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CHAPTER 12 Group financial statements. Contents  Introduction – Company groups  Rationale for group financial statements  Current practice  Acquisition.

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Presentation on theme: "CHAPTER 12 Group financial statements. Contents  Introduction – Company groups  Rationale for group financial statements  Current practice  Acquisition."— Presentation transcript:

1 CHAPTER 12 Group financial statements

2 Contents  Introduction – Company groups  Rationale for group financial statements  Current practice  Acquisition accounting  Associated companies  Joint ventures

3 Group financial statements  Group (or consolidated) financial statements are the financial statements of a set of two or more enterprises organised as an economic entity  Group is defined according to concept of “control”  Control = power (de jure or de facto) to govern the financial and operating policies of an entity so as to obtain benefits from its activities (IFRS)

4 Company groups  Company group characteristics  Vertical group  Horizontal group  Conglomerate  Group expansion  Development of new subsidiaries  Acquisition by takeover of other companies  Meger between companies

5 Shares - Rights  Membership rights :  Influence on management, voting power  Equity rights:  Right to participate in distribution of profits + equivalent part of liquidation balance  In principle: rights are proportional to capital share  Exceptions: preferent shares, limitations to voting power, multiple votes per share,...

6 Types of participating shareholdings Type of relationship Amount of voting rights Qualification of shareholdings 1Control50% +1Subsidiary 2Significant influence >= 20%Associated company 3Only financial< 20%Financial investment

7 Group structure Enterprise A Enterprise C Enterpise B Enterprise D Enterprise E 51% Enterprise F 100% 25% 100%9%

8 Rationale for group financial statements  Interdependent relationships within a group (patrimonial, contractual, personal ties)  Loss of part of their independence of individual entities  Common or unified management  Economic interest of the group > individual interests of legal entities involved  It is economically more relevant to present the financial statement of the economic whole as an aggregate of all assets and liabilities under unified control

9 From individual to group accounts Co. WCo. XW Group €’000 Tangible assets50010001500 Investment in subsidiary500-- Current assets250350600 Totals125013502100 Shares500 Reserves300(50)250 800450750 LT debt3007001000 Trade creditors150200350 Totals125013502100 Debt/Equity ratio37.5%155%133%

10 Current practice  IAS 27 Consolidated and Separate Financial Statements  IFRS 3 Business Combinations  IAS 28 Investments in Associates  IAS 31 Investments in Joint Ventures  Seventh EC Company law Directive

11 Offsetting the investment in a subsidiary HoldingS Co.EliminationGroup €m Net fixed assets10020-120 Investment in subsidiary25-(25) Current assets3010-40 Totals15530(25)160 Share capital7025(25)70 Reserves30-- 10025(25)100 Current liabilities155-20 Long-term liabilities40-- Totals15530(25)160

12 Acquisition accounting  Purchase method of accounting  Fair value adjustments of acquired assets and liabilities  Subsequent measurement of goodwill  Minority interests  Merger accounting  Group income statement

13 Purchase method of accounting  Acquisition (or purchase method of) accounting is the method used to account for business combinations  Goodwill arises as a consolidation difference if the purchase cost of the investment is not equal to the book value of equity in the subsidiary

14 Goodwill as consolidation difference HoldingS Co.EliminationGroup €m Net fixed assets10020-120 Investment in subsidiary38-(38) Goodwill--13 Current assets1710-27 Totals15530(25)160 Share capital7020(20)70 Reserves305(5)30 10025(25)100 Current liabilities155-20 Long-term liabilities40-- Totals15530(25)160

15 Fair value adjustments of acquired assets and liabilities  The individual assets and liabilities of the acquired company have to be revised to their fair value at acquisition date  This exercise may imply (de-)recognition of new (old) assets and liabilities  Goodwill will be the difference between the revalued net assets and the investment by the parent  The fair value at acquisition date is considered to be the historical cost from the point of view of the parent

16 Fair value adjustments applied Book value of S AdjustmentFair value balance sheet €m Fixed assets - Intangible-10 - Tangible20- Current assets10- Totals301040 Share capital20- Reserves51015 251035 Current liabilities5-5 Totals301040

17 Goodwill after fair value adjustments HoldingRevised SEliminationGroup €m Net fixed assets - Goodwill - Other intangibles - Tangibles - 100 10 20 3--3-- 3 10 120 Investment in S38-(38)- Current assets1710-27 Totals15540(35)160 Share capital7020(20)70 Reserves3015(15)30 10035(35)100 Current liabilities155-20 Long-term liabilities40-- Totals15540(35)160

