AC303 lecture 2

• Changes in technology, financing, business structuring and diversification

– practice of accounting for single business enterprises became inappropriate

– group accounting required to preserve true and fair view because of inter-connected companies and complex relationships

– Made clear by legislation and regulation that group comprises parent, subsidiaries, associates and significant joint ventures

FRS 2 - Accounting for subsidiary undertakings

• Parent/subsidiary relationship exists if any of the following apply (Para 14):

– Parent holds a majority of the voting rights

– Parent is a member of the undertaking and has the right to appoint or remove directors holding a majority of the voting rights at meetings of the Board on all, or substantially all, matters

– Parent has the right to exercise dominant influence (influence to control operating and financial policies, notwithstanding rights or influences of other parties)

FRS 2 - Accounting for subsidiary undertakings

• Examples of dominant influence

– provisions contained in memorandum or articles of association

– control contract authorised by memorandum or articles of association

• Parent is a member of the undertaking and controls it alone pursuant to agreement with other shareholders

• Parent has a participating influence and (i) actually exercises dominant influence or (ii) both are managed on a unified basis

• Parent of a subsidiary is also the parent of any sub-subsidiaries

• A participating influence is an interest held on a long term basis with a view to securing a contribution to its own activities. Twenty percent or more is presumed to be a participating influence.

Group accounts

• Parent/subsidiary relationship is not only based on percentage ownership

• Company A owns 20% of company B. Majority board representation and controls all decisions. Is company B a subsidiary of company A?

• All parents must prepare group accounts, subject to exemptions and exclusions

Exemptions• Group is classified as ‘small’. Two of following criteria

must be met for two successive years:– balance sheet total< IR£6 million

– annual turnover<IR£12 million

– average number of employees<250

• Parent undertaking is not a company limited by shares or by guarantee

• Above exemption does not apply to banks, insurance companies or public limited companies

• Intermediate parent undertaking– Irish parent it itself a 90% or greater subsidiary of an undertaking

established under EU law and any minority have approved an exemption for Irish company from preparing group accounts

Excluding subsidiaries

• FRS2 requires exclusion of subsidiaries in following circumstances:

– severe long term restrictions substantially hinder the rights of the parent to the assets or management of the company

– interest in the subsidiary is held exclusively for resale and has not previously been consolidated

– activities of the subsidiary are so different from those of other undertakings to be included in the consolidation that to consolidate would be incompatible with the obligation to present a true and fair view

• FRS2 does not allow exclusion on the basis of undue expense or delay required to acquire the information

Examples

• T plc has two subsidiaries, one of which, R Limited has a 90% subsidiary. T plc is itself a subsidiary of D GmbH. Is T plc required to prepare consolidated accounts?

• A plc has one 100% subsidiary, P Limited, for the last three years. In December 2001, A plc decides to sell P Limited. There are interested buyers but, by March 2002, the sale is still outstanding. The directors believe this is temporary and fully expect the sale to go through in April. Should P Limited be included in the 2001 year end consolidated accounts?

Example

• Swift plc has investments in F Ltd (50%), M Ltd (65%) and Slow Ltd (90%). Swift plc holds a majority of the voting equity in F Ltd and M Ltd and has changed the composition of those Boards since they were acquired. It only has 40% of the voting equity in Slow Ltd and failed in any attempts to change the composition of the Board. How should Slow Ltd be treated for consolidation purposes?

Associate definition - FRS 9

• An associate is an undertaking in which another undertaking has a ‘participating interest’ and

• over which that other undertaking has significant influence and

• is not controlled by that other undertaking either solely or jointly

• No minimum shareholding necessarily indicative of significant influence but 20% is the rebuttable presumption

• Active involvement and influence in the strategic issues of an entity would indicate significant influence