Consolidation of Financial Statements - baroda-icai. · PDF filePage 2 Consolidation of Financial Statements ... Accounting of partnership firm/AOP in separate and consolidated financial

Consolidation of Financial Statements Indian GAAP

Consolidation of Financial Statements – Indian GAAP Page 2

Contents

► AS 21 – Consolidated Financial Statements

► AS 23 – Accounting for Investments in Associates in Consolidated Financial Statements

► AS 27 – Financial reporting of Interests in Joint Ventures


Key features:

► Objective and scope

► Concept of „Group‟, „Minority Interest‟ etc.

► Control

► Exclusion from consolidation

► Concept of associate and its accounting

► Concept of joint venture and its accounting

► Issues in consolidation accounting

► Auditing of consolidated financial statements


Consolidation requirements (1/2)

► Legal Requirements:

► Companies Act require Consolidation at every level

► SEBI regulations require listed companies to prepare

► Annually

► Quarterly

► Indian GAAP:

► AS21 Consolidated Financial Statements (CFS)

► AS23 Accounting for Investments in Associates in CFS

► AS27 Financial Reporting of Interests in JV


Consolidation requirements (2/2)

► Legal Requirements:

► IndAS:

► IndAS27 Separate Financial Statements (SFS)

► IndAS110 Consolidated Financial Statements (CFS)

► IndAS112 Disclosure of Interests in Other Entities

In the consolidated financial statements of the parent: Present economic

position and results of operations as if there was essentially one single

entity


Why consolidation ?

► Increasingly business operations managed through complex structures

► Standalone financials do not reflect economic reality

► Mergers and acquisitions – including cross border transactions

► Significant Impact on all profit and loss and even balance sheet ratios


Accounting for the economics

Significant

Influence

AS 23 Equity

Method

Neither control nor

significant influence

Cost or Fair Value Method

AS 21 Line by Line

Consolidation

AS 27 Proportionate

consolidation

Joint control

Corporate

relationship

Control


General rule

<20%

Ownership

20% to 50%

Ownership

>50%

Ownership Control

Consolidate

Significant

Influence

Equity

Accounting

Less than

significant

influence

AS-13

Accounting for

Investment


Accounting for share of losses

Full

Restricted to the carrying

amount of investment*

Proportion of their

shares in the venture* Joint Venture

Associates

Subsidiary

* Unless there is a binding obligation


Control (1/2)

► Subsidiary under the AS 21: -

► Direct or indirect ownership of more than half of the voting power

► Control of the composition of the Board of Directors

► AS 21 read with AS 23 - potential equity shares of the investee are

not considered for determining voting power

► Subsidiary under Companies Act 2013

A company in which the holding company

► Controls the composition of the board of directors, or

► Exercises or controls more than one-half of the total share capital

either at its own or together with one or more of its subsidiary

companies.

► As per rules, total share capital = Paid-up equity and convertible

preference share capital

► Relevant only for subsidiary and associate definition


Control (2/2)

► Control as per Companies Act 2013 -

“control” shall include the right to appoint majority of the directors or to

control the management or policy decisions exercisable by a person

or persons acting individually or in concert, directly or indirectly,

including by virtue of their shareholding or management rights or

shareholders agreements or voting agreements or in any other

manner”


Control example-1

Company B

Company A

Company C

60%

Holding

Representation

of 3/4 directors

Both B and C will consolidate A in their books as per AS 21, as both the companies

have control over A


Control example-2

Is Company D controlled by Company A ?

Company A

Company B

Company D

Company C

100 % 100 %

30 % 30 %


Is Company D controlled by Company A ?

Company A

Company B

Company D

Company C

51 % 51 %

30 % 30 %

Control example-3


Is Company C controlled by Company A ?

