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7/29/2019 Group Accounting
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GROUP ACCOUNTING
common for groups of companies to combine in pursuit of common goals where a reporting entity controls another entity, consolidated financial statements
needs to be prepared (NZIAS 27)
key terms:o consolidated financial statements: financial statements of a group of entities
presented as those of a single economic entity
o group: comprises a parent and its subsidiarieso parent: entity that controls one of more entities known as subsidiarieso subsidiary: entity controlled by another entity
entity MUST CONTROL an organization before it is considered to be a subsidiary consolidated financial statements provide info of entity that exists in an economic sense,
not legal sense. within an economic entity- can have separate legal entities.
Rationale:
consolidated statements show the results and financial position of a group as if thesubsidiary and parent companies were operating as a single economic entity
shows the results of operations with parties external to the group inter-group transactions are eliminated, since from the economic entitys perspective
INCOME WILL NOT BE DERIVED AS RESULT OF TRANSACTIONS WITHIN THE GROUP, only
from transactions with external parties
sows total assets controlled by the economic entity and the total liabilities owed toparties outside the economic entity
liabilities owing to the org within the group will be eliminated in the consolidationprocess.
Alternative consolidation concept:
Entity concept NZIAS27 requires adoption of the entity concept. entire group is viewed as a single economic entity all assets and liabilities of the parent entity and subsidiaries are included in consolidated
statement of financial statement.
o non controlling interests are treated as part of consolidated entity.o non-controlling interests: equity in a subsidiary not directly or indirectly to a
parent, eg owned by unrelated entity
Proprietary concept all assets and liabilities of the parent entity and only a proportionate share of the
subsidiaries assets and liabilities included in the consolidated statement of financial
position.
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non controlling interest is NOT included in the consolidated statement of financialposition.
parent entity concept all assets and liabilities of the parents and subsidiaries are included in the consolidated
statement of financial position
non-controlling interest is treated as a liability NZIFRS10 rejects the parents entity concept as it regards it as inappropriate to classify
the interest of stakeholders as liabilities
Concept of Control
an investor controls an investee when the investor is exposed, or has rights to, variablereturns from its involvement with the investee and has the ability to affect those returns,
through its power over the investess.
subsidiaries are considered to be entities that are under the control of a parent entity the power to govern the financial and operating policies of an entity so as to obtain
benefits from its activities
the capacity to control both the financial and operating policies must exist prior toestablishing the existence of control.
substance over form considerations are required to be used in determining theexistence of control, a process that calls for the exercise of professional judgment.
factors that indicate existence of control:o when parent entity owns, directly or indirectly through subsidiaries more than
half of the voting power, unless in exceptional circumstances can be clearly
demonstrated that such ownership does not constitute control
o holding of an ownership interest usually entitles the investor to an equivalentpercentage interest in the voting rights of the investee, and consequently a
majority ownership interest would normally be accompanied by the existence of
control.
o control exists when parent owns half or less of the voting power if: has more than half of voting rights through agreements with other
investors
power to govern financial and operating policies under a statute oragreement
power to appoint or remove the majority of BOD power to cast the majority of cotes at meetings of the BOD
o control can be passive- possible to exert control even though the option to exertsuch control might never have been exercised potential voting rights
o importance is existence of capacity to control can arise from convertibleinstruments or options, preference shares
subsequent loss of control
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a parent loses control over its subsidiary when it loses the power to govern the financialand operating policies so as to obtain benefit from its activities
can occur with or without a change in absolute or relative ownership levels eg when a subsidiary becomes subject to the control of government, or contractual
agreement.
Direct control: parent has direct ownership interest in subsidiary Indirect control: eg A has 70% ownership interest in B which has 60% ownership
interest in C. Therefore A has indirect control of C.
Accounting for Business Combinations
NZIFRS 3 requires use of acquisition method which involves:o identifying the acquirero determining the acquisition dateo recognizing and measuring the identifiable assets acquired, the liabilities
assumed, and any non-controlling interest in the acquireo recognizing and measuring goodwill or a gain from a bargain purchase