Group Consolidations A Group is a parent and all its subsidiaries. Parent is an entity that has one or more subsidiaries.

Subsidiary is an entity, including an unincorporated entity such as a partnership that is controlled by another entity (known as the parent). IAS 27 states: Consolidated financial statements shall include the accounts of all the subsidiaries of the financial statements it is necessary to identify the subsidiary companies by examining them against certain test of control. The following subsidiaries cannot be excluded from the consolidation process: - A subsidiary whose business activities are dissimilar from those of the other entities within the group. - Subsidiaries of venture capital organization, mutual funds, unit trust or any similar entity. - Subsidiaries held for sale. i.e. investments by a parent in an entity only for the purpose of selling it. The financial statements of the parent and its subsidiaries used in the preparation of the consolidated financial statements shall be prepared as of the same date. When it is not possible for the parent and subsidiaries to have the same reporting date IAS 27 requires the subsidiary to prepare for consolidation purpose additional financial statements as of the same date as the financial statements of the parent unless it is impracticable to do so. The financial statements of a subsidiary are to be included in consolidated financial statements from the date of acquisition the date on which the parent acquires control. The financial statements of the subsidiary are to be included in consolidated Test of control: Direct Control when any shareholder owns more than 50% of the shares (voting rights) to appoint the directors to manage the affairs of the company. Control is the power t govern the financial and operating policies of an entity so as to benefit from its activities. A co. controls another when it acquires more than 50% of the voting rights of another entity.

Control by direct influence when one party has the ability to influence the financial and operating policies of another even though it is not a majority shareholder there. This happens when: - The parent acquires the power to govern the financial and operating policies of the entity by virtue of an agreement with other investors. - The parent acquires the power to govern the financial and operating policies of the other entity by virtue of statute or agreement. - The parent acquires the power to appoint or remove a majority of directors or equivalent governing body of the other entity. - The parent acquires the power to cast a majority of votes at the meeting of the members of the board of directors or equivalent governing body of the other entity. Control due to existence and effect of potential voting rights An entity may own share warrants, share call options, debt or equity instruments that can be converted into ordinary shares of another company. Indirect control to pass the test of indirect control it is necessary to look beyond the factual holding of shares and to ascertain the actual holding of shares via intermediaries. Exclusion of a subsidiary from consolidated financial statements: The accounts of a subsidiary need not be included in a consolidated financial statements, only if all the four conditions are fulfilled: The parent itself is a wholly or partially-owned subsidiary of another entity, and its other owners (including those who are not otherwise entitled to vote) have been informed and do not object to, the parent not presenting consolidated financial statements. The ultimate or any intermediate parent of the parent produces consolidated financial statements available for public use that comply with IFRS. The parents debt or equity instruments are not traded in a public market The parent has not filed, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market.

Coterminous year ends Coterminous year ends means that the financial year end of to or more entities is the same. It follows that the financial year used for recording financial statements by two or more entities is the same. Where a subsidiary accounts used for consolidation purposes are drawn up to a different year end adjustments should be made for the effects of significant transactions or events that occur between the reporting dates of the subsidiary and parent. There can be a gap of no more than three months between the reporting date of the parent and the subsidiary. Tenure for Inclusion in group accounts IAS 27 states: The financial statements of a subsidiary are to be included in consolidated financial statements from the date on which the parent acquires control. The financial statements of a subsidiary are to be included in consolidated financing financial statements up to the date of disposal meaning the date the parent relinquishes control. Need for using uniform accounting policies Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. IAS 27 requires that consolidated financial statements shall be prepared using uniform accounting policies for like transactions and other events in similar circumstances. IAS 27 requires that where a subsidiary uses different accounting policies, for like transactions and other events in similar circumstances, then adjustments should be made to make its accounts suitable for consolidation. Intra-group transactions Intra-group transactions are commercial transactions which take place between companies belonging to the same group, in the ordinary course of business. When accounting for intra-group transactions in their individual accounts, the companies do not make any distinction between group companies and other companies.

