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Requirement to prepare consolidated financial statements - Coggle Diagram
Requirement to prepare consolidated financial statements
Laws, regulations and IFRS
IFRS 10 defines the principle of control and outlines the requirements for the preparation and presentation of consolidated financial statements requiring entities to consolidate the entities it controls
If one company controls another, then IFRS 10 requires that a single set of consolidated financial statements be prepared to reflect the financial performance and position of the group as one combined economic entity
CA2006 requires all registered companies to prepare individual accounts, where a business operates through more than one company, CA2006 requires group accounts to be prepared
Small groups that can meet 2 out 3 size criteria are exempt from preparing group accounts
Turnover: Gross £12.2 m Net £10.2 m
Balance sheet total: Gross £6.1m Net £5.1m
Employees: 50
Control cocnept
In accordance with IFRS 10, control of an investor over an invested consists of 3 elements
Power over the invested: existing rights, normally exercised through most of voting rights (owning more than 50%)
Variable returns: exposure or rights to a dividend stems from the investors involvement with the investee
Ability to use the power: to affect the amount of investor returns
Group structure
Control can be exercised in a variety of ways, most commonly by
Direct and indirect voting rights
Via a contract
Through control of the board
Through de facto control
Basic method of consolidation
When a parent company controls a subsidiary company, the parent must produce consolidated financial statements which effectively add together the results of the parent and its subsidiary
The NCI is the equity in the subsidiary not attributable to the parent (direct or non direct)
There are a number of factors to be considered
To avoid double counting, intra group items including all transactions, balances and unrealised profits and losses arising from intra group trading must be eliminated. Intr group items include purchase and sales of inventories and other assets between parent and subsidiary.
The consolidated totals should consist of transactions, balances and profits and losses created through transactions with parties outside the group
The parent's investment in the subsidiaries, carried as investments in its wn statement of financial position are also eleiminated
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
Subsidiaries the follow local accounting rules will need to be adjusted for the consolidation process
Subsidiaries should have the same reporting date as that of the parent company. Where impracticable, the most recent financial statement of the subsidiary are used with adjustments made for significant transactions between the reporting dates of the subsidiary and the consolidated financial statements. The difference between the date of the subsidiary's financial and that of the consolidated statements shall be no more than 3 months. Special accounts will need to be prepared for the consolidation if the difference is more than 3 months
Any share of a subsidiary's results or equity that belong to any NCI must be disclosed at the foot of each consolidated financial statement
Consolidation will cease from the date the parent loses control of a subsidiary. If the control ceases or the subsidiary is acquired part way through the year, the financial results must be time apportioned during the consolidation process