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Group accounts: All in it together

Tom Clendons five things you need know about group accounts
April 2013: 1. The basic principle Group accounts are prepared in accordance with the substance over form concept. While the parent and subsidiary are separate legal entities group accounts are prepared as if they were a single entity. The preparation of group accounts is a bit like preparing a single set of accounts for my marriage. If I borrow cash from my wife then I have the liability of a payable, and my wife has the asset of a receivable. However, from the perspective of the marriage there is no external liability or asset. In a similar way, in group accounts any balances or transactions between the parent and the subsidiary have to be eliminated on consolidation. 2. Theory There is lots of accounting theory connected to group accounts and it really does help when approaching questions if you can see the big picture. For example, it is useful to understand exactly what is meant by control, by fair value, and the consequences of measuring NCI at acquisition at fair value or as a proportion of net assets. This is because the theory is often examined in a written form but also understanding the theory helps with doing the numbers as well. 3. Proformas Group accounts are primarily examined in number-crunching questions. Help is at hand, though, as there are proformas for every calculation. For example, goodwill, post-acquisition profits, NCI, retained earnings, disposals, associates and group exchange difference can all be calculated using proformas. These proformas are invaluable aids in helping you approach even the trickiest questions. A little bit of rote learning here is a good thing. 4. Question practice Once you have understood the theory and rote learnt the proforma then this is the key to passing exams. So it is important to do lots of question practice. My book, A students guide to group accounts, contains lots of examples and questions, and there are extra questions online, too. 5. How useful are group accounts? Lets imagine that my unemployed teenage son approaches you for a loan and in support of his application he presents you with the consolidated accounts of the Clendon family, which comprises me, my son and my wife. These accounts would show the aggregate of the assets, liabilities, income and expenses of the three of us. An analysis of these family accounts show strong profitability and liquidity ratios revealing that all is well in the Clendon family finances. As a lender to my son, how much weight would you put on these Clendon family accounts? I hope very little; after all, remember you would be lending to my unemployed son as an individual, and not to the family. It is much more relevant for a prospective lender to look at his assets and his income (BTW he has none!). On this basis, lenders to a subsidiary company should not be taken in by a strong set of group accounts and should assess the credit worthiness based on the financial statements of the individual company. Tom Clendon is a former PQ Tutor of the year. A students guide to group accounts is available from (twitter@tomclendon)