PRACTICAL GUIDE IFRS 10: CONSOLIDATED FINANCIAL STATEMENTS

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PRACTICAL GUIDE IFRS 10 Consolidated Financial Statements Our only goal is to exceed your expectations

The objective of this IFRS is to establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. To meet the objective, this IFRS: (a) requires an entity (the parent) that controls one or more other entities (subsidiaries) to present consolidated financial statements; (b) defines the principle of control, and establishes control as the basis for consolidation; (c) sets out how to apply the principle of control to identify whether an investor controls an investee and therefore must consolidate the investee; and

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(d) sets out the accounting requirements for the preparation of consolidated financial statements. Consolidated financial statements are 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. Presentation of consolidated financial statements The IFRS requires an entity that is a parent to present consolidated financial statements. A limited exemption is available to some entities. The IFRS defines the principle of control and establishes control as the basis for determining which entities are consolidated in the consolidated financial statements.

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An investor controls an investee when it 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 IFRS sets out requirements on how to apply the control principle: (a) in circumstances when voting rights or similar rights give an investor power, including situations where the investor holds less than a majority of voting rights and in circumstances involving potential voting rights. (b) in circumstances when an investee is designed so that voting rights are not the dominant factor in deciding who controls the investee, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by

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means of contractual arrangements. (c) in circumstances involving agency relationships. (d) in circumstances when the investor has control over specified assets of an investee. Consolidation procedures When preparing consolidated financial statements, an entity must use uniform accounting policies for reporting like transactions and other events in similar circumstances. Intragroup balances and transactions must be eliminated. Non-controlling interests in subsidiaries must be presented in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent. Changes in the ownership 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 (ie transactions with owners in their capacity as owners). Loss of control If a parent loses control of a subsidiary, the parent: (a) derecognises the assets and liabilities of the former subsidiary from the consolidated statement of financial position. (b) recognises any investment retained in the former subsidiary at its fair value when control is lost and subsequently accounts for it and for any amounts owed by or to the former sub sidiary in accordance with relevant IFRSs. That fair value shall be regarded as the fair value on initial recognition of a financial asset in accordance with IFRS 9 or, when appropriate, the cost on initial recognition of an investment in an associate or joint venture. (c) recognises the gain or loss associated with the loss of control attributable to the former controlling interest. Disclosure The disclosure requirements for interests in subsidiaries are specified in IFRS 12 Disclosure of Interests in Other Entities.

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IAS 27 Unrealised profit in inventories - seller is a non-wholly owned subsidiary When goods are sold by a non-wholly-owned subsidiary to another group entity (whether the parent or a fellow subsidiary), how should the elimination of unrealised profits be calculated? As required by IAS 27, the whole of the unrealised profit should be eliminated. In these circumstances, however, a question arises as to how the amount of profit to be shown as attributable to non-controlling interests should be calculated. - Method 1: allocate to non-controlling interests their proportionate share of the unrealised profit. This approach eliminates the profit in the selling entity. - Method 2: no part of the unrealised profit is allocated to the non-controlling interests, acknowledging that they are still entitled to their full share of profit arising on intragroup sales. Under this approach, the figure for non-controlling interests reflects their entitlement to the share capital and reserves of the subsidiary. IAS 27 does not specify which treatment is more appropriate and, in practice, both alternatives are commonly adopted. Whichever approach is adopted, it should be applied consistently as an accounting policy choice. Example 1 A Limited has an 80 per cent subsidiary, B Limited. During 20X1, A Limited sells goods, which originally cost CU20,000, to B Limited for CU30,000. At 31 December 20X1, B Limited continues to hold half of those goods as inventories.

Changes in ownership interest that do not result in loss of control Non-controlling interests (NCI) in a subsidiary are presented as a separate component of equity in the consolidated statement of financial position. Consequently, changes in a parent`s ownership interest in a subsidiary that do not result in loss of control are accounted for as equity transactions. Parent`s accounting treatment: • no gain or loss is recognised when the parent sells shares in the subsidiary (so increasing NCI) • a parent`s purchase of additional shares in the subsidiary (so reducing NCI) does not result in additional goodwill or other adjustments to the initial accounting for the business combination • in both situations, the carrying amount of the parent`s equity and NCI`s share of equity is adjusted to reflect changes in their relative ownership interest in the subsidiary. Any difference between the amount of NCI adjustment and the fair value of the consideration received or paid is recognised in equity, attributed to the parent (IAS 27.30-31) • the parent should also take the following into consideration: © 2014 www.consultasifrs.com

