 25,000 |
Being journal to reflect fall in value at 31 December 2016. The CU5,000 is posted to the profit and loss as there is nothing left in the revaluation reserve after the CU20,000 has been debited in line with Section 17.
| CU | CU | |
| Dr Deferred Tax Liability | 2,000 | |
| Cr Deferred Tax in Revaluation Reserve (CU20,000*10%) | 2,000 |
Being journal to reverse deferred tax recognised at 1 January 2016 as the investment is now stated below cost. No deferred tax asset recognised as assumed it is not probable there will be taxable profits to utilise the loss. If there was taxable profits then the deferred tax asset of CU500 would be recognised ((CU100,000-CU95,000)*10%)
Journals required in the 31 December 2017
| CU | CU | |
|
Dr Investments in Subsidiaries (CU125,000-CU95,000) |
30,000 | |
| Cr Profit and Loss Fair Value Movement | 5,000 | |
| Cr Fair Value Movement in Subsidiaries in P&L | 25,000 |
Being journal to reflect uplift in value on from 2016 to 2017. CU5,000 credit to profit and loss as CU5,000 had previously been debited to the profit and loss for the downward valuation
| CU | CU | |
|
Dr Deferred Tax in P&L ((CU125,000-CU100,000)*10%) |
2,500 | |
| Cr Deferred Tax Liability | 2,500 |
Being journal to reflect deferred tax on the uplift. The movement of CU95,000 to CU100,000 was not recognised in 2016 as per narrative above as the asset was not deemed recoverable.
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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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