IFRS 10 states control arises when the investor (the parent) has: i. power over the investee (the subsidiary), ii. Effectively if you did not make an adjustment for PUP the group would be recording a profit of $500 selling inventory to itself. a) its share of the jointly controlled assets, classified according to the nature of the assets, c) its share of any liabilities incurred jointly with the other venturers in relation to the joint venture, d) any income from the sale or use of its share of the output of the joint venture, together with its share of any expenses incurred by the joint venture, and. 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. re-read the question to ensure you understand it and check you are answering the question set if your initial calculation does not match any of the answer options. Which of the following investments owned by Indigo Co should be accounted for using the equity method in the consolidated financial statements? 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. Each venturer uses its own property, plant and equipment and carries its own inventories. (6) Concluding exam tips Statement (3): Don’t just look at the 45% holding and presume it is an associate without considering the other facts. When a valuation technique is used, the entity shall disclose the assumptions applied in determining fair value. Red Co acquired 80% of Blue Co’s 40,000 $1 ordinary share capital on 1 January 20X2 for a consideration of $3.50 cash per share. This article focuses on some of the main principles of consolidated financial statements that a candidate must be able to understand and gives examples of how they may be tested in objective test questions (OTs) and multi-task questions (MTQs). This is why we need to include the fair value of the non-controlling interest in our goodwill calculation. A group is made up of a parent and its subsidiary. What should be shown as the consolidated figure for receivables and payables? Answer 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. This exemption notice, issued with immediate effect on 18 June 2015 and will expire on 31 July 2020, the exemption applies also to accounting periods that commenced before the exemption was granted (e.g. IFRS 10, Consolidated Financial Statements Please note the syllabus does not cover Joint Ventures but IAS 28 is applicable to Associates which are covered. 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. 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. If the subsidiary subsequently makes profits, the majority interest (ie the parent) is allocated all such profits until the minority’s share of losses previously absorbed by the majority has been recovered. Cost of sales                   $500 The effect of equity accounting was only disclosed in the notes to the financial statements. However make sure you read any other information with regards power to participate or other shareholdings ( see illustration 6). It does not attempt to cover every technical aspect of consolidation, but to give candidates the tools they need to prepare for the style and level of testing, they can expect to see in this paper. The Financial Reporting Framework in Malaysia very simply, works like this – registered companies in Malaysia are all required to prepare statutory financial statements. 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. A 1 and 2 Practising full length consolidation questions will help you grasp a better understanding of consolidation. This should mean that you immediately consider adding together 100% of Pink Co’s balances and Scarlett Co’s balances to reflect control. Purple Co has made a profit of $1,000 (calculated as revenue of $5,000 – cost of $4,000). 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. 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. But just like associates, a venturer shall measure its investments in jointly controlled entities for which there is a published price quotation using the fair value model. A common question asked is whether this includes overseas subsidiaries. representation on the board of directors of the investee, participation in the policy-making process, material transactions between the investor and investee. For an associate we have to use the equity method, which means we simply bring in our share of the associate’s results. 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. 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. 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. financial statements in which all of its subsidiaries are measured at fair value through profit or loss in accordance with HKFRS 10. Answer By looking at the ability to appoint directors shows that Indigo Co has four of the six directors, effectively giving them power and therefore control over the decision making in the company. You would not select answer C, which incorrectly adds 100% of Pink Co (the parent) and only 80% of Scarlett Co (the subsidiary). Please visit our global website instead, Can't find your location listed? D 2 and 3 only. Dormant listed companies and their subsidiaries, and dormant unlisted companies which do not fulfil the substantial asset test must prepare financial statements but are exempt from audit. B Amber only 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. -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, 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. IFRS 10 was issued in May 2011 and applies to annual periods beginning on or after 1 January 2013. A $17,000 And the financial reporting framework serves as a guideline to ensure each criterion that is needed is being fulfilled. (1) How is a parent-subsidiary relationship identified? 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. However, in In the consolidated statement of profit or loss, any dividend income received from the associate is replaced by bringing in one line that shows the parent’s share of the associate’s profit. 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. Illustration (3) See Illustration 5 below for a typical MCQ on goodwill. 31 March 2015 year ends) provided that the financial statements were not required to be registered or completed before 18 June 2015. For the fair value model, an investment in an associate is recognised initially at the transaction price, excluding transaction costs. 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. At each reporting date, an investor shall measure its investments in associates at fair value, with changes recognised in profit or loss, using the fair valuation guidance in section 11 of MPERS. 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. 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. D $104,200. provision of essential technical information. There is a further exemption under section 300 Companies Act 2014, being an exemption from the requirement to prepare group financial statements for a holding undertaking which is a fully or 50 per cent owned subsidiary undertaking of an EEA undertaking. Until inventory is sold to entities outwith the group, any profit is unrealised and should be eliminated from the consolidated accounts. Purple Co had originally purchased the goods at a cost of $4,000. 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. Malaysia Financial Reporting Standards. (5) What is an associate and how does equity accounting work? The global body for professional accountants, Can't find your location/region listed? 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. An exemption from the obligation to prepare consolidated financial statements is available for "small sized groups" of companies, of which the companies that are being consolidated: • are not public companies; • are not required to prepare consolidated financial statements under … 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. If a reliable measure of fair value is no longer available, the entity shall disclose that fact. The group statement of financial position should only include amounts owed and owing to entities outwith the group. A Violet only It is important to understand how each calculation fits into the consolidated financial statements, and this will also benefit your future studies when you revisit consolidation in your later Paper Fr and Paper SBR studies. 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 standard was published in May 2011 and is effective from 1 January 2013. 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. Illustration (6) Note: Answer A is incorrect, as although it correctly cancels the intra-group sale of $5,000, it incorrectly adds the $500 adjustment for unrealised profit to the revenue figure ($79,300 + $29,900 – $5,000 + $500 = $104,700). Half of these items remained in the inventory of Silver Co at the year end. Do any of the items remain in inventory at the end of the year? Payables         ($70,000 + $42,000 – $4,600) = $107,400. b) Section 9 Consolidated and Separate Financial Statements, – requires the ultimate Malaysian parent to prepare consolidated financial statements regardless of whether its ultimate parent that is not incorporated in Malaysia prepares consolidated financial statements. In particular, important simplifications are available for small companies and micro-entities when preparing and filing their annual accounts and reports. Please visit our global website instead. As Pink Co shows a receivable of $4,600, then in Scarlett Co’s individual accounts there must be a corresponding payable of $4,600. D All of them. 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. You do not need to prepare separate financial accounts for us. This is presented as ‘Share of profits of Associate’ as a new heading immediately before the consolidated profit before tax. If a Hong Kong company is owned by an individual, then a consolidated financial statement is mandatory. Illustration (5) Equity accounting is not the same process as consolidation. You learning providers question banks and revision material will also provide further practice. Moreover, it also requires to present the CFS along with separate financial statements in the Annual General Meeting (AGM) before the shareholders. exempt such entities from preparing consolidated financial statements. This arises when profits are made on intra-group trading and the related inventories have not subsequently been sold to customers outside the group. 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. You should look at the specimen paper and extra MTQs available on the ACCA website. For a parent company, the consolidated total assets of group at any time within the financial year must not exceed $500,000. 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