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– the allocated amounts of accumulated OCI (including cumulative exchange differences relating to foreign operations) are adjusted to reflect the changed ownership interests of the parent and the NCI. The re-attribution of accumulated OCI is similarly treated as an equity transaction (ie a transfer between the parent and the NCI) – for a partial disposal of a subsidiary with foreign operations, the parent must re-attribute the proportionate share of cumulative exchange differences recognised in OCI to NCI in that foreign operation (IAS 21.48C) – IAS 27 does not have any specific guidance for costs directly related to changes in ownership interests but, costs that are incremental should be deducted from equity (consistent with IAS 32`s rules on other types of transaction in the entity`s own equity).

Example 1 – Parent sells shares in a subsidiary Company A acquired 80% of Company B in 20X6. On 1 January 20X9, Company A sells Company B shares equivalent to 20% of Company B`s outstanding shares for CU260. On that date, the carrying value of Company B`s net assets in the consolidated financial statements, excluding goodwill, amounted to CU900. Goodwill measured using the fair value and proportionate interest model amounts to CU230 and CU200, respectively. Company A`s recorded goodwill is not impaired. Company B has no accumulated OCI. After the sale, Company A still has a 60% interest in Company B and continues to control its operations. Adjustments to NCI and equity: NCI at fair

Carrying value of Company B`s net assets Goodwill recognised at acquisition Carrying amount – 1 January 20X9 Cash consideration received Less additional NCI to be recognised (20% of carrying amount) Amount to be credited to parent`s equity

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NCI at proportionate

value model interest model 900

900

230 1,130

200 1,100

260 226

260 220

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Example 2 – Parent acquires additional shares in a subsidiary Company A has an 80% interest in Company B. On the acquisition date, NCI measured using the fair value and proportionate interest model amounts to CU180 and CU150, respectively. On 1 January 20X9, Company A purchases the remaining 20% interest in Company B for CU280. Company A`s recorded goodwill is not impaired. From the date of acquisition up to 1 January 20X9, the balance of NCI has increased by CU80 related to the NCI`s share of Company B`s profits (CU70) and other comprehensive income (CU10). Adjustments to NCI and equity: NCI at fair

NCI at proportionate

value model

interest model

NCI recognised on acquisition date NCI`s accumulated share of profits NCI`s accumulated share of other comprehensive income Carrying amount of NCI – 1 January 20X9

180 70 10

150 70 10

260

230

Cash consideration paid Less amount debited to NCI (carrying amount) Amount to be debited to parent`s equity

280 60 20

280 230 50

With the change in ownership interest, the NCI`s share of the accumulated other comprehensive income is re-attributed to the parent and will be included in the balance of accumulated other comprehensive income. Company A will then record the following entry: Equity 10 Accumulated other comprehensive income 10 Example 3 – Subsidiary issues new shares Company Q owns 90% of 100 outstanding shares of Company R. On 1 January 20X9, Company R issued 20 new shares to an independent third party for CU200. This diluted Company Q`s ownership interest from 90% to 75% (90/(100+20)). The carrying value of the identifiable net assets (excluding goodwill) of Company R in the consolidated accounts immediately before the new share issue is CU800, of which CU720 is attributable to Company Q. The carrying value of the NCI at the same date is CU80.

Accounting for the change in ownership interest: © 2014 www.consultasifrs.com

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Carrying Value

Parent`s NCI`s share share % % 800 90 720 10 80 200 1,000 75 750 25 250 30 170

Net assets immediately before share issue Proceeds from share issue Net assets immediately after share issue Change in balances

• proceeds from the issuance of shares increases the net assets of Company R and also increases NCI`s ownership interest from 10% to 25%. The increase in NCI is determined to be CU170 based on NCI`s proportional interest in the adjusted net assets of Company R. • The difference between the increase in NCI of CU170 and the fair value of the consideration for such shares of CU200, amounting to CU30, is recorded as an adjustment to equity. No gain or loss is recognised. In the consolidated financial statements of Company Q, the following entry will be recorded: Cash 200 NCI

170

Equity attributable to the parent

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The inventories held by B Limited include an unrealised profit of CU5,000. This profit must be eliminated in full — irrespective of any non-controlling interest.

