Study notes on

consolidated
financial
statements
Presented by:
Obisike Francis Emezi
 Consolidated financial
statements
Learning objectives include:
• The basic terminology common to all relevant standards,
• Investments threshold and relevant accounting
treatments,
• Relevant standards on group financial statements,
 IFRS 10 – Consolidated Financial Statements,
 IFRS 3 – Business Combinations,
 IAS 28- Investments In Associates
 IAS 27 ( revised) – Separate Financial Statements,
 IFRS 11 – Joint Arrangements, and
 IFRS 12 – Disclosure of Interests in other entities.
 Terminology

Control. An investor
controls an investee Significant
when the investor is Associate. An entity influence. The
exposed, or has Power. Existing over which an power to participate
rights, to variable rights that give the Subsidiary. An investor has in the financial and
Parent. An entity
returns from its current ability to entity that is Group. A parent and significant influence operating policy
that controls one or
involvement with direct the relevant controlled by all its subsidiaries. and which is neither decisions of an
more subsidiaries.
the investee and has activities of the another entity. a subsidiary nor an investee but is not
the ability to affect investee interest in a joint control or joint
those returns venture. control over those
through power over policies.
the investee.
Categories of Investment and Accounting Treatment

Investment Criteria Accounting Treatment Shareholding

Subsidiary Control Consolidation (IFRS 10 & IFRS 3) 51% to 100%

Associate Significant influence Equity accounting (IAS 28/IFRS 11) 21% to 50%

Ordinary Passive interest IFRS 9 requirements 1% to 20%

investment
IFRS 10 Consolidated Financial Statements

Concept of 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.

•Control can be obtained by having more

than 50% of voting shares in an investee;
however, there are situations when an
investor has control over an investee even
with minority shares.
Elements of Control

Power of the
investee

Exposure or
rights to
variable
returns

Link between
power and
returns
 Power over an Investee

Purchase and
sale of goods
and services,
Determinatio
Managing
n of capital
financial
structure and
assets
funding,

Selection
Research
and
and
acquisition
developme
of fixed
nt policies
assets,
 Other Rights

Rights to appoint,
Rights to appoint
reassign or remove
or remove another
key management
entity that directs
personnel, who can
the relevant
direct the relevant
activities,
activities,

Rights to direct the

investee to enter
Other rights, such
into, or veto
as those specified
changes to
in a management
transactions for the
contract
benefit of the
investor,
Exposure Or Rights To Variable Returns

Control exist only when there is exposure, or rights, to

variable returns from an investee,

Returns vary according to the investee’s performance.

Returns may include dividends, remuneration for

servicing an investee’s assets or liabilities, fees from
providing credit support, synergies or economies of scale
through combined use assets with the investee.
Link between Power and Returns
Exemption from Preparing Consolidated Accounts

• The parent is itself a wholly-owned subsidiary

or it is a partially owned subsidiary of another
entity and its other owners do not object to, the
parent not presenting consolidated financial
statements
• Its securities are not publicly traded
• It is not in the process of issuing securities in
public securities markets; and
• The ultimate or intermediate parent publishes
consolidated financial statements that comply
with IFRS
Exclusion of a Subsidiary from Consolidation

•Those held for sale in accordance with

IFRS 5, or
•Those held under such long-term
restrictions that control cannot be
operated.
 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).
 Other Issues on Consolidation Theory

Where the parent and subsidiary has different reporting dates, the
accounts can only be consolidated if gap in their dates are not more
than three months,
Consolidation begins on date control is obtained and stops on the
date control is lost,

The parent should account for its investments in subsidiaries,

associates and JVs at either cost or according to IFRS 9 in its
separate financial statements,
Special purpose entities (SPEs) are consolidated if the investor has
control.
 Goodwill On Acquisition Date

Where the
Subtract the FV
result is
of net assets If the result is
negative
Determine the Determine the acquired from positive
Determine the goodwill or
purchase fair value of net the sum of goodwill, it
NCI, bargain
consideration, asset acquired, purchase should be
purchase, credit
consideration capitalized,
to profit or loss
and NCI,
in full.
 Purchase consideration
Cash payment
Share exchange & contingent shares
Deferred consideration
Contingent consideration
Loan note issue
Purchase consideration
Non-Controlling Interests on Acquisition Date

Proportionate
Fair value
share of net
method
assets method
 Fair Value Adjustments

• The net assets of the acquiree should be stated at

fair values on acquisition date
• Changes in FV will have effect on depreciation or
amortization figures in the consolidated FS
• Increase in fair value of assets will create additional
depreciation or amortization while a decrease will
reduce depreciation/amortization,
• Assets and liabilities not recognised in the separate
FS of the acquiree to be recognised in CSOFP.
Computation Of Goodwill On Acquisition Date
Details $’000
Purchase consideration xxxxx
Non Controlling Interest xx
Net Assets acquired (xx)
GOODWILL ACQUIRED xx/(xx)
 Net Assets of Subsidiary At Reporting Date

Pre acq’n Post acq’n Movement

$’000 $’000 $’000
Share capital xxx xxx
Other components of equity xx xx
Retained earnings xx xx
FV adjustments x/(x) x/(x)
Dep./amortization of FV adjustments (x)
Assets not recognised x x
Contingent liability not recognised (x) (x)
Goodwill recognised by subsidiary (x) (x)
Unrealized (profit)/loss by subsidiary (x)/x
TOTAL (xxxx) xxxx xx/(xx)
 Consolidated Retained Earnings