Company A

Company B

Company C

40 %

40 %

60 %

Control example-4


Significant Influence


Definition of the term “associate” Key impact


AS 27 – Interests in Joint Venture

► Three Types of Joint Venture:

► Jointly controlled operations (accounted in separate financial

statements)

► Manufacture of an aircraft

► Jointly controlled assets (accounted in separate financial

statements)

► Oil pipeline

► Building

► Jointly controlled entity (accounted in consolidated financial

statements)

► Separate legal entity


AS 27 – Interests in Joint Venture

► A jointly controlled entity is a joint venture which involves the

establishment of a corporation, partnership or other entity in which

each venturer has an interest. The entity operates in the same way as

other enterprises, except that a contractual arrangement between the

venturers establishes joint control over the economic activity of the

entity.

► A jointly controlled entity maintains its own accounting records and

prepares and presents financial statements in the same way as other

enterprises in conformity with the requirements applicable to that

jointly controlled entity.

► Joint control is the contractually agreed sharing of control over an

economic activity

► Control is the power to govern the financial and operating policies of

an economic activity so as to obtain benefits from it.

► Accounting of partnership firm/AOP in separate and consolidated

► financial statements


Company A Company B

Company JV

(Contractual arrangement

for joint control)

60% 40%

Whether Company should consolidate Company JV as a subsidiary

under AS 21 or a A s a Joint Venture under AS 27?

Accounting for JV which is a subsidiary

► Effective for periods commencing on or after 1-4-2004

► Enterprises by a contractual arrangement establishes Joint Control in a subsidiary, to be consolidated as per AS 21 and not treated as JV as per AS 27 [earlier treated as JV]

► The other JV partners may continue treating the same as JV


Start and end of consolidation

► Date from which holding subsidiary/associate/JV relationship comes into existence

► Date upto which holding subsidiary/associate/JV relationship ceases to exist

Start

End


Exclusion from consolidation

► When control is intended to be temporary

► Severe long-term restrictions over transfer of funds

► Key considerations:

► Near future - not more than 12 months from acquisition unless a longer period can be justified

► Intention of disposal should be at time of acquisition


Steps to consolidate

► Eliminate cost of investment and related equity accounts

► Identify minority interest in the equity and the net income for the year,

of the subsidiary, and record in the CFS as a current liability

► Record goodwill / capital reserve computed based on the net worth of

investee at the date of investment

► Eliminate intercompany payables and receivables

► Eliminate intercompany sales, purchases and profit in unsold

inventory at the date of consolidation

► Eliminate effects of other intercompany transactions


AS 23 – Investments in associates

► Goodwill/Capital Reserve – included in carrying amount of investment and to be disclosed separately

► Outstanding cumulative preference shares held outside the group – preference dividend to be adjusted whether declared or not

► Carrying amount of investments – reduce to recognise a decline other

than temporary


AS 23 – Investments in Associates

► Treatment of Proposed Dividend

► Consideration of potential equity shares to determine whether an Investee is an associate under AS 23

► Adjustments to the carrying amount of Investment arising from changes in equity


Adjustments to the carrying amount of Investment arising from changes in equity

Adjustments to the carrying amount of investment in an associate arising from changes in the associate‟s equity that have not been included in the statement of profit and loss of the associate, should be directly made in the carrying amount of investment without routing it through the consolidated statement of profit and loss account

Examples:

► Revaluation of fixed assets ► Foreign exchange translation ► Amalgamations ► Demergers ► Issue of shares at premium


Inter Group transactions

► Parent & subsidiary

► Subsidiary & subsidiary

► Parent/subsidiary & Associate

► Parent/subsidiary & JV

► Associate & Associate

► JV & JV

► Associate & JV


Calculation of GW and MI –Step by step basis

Example

An investing parent A invests Rs 65 lacs on October 1, 2014, to acquire

60% of the equity of B, thereby making it a subsidiary. On that date, the

net assets of the subsidiary aggregated Rs 50 lacs.