Therefore, the required entries on consolidation, to eliminate all of the effects of the transaction, are as follows: Consolidated revenue

30,000

Consolidated cost of sales Consolidated cost of sales Inventories

30,000 5,000 5,000

Example 2 C Limited has two subsidiaries: D Limited, in which it has an 80 per cent interest; and E Limited, in which it has a 75 per cent interest. During the reporting period, D Limited sold goods to E Limited for CU100,000. The goods had been manufactured by D Limited at a cost of CU70,000. Of these goods, E Limited had sold one half by the end of the reporting period.

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In the preparation of C Limiteds consolidated financial statements, the unrealised profit remaining in inventories still held by E Limited will be eliminated. These inventories were transferred from D Limited to E Limited at a value of CU50,000, and their cost to the group was CU35,000. The intragroup profit to be eliminated from inventories, therefore, is CU15,000. Assuming that C Limiteds accounting policy is to allocate a proportion of unrealised profit to the non-controlling interests (Method 1), the proportion attributed to the non-controlling interests is determined by reference to their proportionate interest in the selling subsidiary, D Limited (i.e. 20 per cent). The unrealised profit attributed to the non-controlling interests is therefore CU15,000 × 20 per cent = CU3,000.

Exception of preparing consolidated financial statements An entity that is a parent shall present consolidated financial statements. This IFRS applies to all entities, except as follows: (a) a parent need not present consolidated financial statements if it meets all the following conditions: 1. t is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and all its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements; 2. its debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets); 3. 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; and 4. its ultimate or any intermediate parent produces consolidated financial statements that are available for public use and comply with IFRSs. [IFRS 10.4.(a)] When a parent, in accordance with paragraph 4(a) of IFRS 10, elects not to prepare consolidated financial statements and instead prepares separate financial statements, it shall disclose in those separate financial statements: (a) the fact that the financial statements are separate financial statements; that the exemption from consolidation has been used; the name and principal place of business (and country of incorporation, if different) of the entity whose consolidated financial statements that comply with International Financial Reporting Standards have been produced for public use; and the address where those consolidated financial statements are obtainable. (b) a list of significant investments in subsidiaries, joint ventures and associates, including: 1. the name of those investees. 2. the principal place of business (and country of incorporation, if different) of those investees. 3. its proportion of the ownership interest (and its proportion of the voting rights, if different) held in those investees. © 2014 www.consultasifrs.com

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(c) a description of the method used to account for the investments listed under (b). [IAS 27.16]

Practical Issue The exemption is available when an explicit and unreserved statement of compliance with IFRS can be made the ultimate/intermediate parent that produces consolidated financial statements. Local regulation will dictate when and for what periods an entity must present consolidated or separate financial statements. Local regulations may allow an intermediate parent to produce separate financial statements prepared in accordance with IFRS. Where local legislation or regulation allows an entity not to produce consolidated financial statements, an entity must still consider the exemptions In paragraph 4 of IFRS 10 and whether it is exempt from preparing consolidated financial statements under IFRS. Example – Exemption from preparing consolidated financial statements Entity Atlantic owns the following other entities: -

100% interest in entity Pacific. Entity Pacific owns 70% interest in entity Antarctic.

-

90% interest in entity Indic. Entity Indic owns 65% interest in entity Mediterranean.

Entity Atlantic is a listed company and prepares IFRS consolidated financial statements. Entities Pacific and Indic do not have their securities publicly traded and there are not in process of issuing securities in public markets. Entity Atlantic does not require its subsidiary Indic to prepare consolidated financial statements. Entity Pacific is a wholly-owned subsidiary of Entity Atlantic. It is not required to prepare consolidated financial statements. Indic is not required to prepare consolidated financial statements provided the non-controlling interest holders have been informed about, and do not object to, Entity Altantic not presenting consolidated financial statements. [IFRS 10.4.a.i]. If the parent is exempt from preparing consolidated financial statements it has the choice (subject to local regulation) to present separate financial statements instead of consolidated financial statements.

The Technical summary has been prepared by IFRS Foundation staff and has not been approved by the IASB. For the requirements reference must be made to International Financial Reporting Standard which can be obtained if pay the subscription to IASB – www.ifrs.org The examples included in this application guide have been prepared by ConsultasIFRS team. You are not allowed to copy, forward, edit, translate, modify, use or copy any content.

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