Do any of the items remain in inventory at the end of the year? Violet Co – by looking at the equity shares, Green Co has more than 50% of the voting shares – ie an 80% equity holding. At Paper FA level, it is assumed that control exists if the parent company has more than 50% of the ordinary (equity) shares – ie giving them more than 50% of the voting power. Illustration 1 shows an example of a typical group structure. As Green Co only has 25% of the equity shares, they do not have control and, therefore, Amber Co is not a subsidiary. If a reliable measure of fair value is no longer available, the entity shall disclose that fact. When a valuation technique is used, the entity shall disclose the assumptions applied in determining fair value. Dr. If we consider each component in turn, the first thing to identify is how much the parent company has paid to acquire control over the subsidiary. Consolidated financial statements reflect control, not ownership. Under s399 of CA06, group accounts only have to be prepared where, at the end of a financial year, an undertaking is a parent company. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. What should be shown as the consolidated figure for receivables and payables? Purple Co had originally purchased the goods at a cost of $4,000. Black Co – by looking at the percentage of equity shares, you may incorrectly conclude that Black Co is not a subsidiary, as Green Co has less than half of the voting rights. You should ensure you have looked at the specimen paper (the full exam amd the additional MTQs) for practice of the fuller consolidation exam questions. IFRS 10, Consolidated Financial Statements Please note the syllabus does not cover Joint Ventures but IAS 28 is applicable to Associates which are covered. C Violet and Black Purple Co acquired 70% of the voting share capital of Silver Co on 1 October 20X1. Note although we refer to this as a provision, it is not a liability but an adjustment to the asset, inventory. The old Companies Act 1956 exempted Unlisted Public Companies and Private Companies from mandatory CFS (Consolidated Financial Statements) but the new Companies Act 2013 mandates even these 2 companies to prepare CFS. The FA syllabus examines the principles contained in: Please note the syllabus does not cover Joint Ventures but IAS 28 is applicable to Associates which are covered. In this question the fair value of the non-controlling interest is given, so in our calculation we just need to add it to the consideration transferred. exemptions from preparing consolidated financial statements Source: A Dictionary of Accounting. These do not give Indigo Co significant influence over Yellow Co and, therefore, Yellow Co is not an associate and would not be equity accounted. If a venturer does not prepare consolidated financial statements, it uses the cost method or revalued amount to measure its interest in JCE in its financial statements, with the effects of equity accounting shown in the notes. The audit exemption is applicable for financial years beginning on or after the change in the law (1 Jul 2015). Answer Under the PERS framework (MASB 11), there was no explicit mention on consolidating SPEs. A $104,700 Has there been any intra-group trading during the year, irrespective of whether the goods are still included in inventory at the year end? Purple Co has made a profit of $1,000 (calculated as revenue of $5,000 – cost of $4,000). A venturer shall recognise in its own financial statements: i. the assets that it controls and the liabilities that it incurs, and. Note: Answer B ignores that Red Co only acquired 80% of the shares and calculates the cost of investment incorrectly as 40,000 x $3.50 = $140,000 – therefore, goodwill of $140,000 + $30,000 – $125,000 = $45,000. However, a parent need not present consolidated financial statements if the parent itself is a subsidiary, and its ultimate parent (or any intermediate parent) produces consolidated general purpose financial statements that comply with Malaysian Financial Reporting Standards or MPERS. Under section 14 of MPERS, an entity is given an accounting policy choice to account for its associates using either a cost model, fair value model or equity method. The second step here is to identify the provision for unrealised profit (PUP). It is important to determine the size of company in order to ensure that the relevant regulatory requirements for the preparation and filing of the annual accounts and reports are applied. Therefore, the consolidated revenue is calculated as: Had the question stem asked for the consolidated cost of sales figure, the answer would be correctly calculated as: $54,990 + $17,940 + $500 – $5,000 = $68,430. For claiming exemptions, the subsidiary companies are required to comply with conditions mentioned under Second Proviso to Rule 6 of Companies (Accounts) Rules, 2014. Another common adjustment that you could be asked to deal with is the removal of unrealised profit. Under the PERS framework, a parent is exempted from consolidating its subsidiary if it operates under severe long-term restrictions; however, such an exemption is not available under MPERS. For investment in associates measured using fair value, the entity shall disclose the basis for determining fair value, eg quoted market price in an active market or a valuation technique. Illustration (3) Section 9 of MPERS