Process: Consolidated Balance Sheet are prepared by combining the financial statements of the parent and the subsidiary line by line by adding together like items of assets, liabilities, equity, income and expenses. IAS 27 requires that all intra-group balances and transactions , including income and expenses are eliminated in full. This is because: If they are not eliminated, the consolidated financial statements will show an inflated and hence misleading picture of the financial status of the group. It will be against the very definition of consolidated financial statements which states that the group is to be considered as one single economic unit. One single economic unit cannot transact with itself. The Concept of Consolidated Financial Statements Each entity in the group prepares its own financial statements in which investments in/by the other entity are reported. Consolidated financial statements are prepared by combining the financial statements of all the group entities in order to determine the financial status of the group as if it were one single entity. Importance of Consolidated financial statements: They safeguard the interest of the ordinary shareholders of the parent company. They show the full earnings on a parent companys investment. The parents individual accounts show only the dividend received, if any, from subsidiaries. They help management of the parent company form a picture of the group as a whole. They help prevent companies from indulging in malpractice and manipulation to avoid taxes, to smooth profits etc. Related Parties IAS 24 lists all possible cases by which a party can be related to another. Related Party a party is related to an entity if directly, or indirectly through one or more intermediaries the party: Controls, is controlled by, or is under common control with, the entity. (includes parents, subsidiaries and fellow subsidiaries) Has an interest in the entity that gives it significant influence over the entity; or

Has joint control over the entity

Because the parent and the subsidiary are related they would have to make the related party disclosures as laid down by IAS 24 when preparing their individual financial statements. A related party transaction is a transfer of resources, services or obligations between related parties regardless of whether a price is charged. IAS 24 requires that: 1. Relationships between parents and subsidiaries shall be disclosed irrespective of whether there have been transactions between the related parties. 2. If there have been transactions between related parties, then for an understanding of the potential effect of the relationship on the financial statements, an entity shall disclose: - The nature of the related party relationship; - The amount of the transactions; - The terms and conditions, including whether they are secure - The nature of the consideration to be provided in settlement; - Details of any guarantee given or received; The provisions for doubtful debts related to the amount of outstanding balances; and The amounts written off as bad or doubtful debts due from related parties 3. The entity shall also disclose key management personnel compensations (salaries plus benefits) Who constitutes key management personnel? Key Management personnel are those having authority and responsible for planning, directing and controlling the activities of the entity, directly or indirectly, including any director of that entity. The Need for Related Party Disclosures Related party disclosures help outsiders ascertain whether the related parties exploit their relationship to give each other an unfair advantage compared to arms length transactions with third parties. Related parties disclosures help shareholders of group assess the impact of related party transactions on the financial status of their respective entities. RP disclosures help minority shareholders decide whether any unfair advantage has been given to group companies. They can also access

 How this has been advantageous/disadvantageous to their own entity. RP disclosures help government agencies decide whether there have been any transactions specifically meant to avoid taxes or to bypass regulations. RP disclosures help financial institutions, banks etc. decide whether there has been a misuse of loans given to group entities. Reasons why intra-group transactions are eliminated: If such transactions are not eliminated then the consolidated financial statements will show an inflated picture of the financial status of the group, which will be misleading. It will also be against the definition of consolidated financial statements, which states that the group is to be considered as one single economic unit and so it cannot trade with itself. The IASBs conceptual framework states that financial statements fulfill two purposes: The assessment of stewardship; and The provision of information for economic decision-making IFRS 3 requires that all business combinations shall be accounted for by applying the purchase method. Applying the purchase method involves the following steps: Identifying an acquirer Measuring the cost of the business combinations; and Allocating, at the acquisition date, the cost of the business combinations to the assets acquired and liabilities and contingent liabilities assumed. The acquirer shall measure the cost of a business combination as the aggregate of: The fair values, at the date of exchange of assets given, liabilities incurred or assumed, and equity instruments issued by