$000
Retained earnings in the SOFP of parent xxx
Share of net assets of subsidiary xx/(xx)
Unrealized profits (x)
Unwinding of discounts on deferred consideration (x)
Acquisition costs (x)
Share of profit of associates x/(x)
Share of impairment loss on goodwill** (x)
xx/(xx)
 NCI at Reporting Date

$000
NCI at acquisition date** xxx
Share of increase or decrease of net assets
Of subsidiary xxx
Share of impairment of goodwill** (x)
NCI at reporting date xx/(xx
 Acquisition costs

Any costs incurred by the parent should NOT

be included as part of the purchase
consideration and should be eliminated from
the group retained earnings as follows:

If the parent company capitalized this

cost as part of the cost of investment
If the parent did not include the
in its separate SOFP, then such
amount in the cost of investment in its
amount will be deducted from
separate SOFP, then take no action
consideration paid when computing
good on acquisition date,
 IAS 28 Investments in Associates and Joint

Ventures

Meaning

An entity over which an investor has

significant influence and which is neither a
subsidiary nor an interest in a joint venture
 Significant influence
Representation on the board of directors of the investee,

Participation in the policy making process,

Material transactions between investor and investee,

Interchange of management personnel,

Provision of essential technical information.

 Equity Accounting

$'000
Initial cost of investment xxx
Share of profit/(loss) x/(x)
Dividend received (xx)
Unrealised (profit)/loss on intercoy trade* (x)/x
Impairment of investment (x)
xxx
 Exemption from Equity Accounting

Exemption is allowed if and only if:

• It is a parent exempt from preparing consolidated financial
statements under IAS 27, or
• The investor is a wholly-owned subsidiary or it is a partially
owned subsidiary of another entity and its other owners, do
not object to, the investor not applying the equity method;
• The investor's securities are not publicly traded,
• It is not in the process of issuing securities in public securities
markets; and
• The ultimate or intermediate parent publishes consolidated
financial statements that comply with IFRS.
 IAS 27 – Separate Financial Statements

Scope of IAS 27
• When an investor elects to present separate
financial statements, IAS 27 applies in
accounting for investments in subsidiaries,
associates and joint ventures.
• The standard does not mandate which
entities to produce separate financial
statements.
 Preparation of Separate Financial Statements
Investments in subsidiaries, JVs or associates
are accounted for at either:
• Cost, or
• Fair Value (IFRS 9)
The entity is required to apply the same
accounting policy for each category of
investments. Any change is a change in
accounting policy.
 Disclosures requirements

A list of significant investments in subsidiaries,

joint ventures, associates, including:
• The name of those investees
• The investees principal place of business and country of
incorporation
• The proportion of ownership interest and its proportion
of the voting rights held in those investees.
• A description of the method used to account for those
investments listed above.
IFRS 11 Joint Arrangements
• Background to IFRS
11
• Principles of IFRS 11
Learning • Joint operation
• Joint venture
Outcome • Classification of
Joint Arrangements,
Statements and
• Disclosures of Joint
Arrangements
 Background to IFRS 11

Issued in May 2011 to replace IAS 31 with an

effective date of January 1, 2013.
Earlier adoption was permitted provided the
entities also adopted the new standards on
consolidation (IFRS 10) and disclosures (IFRS
12) at the same time as well as the revised
standards on separate financial statements
(IAS 27) and equity accounting (IAS 28).
Principles of IFRS 11

Where a party has the rights to the assets and

the obligations for the liabilities of a joint
arrangement, then the joint arrangement is
considered to be a “joint operation”.

Where the parties to the arrangement have an

interest to the net assets, then the
arrangement will be classified as a joint
venture and subject to equity method
accounting under IAS 28 (revised).
 Joint operation
Includes all joint arrangements which are not structured through a separate
vehicle and certain joint arrangements which are structured through a separate
vehicle depending on the contractual rights and other facts and circumstances.

Each party to a joint operation (joint operator) recognizes its share of the assets,
liabilities, revenues and expenses of the joint arrangement.

The share is determined based on the rights and obligations of each party as set
out in the contractual terms.

The joint operator is required to apply the corresponding IFRS to each financial
statement element recognized
 Joint venture

Joint ventures are joint arrangements which are structured

through a separate vehicle that confers legal separation between
the joint venture and the assets and liabilities in the vehicle.

Each party to the joint venture (joint venturer) recognizes an

investment.

The investment is accounted for using the equity method in

accordance with IAS 28 (revised).
Classifying Joint arrangements structured through a separate vehicle

Consider
Legal form

Contractual terms

Other facts & circumstances

What are “other facts and circumstances”?

The purpose and design of the arrangement is

for the provision of output to the parties to the
arrangement;

Substantially all sales of the arrangement are to

the parties (in some cases the arrangement may
be prevented from selling to third parties); and

As a result, the parties to the arrangement are

substantially the only source of cash flows
funding the arrangement.
 Disclosure requirements
Nature, extent and financial effects of an entity’s interests in joint
arrangements showing: name, nature of relationship with the joint
arrangement (e.g. how the activities of the JA relate to those of the
reporting entity), principal place of business and country of
incorporation, percentage ownership interest (or participating share
rights) and percentage of voting rights held, and

Risks associated with an entity’s interests in joint ventures showing:

separate disclosure of commitments related to joint ventures and separate
disclosure of contingent liabilities related to joint ventures.