18 Subsequent measurement of goodwill  IAS before 2004 + European Accounting Directives: Amortise goodwill on a systematic basis over the best estimate of its useful life Rebuttable assumption of a maximum of 20 years  IFRS 3 “Business Combinations” (2004):  Test goodwill for impairment annually (or more frequently if indications)

19 Minority interests  Minority interests (or non-controlling interests) appear if the group does not own 100% of the shares in a subsidiary  They represent the part of the net assets and profit or loss of the subsidiary attributable to the equity interests that are not owned

20 Minority interests applied L Co.M. CoEliminationGroup €’000 Intangibles--280 Tangibles1200300-1500 Investment in M600-(600)- Current assets550225-775 Totals2350525(320)2555 Share capital800300(300)800 Reserves1150100(100)1150 Minority interests80 1950400(320)2030 Current liabilities200125-325 LT Creditors200-- Totals2350525(320)2555

21 Merger accounting  Two companies can combine by merging their activities and managements without one of them acquiring the other  Two types of merger  Fusion  Pooling of interests  IFRS3 Business Combinations (2004) banned merger accounting methods

22 Illustration - Merger accounting Company A before merger Issue shares Company A after merger Company BAdjustGroup €m Assets Tangibles1200 9002100 Investment in B+500500--500- Current assets420 350770 Totals1620+50021201250-5002870 Financing Share capital300+500800300-300800 Reserves420 730-730 +530 950 Debt600 -- Trade payables300 220-520 Totals1620+50021201250-5002870

23 Illustration - Acquisition accounting Company A before merger Issue shares Company A after merger Company BAdjustGroup €m Assets Goodwill----+ 470470 Tangible assets1200- 900-2100 Investment in B-+15001500--1500- Current assets420- 350770 Totals1620+150031201250-10303340 Financing Share capital300+500800300-300800 Reserves420+10001420730-7301420 Debt600- -- Trade payables300- 220-520 Totals1620+150031201250-10303340

24 Group income statement  In the group income statement, the effect of intra-group transactions has to be eliminated  Only income and expenses recognized with regard to parties outside the group will be retained  Follow-up effects of fair value adjustments over time have to be integrated  Amortization of goodwill or impairment losses on goodwill may also significantly impact the group income statement

25 Intra-group transactions Subsidiary A Expenses1200 Sales to B1500 Profit300 Subsidiary B Purchases from A1500 Other expenses5000 Sales to C7500 Profit1000 Subsidiary C Purchases from B7500 Other expenses500 Sales to retailers8500 Profit500 Totals15700175001800

26 Deduct amortization/ impairment losses on goodwill / Follow-up of fair value adjustments Aggregation of financial statements of all subsidiaries Fig.12.1 Consolidation procedures Adjust recognition criteria / measurements of financial statements of subsidiaries to uniform principles (IFRS) Fair value adjustments / Remove investment in subsidiaries / Identify goodwill and minority interests Remove intra-group transactions and balances Group financial statements

27 Associated companies  Associated companies are companies in which the investor company has “significant influence”  Different types of relationships between investor company and investee company mainly according to voting rights under control  Accounting rules differ according to the type of relationship

28 Types of participating shareholdings (bis) 1Control50% +1 SubsidiaryAcquisition accounting 2Significant influence >= 20% Associated company ? 3Only financial< 20%Financial investment “Fair Value” Or “At Cost (Locom)”

29 Illustration - Associated company Company C ASSETS Tangible fixed assets600 Current assets300 Total900 FINANCING Share capital400 Reserves50 450 Payables200 Debt250 Total900 Company A buys 20% of Company C

30 Illustration - Equity method Co ACo CGroup Net fixed assets1050 Investment in C150- 150 Goodwill-+6060 Equity value+9090 Current assets420 Totals1620- Share capital300 Reserves420 720 Payables300 Debt600 Totals1620

31 Illustration - Proportionate consolidation Co ACo C (20%)EliminationsGroup Net fixed assets1050120-1170 Investment in C150--150 Goodwill--+ 6060 Current assets42060-480 Totals1620180-901710 Share capital30080-80300 Reserves42010-10420 72090-90720 Payables30040-340 Debt60050-650 Totals1620180-901710

32 IAS 28 Investments in Associates  IAS 28 Investments in Associates assumes significant influence if the investor holds at least 20 per cent of the voting rights of the investee  IAS 28 requires the equity method to account for associated companies  The part of the investor in the profit and loss of the associated company is introduced as a separate caption in the group income statement (“income from associates”)

33 Joint ventures  A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to jount control (IAS 31 Investments in Joint Ventures)  IFRS recognizes three kinds of arrangement:  Jointly controlled operations  Jointly controlled assets  Jointly controlled entities  IFRS recommends use of proportionate consolidation for jointly controlled entities

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