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FINANCIAL REPORTING FOR GROUP ENTITIES UNDER IFRS -IFRS 10 Consolidated Financial Statements
Conf.univ.dr. Victor-Octavian Müller
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Overview IFRS 10 outlines the principles and procedures for the preparation and presentation of consolidated financial statements, requiring entities to consolidate entities it controls. defines the control, establishes control as the basis for consolidation and gives a guidance to identify whether there is a control or not. Control requires exposure or rights to variable returns and the ability to affect those returns through power over an investee defines an investment entity and sets out an exception to consolidating particular subsidiaries of an investment entity
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Overview Requirement to present consolidated financial statements
Definition and assessment of control Accounting requirements for consolidation Investment entities and consolidation exception
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Brief History of IFRS 10 Project added to IASB agenda
April 2002 Project added to IASB agenda Dec. 2008 Exposure draft (ED) 10 Consolidated financial statements Sept. 2010 Staff draft of IFRS X Consolidated financial statements May 2011 Standard IFRS 10 Consolidated financial statements Amendments to IFRS 10 by different IASB projects 2010 –2013 Amendments under consideration
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A parent and its subsidiaries
Key terms An entity that is controlled by another entity SUBSIDIARY A parent and its subsidiaries GROUP An entity that controls one or more entities CONTROL OF AN INVESTEE PARENT 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 its power over the investee The financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity CONSOLIDATED FINANCIAL STATEMENTS
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Requirement to present consolidated financial statements
An entity that is a parent shall present consolidated financial statements (CFS). A parent need not present CFS if it meets all the following conditions: It is a wholly/partially-owned subsidiary of another entity and its other owners do not object to, the parent not presenting CFS its debt or equity instruments are not traded in a public market it did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market its ultimate or any intermediate parent produces CFS available for public use that comply with IFRSs Post-employment or other long-term employee benefit plans to which IAS 19 Employee Benefits applies –don’t need to present CFS A parent that is an investment entity shall not present CFS if it is required by this IFRS, to measure all of its subsidiaries at fair value through profit or loss
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Assessment of control An investor determines whether it is a parent by assessing whether it controls one or more investees. An investor considers all relevant facts and circumstances when assessing whether it controls an investee. An investor controls an investee if and only if the investor has all of the following elements: Ability to affect the returns Power over the investee Exposure/rights to variable returns Power arises from existing rights, which can be straightforward (e.g. through voting rights) or complex (e.g. embedded in contractual arrangements). Protective rights cannot give power over an investee Link btw. power and returns Ability to use its power over the investee to affect the amount of the investor's returns Such returns must have the potential to vary as a result of the investee's performance and can be positive, negative, or both
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Accounting requirements: accounting policies, measurement
Uniform accounting policies: A parent shall prepare consolidated financial statements using uniform accounting policies for like transactions and other events in similar circumstances If a member of the group uses accounting policies other than those adopted in the CFS for like transactions and events in similar circumstances, appropriate adjustments are made to that group member’s FS in preparing the CFS to ensure conformity with the group’s accounting policies Measurement: Consolidation of an investee shall begin from the date the investor obtains control of the investee and cease when the investor loses control of the investee Income and expenses of the subsidiary are based on the amounts of the assets and liabilities recognised in the CFS at the acquisition date
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Accounting requirements: reporting date
The financial statements of the parent and its subsidiaries used in the preparation of the CFS shall have the same reporting date. When the reporting dated differ, the subsidiary prepares, for consolidation purposes, additional financial information as of the parent’s reporting date, unless it is impracticable to do so Where impracticable, the most recent FS of the subsidiary are used, adjusted for the effects of significant transactions or events between the reporting dates of the subsidiary and CFS. The difference between the date of the subsidiary's FS and that of the CFS shall be no more than three months
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Accounting requirements: consolidation procedures
In order to prepare consolidated financial statements, IFRS 10 prescribes the following consolidation procedures: 1. Combining like items of the parent & subsidiaries 2. Offseting the parents investment & portion of subsidiaries’equity 3. Eliminating intragroup transactions Like items of assets, liabilities, equity, income, expenses and cash flows belonging to the parent and its subsidiaries are added together - The carrying amount of the parent’s investment in each subsidiary and the parent’s portion of equity of each subsidiary are eliminated - Any non-controlling interest and goodwill is accounted for according to IFRS 3 - Intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between entities of the group are eliminated in full - Profits or losses resulting from intragroup transactions that are recognised in assets (e.g. inventory and fixed assets) are eliminated in full
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Accounting requirements: non-controlling interests (NCI)
Presenting and measuring non-controlling interests (NCI): A parent presents NCI in its consolidated statement of financial position within equity, separately from the equity of the owners of the parent. A reporting entity attributes the profit or loss and each component of OCI to the owners of the parent and to the NCI. The proportion allocated to the parent and NCI are determined on the basis of present ownership interests. The reporting entity also attributes total comprehensive income to the owners of the parent and to the NCI even if this results in the NCI having a deficit balance. Changes in the proportion held by non-controlling interests: Changes in a parent's ownership interest in a subsidiary that do not result in the parent losing control of the subsidiary are equity transactions (i.e. transactions with owners in their capacity as owners). When the proportion of the equity held by NCI changes, the carrying amounts of the controlling and NCI area adjusted to reflect the changes in their relative interests in the subsidiary. Any difference between the amount by which the NCI are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the owners of the parent.
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Accounting requirements: loss of control
If a parent loses control of a subsidiary, the parent: derecognises the assets and liabilities of the former subsidiary from the consolidated statement of financial position recognises any investment retained in the former subsidiary when control is lost and subsequently accounts for it and for any amounts owed by or to the former subsidiary in accordance with relevant IFRSs. remeasures the retained interest where the remeasured value is regarded as the fair value on initial recognition of a financial asset in accordance with IFRS 9 Financial Instruments or, when appropriate, the cost on initial recognition of an investment in an associate or joint venture recognises the gain or loss associated with the loss of control attributable to the former controlling interest
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Other issues addressed
Determining whether an entity is an investment entity Investment entities: exception to consolidation Disclosures: There are no disclosures specified in IFRS 10. Instead, IFRS 12 Disclosure of Interests in Other Entities outlines the disclosures required.
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