Subsequently, A invested, on January 1, 2015, Rs 22 lacs to acquire a

further 20% of B‟s equity shares, on which date the net assets of B were

Rs 80 lacs. At March 31, 2015, the net assets of the subsidiary were Rs

120 lacs. Assuming that there are no intra group transactions between A &

B and that both have their reporting date as March 31, 2015. How is the

amount of goodwill and minority interest calculated for the purpose of CFS

of A?


Calculation of GW and MI –Step by step basis

Acquisition

cost

% share

holding

Net

Assets

Own

Share

Minority

Interest Goodwill

Oct-14 65 60% 50 30 20 35

Oct –Dec 60% 30 18 12

Dec-14 80 48 32 35

Jan-15 22 20% 80 16 -16 6

80 64 16 41

Jan –Mar 80% 40 32 8

Mar-15 87 80% 120 96 24 41


Amortisation of goodwill

Issue

► Whether goodwill arising on consolidation is required to be amortised?

View

► Practice under Indian GAAP on goodwill is divergent.

► Amortisation is not mandatory under AS 10 (mandatory under AS 14)

► whereas AS 21, AS 23 and AS 27 are silent on goodwill amortisation.




Other Considerations


Key issues - Goodwill


Goodwill

H Ltd consolidates its wholly owned (acquired) subsidiary S Ltd and

records a goodwill on consolidation.

In subsequent year S Ltd, amalgamates with its parent H Ltd.

Issue:

Accounting for Goodwill subsequent to amalgamation in CFS?

Whether the goodwill on consolidation until prior year should be adjusted

against reserves since the subsidiary is merged into the parent ?

Preferred view:

Continue Goodwill Alternate view:

Reverse Goodwill


Key Issues

► Deemed disposal arising from new issue of shares by subsidiary

► Accounting for redemptions of shares of subsidiaries held by minority interest

► Adjustment arising due to harmonizing accounting policies for the first consolidation


Accounting for dilution gains & losses

Gains or losses arising on account of direct issue of shares by a

subsidiary/associate at a price different from the book value per share

A Ltd.

B Ltd.

25% NAV – Rs.100

A Ltd.

B Ltd.

20% NAV – Rs.150

Issue of shares by B at a premium


Accounting for dilution gains & losses

A‟s share of Net Assets of B (post issue) (150 x 20%) 30

A‟s share of Net Assets of B (pre issue) (100 x 25%) 25

Dilution Gain 5

How should the dilution gain be accounted for?

Dilution possible on ► Conversion of FCCB ► Exercise of ESOP


Widespread

1 Equity Owner

Company A

74% 26%

Able to nominate maximum number of directors on the board

Consolidation- Control

Would the single 26% Equity Owner consolidate as per

AS 21?


Key issues

► Subsidiaries during the reporting period – but not at the balance sheet date – is consolidation required?

► First CFS – Adjustment of intra-group unrealized profits/losses of earlier years

► Whether preferential capital stockholders have 20% voting power but do not participate in the net results or assets of the company other than to the extent of a guaranteed IRR or dividend rate

► minority interest or a liability


Accounting for taxes on income in CFS

► While preparing CFS, the tax expense to be shown in the CFS should be the aggregate of the amounts of tax expense appearing in the separate financial statements of the parent and its subsidiaries


Consolidation reconciliations

► Profit reconciliation

► Profits of parent and subsidiary, share of associates and joint ventures added together

► Adjustment on account of consolidation adjustments having impact on profits e.g. Stock reserve, amortization of goodwill, elimination of dividends from subsidiaries

► Net worth Reconciliation

► Net worth of parent and subsidiary, share of associates and joint ventures added together

► Adjustment for pre-acquisition net worth of subsidiaries

► Other adjustments e.g. accumulated amortization of goodwill, stock reserve

► Minority interest reconciliation

► Goodwill reconciliation

► Investment reconciliation


Thank you

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Consolidation of Financial Statements - baroda-icai. · PDF filePage 2 Consolidation of Financial Statements ... Accounting of partnership firm/AOP in separate and consolidated financial