requires a parent entity to present consolidated financial statements in which it consolidates its investments in subsidiaries. Conversely, significant influence can still be demonstrated where less than 20% of the voting rights are obtained, usually evidenced by: Once we have identified an associate exists, we do not consolidate line by line like we do for a subsidiary. This is because the consolidated statement of profit or loss needs to show revenue and costs of sales which reflects group performance with external, non-group, entities. Effectively if you did not make an adjustment for PUP the group would be recording a profit of $500 selling inventory to itself. Illustration 2 is an example of a typical question. Answer: As discussed in question 1.5, section 379(2) (being the requirement to prepare consolidated financial statements and the exemption from preparing company level financial statements) does not apply to a holding company that satisfies the requirements of section 379(3). Total comprehensive income shall be attributed to the owners of the parent and to the non-controlling interest even if this results in the non-controlling interest having a deficit balance. Although Pink Co only owns 80% of Scarlett Co, it controls 100%. It would be a fundamental mistake in any consolidation question to ever pro-rate a subsidiaries statement of financial position where there is less than 100% ownership. Malaysia Financial Reporting Standards. A group is made up of a parent and its subsidiary. B 2 only This is simply because we do not have control. And the financial reporting framework serves as a guideline to ensure each criterion that is needed is being fulfilled. IFRS 10 states control arises when the investor (the parent) has: i. power over the investee (the subsidiary), ii. B $45,000 Having power and control should make you spot that actually Red Co is a subsidiary and, therefore, would be consolidated line by line in the group accounts and would not be equity accounted. An entity may be created to accomplish a narrow objective – for example, to effect a lease, undertake research and development activities or securitise financial assets. As at 31 December 20X2, extracts from their individual statements of financial position showed: As a result of trading during the year, Pink Co’s receivables balance included an amount due from Scarlett of $4,600. A parent is exempt under the Companies Act from the requirement to prepare consolidated financial statements on any one of the following grounds. Joint ventures can take the form of jointly controlled operations, jointly controlled assets or jointly controlled entities: Jointly controlled operations (JCO) This arrangement involves the use of the assets and other resources of the venturers rather than the establishment of a corporation, partnership or other entity, or a financial structure that is separate from the venturers themselves. A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control – the cornerstone in accounting for joint ventures. A 1 and 2 Note: Red Co has only acquired 80% of Blue Co’s shares, so consideration transferred is 80% x 40,000 = 32,000 x $3.50 = $112,000. -which financial statements components to prepare and / or file with the Registrar of Companies, -which consolidation exemptions remain available and on what conditions, -whether to prepare a directors’ report and what new requirements are to be included therein when applicable, In other MTQs, you may be expected to do more work on finding the fair value of the net assets at acquisition. Under the cost model in MPERS, an investor shall measure its investments in associates, other than those for which there is a published price quotation, at cost less any accumulated impairment losses. You should look at the specimen paper and extra MTQs available on the ACCA website. When answering OTs and MTQs, remember to: Written by a member of the FA examining team, Virtual classroom support for learning partners, Preparing simple consolidated financial statements, Less: fair value of net assets at acquisition, the power over more than 50% of the voting rights by virtue of agreement with other investors, the power to govern the financial and operating policies of the entity under statute or an agreement, the power to appoint or remove the majority of the members of the board of directors, or. An entity that is controlled by a parent becomes its subsidiary. Therefore, the correct answer is D, not A which completely omits the elimination of the intra-group balances, nor answer B which omits to cancel the corresponding payable within liabilities. An associate is defined by IAS 28, Investments in Associates and Joint Ventures as ‘an entity over which the investor has significant influence’. C 1 and 3 only the ability to use its power over the investee to affect the amount of the investors returns. From the question, we can see that Pink Co has control over Scarlett Co. Not all unlisted subsidiary companies are exempt from preparing consolidated financial statements. As only half of the items remain in inventory, the inventory value is overstated by half of that profit – that is, $500. B $95,230 The standard was published in May 2011 and is effective from 1 January 2013. A number of simplifications are also available to … This must be eliminated, irrespective of whether the items remain unsold at the year