Reporting Entity & Consolidation Principles IFRS 10 & 11 ACCA F7 2015Mark Fielding-Pritchard1

Identification  Economic entity means a group of entities comprising a controlling entity and one or more controlled entities.  Controlling entity is an entity that has one or more controlled entities  Controlled entity is an entity that is controlled by another entity, known as the controlling entity  Control is the power to govern the financial and operating policies of another entity to benefit from its activities Mark Fielding-Pritchard

Power Conditions  Power conditions (control is presumed when at least one power condition and one benefit condition exist, unless there is clear evidence of control being held by another entity)  The entity has, directly or indirectly through controlled entities, ownership of a majority voting interest in the other entity;  Or The entity has the power, either granted by or exercised to appoint or remove a majority of the members of the board of directors or equivalent governing body and control of the other entity is by that board or body; or  The entity has the power to cast, or regulate the casting of, a majority of the votes that are likely to be cast at a general meeting of the other entity; or  The entity has the power to cast the majority of votes at meetings of the board of directors or equivalent governing body and control of the other entity is by that board or body Mark Fielding-Pritchard

Power Indicators 1  The entity has the ability to veto operating and capital budgets of the other entity  The entity has the ability to veto, overrule, or modify the board of directors or equivalent governing body decisions of the other entity  The entity has the ability to approve the hiring, reassignment and removal of key personnel of the other entity  The mandate of the other entity is established and limited by legislation Mark Fielding-Pritchard

Power Indicators 2  The entity holds a “golden share” (or equivalent) in the other entity that confers rights to govern the financial and operating policies of that entity  A golden share is a share with special voting rights that allow the holder to outvote other shareholders, usually in restricted circumstances.  The entity has the ability to establish or amend the mission or mandate of the entity  The entity has the ability to establish borrowing or investment limits or restrict the entity’s investments  The entity has the ability to restrict the revenue generating capacity of the entity, notably the sources of revenue Mark Fielding-Pritchard

Benefit Conditions  The entity has the power to dissolve the other entity and obtain a significant level of the residual economic benefits or bear significant obligations. For example the benefit condition may be met if an entity has responsibility for the residual liabilities of another entity; or  The entity has the power to extract distributions of assets from the other entity, and/or may be liable for certain obligations of the other entity Mark Fielding-Pritchard

Benefit Indicators  The entity has a right to a significant level of the net assets of the other entity in the event of liquidation or in a distribution other than liquidation  The entity is able to direct the other entity to co-operate with it in achieving its objectives  The entity is exposed to the residual liabilities of the other entity  The entity has ongoing access to the assets of an entity, has the ability to direct the ongoing use of those assets, or has ongoing responsibility for deficits. Mark Fielding-Pritchard

Exceptions  Regulatory and purchase powers do not constitute control for the purposes of financial reporting.  Therefore, control does not extend to:  The power of the legislature to establish the regulatory framework within which the entities operate and to impose conditions or sanctions on their operations; and  Entities that are economically dependent on an entity. For example, where an entity is dependent on a department for funding. The department has some power, but not to govern the entity’s financial and operating policies Mark Fielding-Pritchard

Examples  For each of the following scenarios will the power to control be presently exercisable?  Scenario one  An entity will only have the power to control another entity if the agreement is renegotiated to be effective.  Scenario two  An entity has the power to control another entity and it has the power to appoint and remove the majority of the members of management.  However, the entity has never exercised the power to remove members of management Mark Fielding-Pritchard

Mark Fielding-Pritchard10 Entity controls another entity Is the power to govern the financial and operating policies presently exercisable? Does the entity have the power to control the financial and operating policies of another entity Does the entity benefit from the activities of another entity Yes Control appears not to exist, consider whether an associate or joint venture No Summary

Consolidated Financial Statements  prepared from separate financial statements of acquiring (parent) and acquired (subsidiaries) organisations using consolidation worksheet procedure  present assets and liabilities of two organisations as if they were single accounting entity  required whenever has a controlling interest in subsidiary Mark Fielding-Pritchard

Direct vs. Indirect Ownership Mark Fielding-Pritchard Organisation A Organisation Y Organisation Z Direct Ownership of Co. Z by Co. A controls Indirect Ownership of Co. Z by Co. A Organisation Z

Criteria for Consolidation 2015Mark Fielding-Pritchard 13 Percentage of Outstanding Voting Stock Acquired 20%50%100%0% 1. Level of economic influence Nominal “Significant influence” Control 2. Financial statement presentation Investment Account Separate Financial Statements Consolidated Financial Statements

Exceptions to > 50% Consolidation Rules  not required when control is likely to be temporary  parent anticipates selling subsidiary’s stock to reduce ownership below 50%  not required when control does not rest with majority stockholders  subsidiary is controlled by trustee  subsidiary located outside home country and availability of assets and net income restricted by foreign governments Mark Fielding-Pritchard