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Different types of investment (Consolidation (Consolidated accounts…
Different types of investment
There are different types of investment that a parent company may have. The most important is between it and any subsidiary. A parent and all its subsidiaries make up a group
Other lesser investments in entities are also important but joint operations and associated are not classified as members of a group; only the parent and subsidiaries are members
Company law also governs whether group accounts should be prepared. The tests and definitions are similar to IFRS Standards in terms of types of investment and process for consolidation, but small groups are exempt form preparing group accounts
Small groups are those that can meet two out of three of the size criteria relating to turnover, balance sheet and total employees. Both turnover and balance sheet total can be judged on a net basis or gross, by just adding up the relevant figures for each company in the group
Aggregate turnover
Gross: Under £12.2m
Net: Under £10.2m
Aggregate balance sheet total
Gross: Under £6.1m
Net: Under £5.1m
Aggregate number of of employees
Under 50 for both
In IFRS Standards and company law there are exemptions from preparing group accounts if a parent company is also a subsidiary of another company, as long as the ultimate parent of the group prepares group accounts that meet certain criteria
A parent and all its subsidiaries make up a group and a group must prepare consolidated financial statements
Control
IFRS 10 states that an investor, regardless of the nature of its involvement with an entity (the invest) must determine whether it is a parent by assessing whether it has control of the invest
IFRS 10 states that control, in relation to a parent and an investee entity, comprises three elements and all must be present
Power over the relevant activities of an invested from existing rights
Exposure or right to variable returns of the investee
Ability to use that power to affect the returns of the investeee
Can be exercised in a variety of ways, most commonly by
Holding voting rights attached to shares
Via a contract
Through control of the board of directors or other decision making body
Through de facto control
De facto control exists where one party has a substantial holding of voting rights and the remainder, while a majority, are held by a wider range of unconnected parties who do not act in agreement with each other
In a situation where a parent has control, if there are other investors in the subsidiary, these are known as non-controlling interests which are also sometimes still called minority interests
Consolidation
Consolidated accounts include everything controlled by the parent on a 100% basis even where the parent owns less than 100% of the shares in the subsidiary
The share of a subsidiary's results that belongs to the non-controlling or minority interest is disclosed at the foot of the balance sheet and income statement and in the statement of changes in equity
Intragroup items must be eliminated, including all transactions, balances and profits and losses. Consolidated totals will consist only of transactions, balances and profits and losses created through transactions with parties outside the group, thereby avoiding double counting
The parent entity's investment in the subsidiaries will usually be carried as cost in its own balance sheet but will also be eliminated through the process of consolidation
The accounting policies of all group companies must be aligned so that like items are treated in the same way for the group as a whole. Groups will often require their subsidies to follow the same accounting policies to avoid having to adjust the figures for consolidation but sometimes subsidiaries (such as those based overseas) are required to follow local accounting rules and therefore adjustments must be made just for consolidation
If subsidiaries have a year end more than three months away from the parent's year end then special accounts will need to be prepared for the salivation
Once a parent loses control of a subsidiary, it will cease to be consolidated from that date. If control is lost during a financial year, the consolidated accounts will include the results of the subsidiary in its income statement only up the date control was lost
Control - more than 50% of voting shares are held
Associate - investor has significant influence, more than 20% but less than 50%