end. The global body for professional accountants, Can't find your location/region listed? The Financial Reporting Framework in Malaysia very simply, works like this – registered companies in Malaysia are all required to prepare statutory financial statements. In the consolidated statement of profit or loss we must always consider two steps: In this question, $5,000 of sales have been made from Purple Co selling to Silver Co. Your company does not have to prepare financial statements if during the income year all of the following apply: It was not part of a group of companies. Here, in this specific OT question, it is the goodwill on acquisition that is being asked for, whereas other questions may ask for the cost of investment that would be recorded in the parent’s books. Even though this question requires an extract from the consolidated statement of profit or loss, the principle is still the same as Illustration (3) – consolidate the group as if it is a single economic entity by adding in 100% line by line, and showing group performance with all non-group entities. representation on the board of directors of the investee, participation in the policy-making process, material transactions between the investor and investee. You should use the range 20-50% of voting shares in the exam as your main indicator of significant influence. The requirement to prepare consolidated financial statements, and the available exemptions, are governed by the Companies Act 2006, which is the same as the position for UK GAAP reporters. In the second of a four-part series on the Malaysian Private Entities Reporting Standard (MPERS), which is effective for private entities in Malaysia from 1 January 2016, we take a closer look at how it impacts group accounting and accounting for associates and joint ventures as well as some key changes from the previous PERS framework. provision of essential technical information. It is imperative to note that investments in associates for which there is a published price quotation must be accounted for using the fair value model. Ramesh Ruben Louis FCCA is a professional trainer and consultant in audit and assurance, risk management and corporate governance, corporate finance and public practice advisory, "There is no prohibition on the equity method if there are no consolidated financial statements presented", Contact information for your local office, Virtual classroom support for learning partners. The illustration shows how a parent company has control over a subsidiary. In a MTQ it is likely you would be given the value of a NCI share and have to apply it to the 8,000 shares that Red did not acquire. We began this article with consideration of how to identify a subsidiary, and we conclude it with consideration of a relationship between a parent and an associate. Joint control is the contractually agreed sharing of control over an economic activity, and exists only when the strategic, financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control (the venturers). Answer C is also incorrect because it omits the cancelling of $5,000 sales and deals incorrectly with the provision for unrealised profit of $500. ii. This gives them control and, therefore, Violet Co is a subsidiary. The fair value of the non-controlling interest was $30,000 and the fair value of the net assets acquired was $125,000. Scope of Consolidated Financial Statements (CFS) A Parent (Holding) Company which presents its consolidated financial statements must consolidate all of its subsidiaries, foreign as well as domestic. An investor using the fair value model shall use the cost model for any investment in an associate for which it is impracticable to measure fair value reliably without undue cost or effort. …4/5 A parent is also exempted if it has no subsidiaries other than those acquired with the intention of selling or disposing of it within one year. When these balances are eliminated, the consolidated figures become: Receivables     ($50,000 + $30,000 – $4,600) = $75,400 the expenses that it incurs and its share of the income that it earns from the sale of goods or services by the joint venture. Therefore, answer B would not be selected as it incorrectly adds 100% of Purple Co and only 70% of Silver Co. Equity accounting is not the same process as consolidation. This  inflates the value of the inventory held by the group in the statement of position and the profit in the statement of profit or loss. According to section 379(3) of the CO, companies can be exempt from preparing consolidated financial statements if they meet one of the following conditions: Statement (2): Despite only 18% of the ordinary share capital being held by Indigo Co, as we have already discussed, we do not just consider the percentage of equity shares held, but also look at whether there can be an exercise of significant influence. However, if the investor did not present any consolidated financial statements, the investment is accounted for under the cost method or at revalued amount in its financial statements. Remember that at Paper FA, a good solid platform of understanding the principles of consolidation is required. Paragraph 4 of IFRS 10 provides relief whereby a parent need not present con­sol­i­dated financial state­ments if it meets par­tic­u­lar con­di­tions, including the re­quire­ment that “its ultimate or any in­ter­me­di­ate parent produces con­sol­i­dated financial state­ments that are available for public use and comply with IFRSs.” Proportionate consolidation is prohibited under MPERS and PERS (which was allowed under the previous IAS 31, Interests in Joint Ventures, superseded in 2013 by IFRS 11, Joint Arrangements). When its immediate parent is established under the law of an EEA State (Section 400 of the Act): (a) The parent is a wholly-owned subsidiary. Illustration (2) IFRS 10 was issued in May 2011 and applies to annual periods beginning on or after 1 January 2013. Under section 9 of MPERS, profit or loss and each component of other comprehensive income shall be attributed to the owners of the parent and to the non-controlling interest. If a company is registered in the UK, those subsidiaries would need to be included within the consolidated financial statements. C $108,700 In many jurisdictions, governments have recognized this In the final part of the calculation, following on from the point just made, it is necessary to look at all (100%) of the fair value of net assets at acquisition. However, there are examples where a holding of less than 50% of the ordinary shares can still lead to control existing. A Violet only However, by looking at the fact that Green Co has appointed five of the seven directors, effectively they have the power, and ability to use that power, to affect the decision making in the company which will impact on the returns to be made. D $104,200. IAS 28 also states that a holding of 20% or more of the ordinary (voting) shares can be presumed to give the investor significant influence unless it can be demonstrated otherwise. Control requires exposure or rights to variable returns and the ability to affect those returns through power over an investee. The Amendments confirm that the exemption from preparing consolidated financial statements is also available to a parent entity that is a subsidiary of an investment entity, in which all of its (1) How is a parent-subsidiary relationship identified? The purpose of this publication is to assist entities in Malaysia which are currently preparing t heir financial statements in accordance with Malaysian Financial Reporting Standards (“MFRSs”) issued by the Malaysian Accounting Standards Board (“MASB”). Typically this will involve calculating the figures for a consolidated statement of profit or loss or a consolidated statement of financial position. In this question, Red Co acquires control by paying $3.50 cash per share. However, if it is owned by a body corporate – there are some exemptions. The Paper FA syllabus is limited to the definition and identification of an Associate and describing the principle of equity accounting only. Answer Inventory (SoFP)             $500. This is presented as ‘Share of profits of Associate’ as a new heading immediately before the consolidated profit before tax. In terms of consolidation procedures, section 9’s requirements remain largely similar to that under the PERS framework which encompasses elimination of investment in subsidiaries, full elimination of intragroup balances and transactions and any resulting unrealised profits, use of uniform accounting policies and use of financial statements drawn from the same reporting date. Power may be evidenced by all or some of the following: A typical OT may describe a number of different investments and you would need to decide if they are subsidiaries – ie if control exists. If a Hong Kong company is owned by an individual, then a consolidated financial statement is mandatory. This article was first published in the February 2017 Malaysia edition of Accounting and Business magazine. (6) Concluding exam tips Note: in many Paper FA questions, you will be expected to calculate the profit made by using margins or mark-ups, which are not discussed here.). Practising full length consolidation questions will help you grasp a better understanding of consolidation. While preparing the consolidated statement, it should take into account that the date of reporting the financial statements of the parent company and subsidiary companies is the same. The consolidation adjustment  is saying that the group has made a profit of $500 on items, which have not been sold on to a third party/non-group entity. Even though we only own 80% of the share capital, the full goodwill method brings 100% of the goodwill on to the consolidated statement of financial position. In this situation, the information needs of certain users may not be served by the consolidated financial statements at a whole-of-government level alone. Section 9 of MPERS requires a parent entity to present consolidated financial statements in which it consolidates its investments in subsidiaries. Section 9 also requires consolidation of special-purpose entities (SPE), which a reporting entity controls. For a parent company, the consolidated total assets of group at any time within the financial year must not exceed $500,000. Under this syllabus, only the full goodwill method is examinable and is calculated as: This could be asked as an OT question but is more likely to be a MTQ where you will be calculating and submitting a figure for each of the component parts of the good will calculation – cost, NCI and net assets. Pink Co acquired 80% of Scarlett’s Co ordinary share capital on 1 January 20X2. 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