Chapter 13: Group Accounts: Basic Principles

Question 1

What happens when one company (P Ltd) buys shares in another company (S Ltd)?

Answer 1

P will:
Dr Investment
Cr Cash

S Ltd’s books are not impacted, as the transaction is between P Ltd and the owners of S Ltd, rather than S itself

Question 2

When does P have ‘power’ and therefore ‘control’?

Answer 2

If P Ltd owns more than 50% of the ordinary shares of S Ltd, this will usually give P Ltd ‘power’ and therefore ‘control’ of S Ltd

Question 3

What is the key principle underlying group accounts?

Answer 3

The need to reflect the economic substance of the relationship (substance over form)

Question 4

What is the objective of the consolidated financial statements?

Answer 4

To show the position of the group as if it were a single economic entity, therefore:

• 100% of the assets and liabilities of P and S are included in the consolidated statement of financial position
• 100% of the income and expenses of P and S are included in the consolidated statement of profit or loss

Question 5

What are the basic steps to a consolidated statement of financial position?

Answer 5

1. Consolidate 100% of assets and liabilities of Parent and Subsidiary with the exception of the investment in Subsidiary within Parent’s statement of financial position (this reflects the control which held)
2. Include parent’s share capital and share premium only in equity
3. Consolidate all of Parent’s retained earnings but only consolidate Parent’s share of Subsidiary’s retained earnings since acquisition
4. If Parent Ltd does not own 100% of Subsidiary Ltd then reflect in equity that the non-controlling interest (NCI) owns a share of the net assets/fair value of identifiable assets acquired and liabilities assumed being consolidated

Question 6

Where is ownership reflected?

Answer 6

Ownership is reflected in the equity section of the statement of financial position. The parent will own a controlling share of the subsidiary’s equity, with the remainder being owned by the NCI (being other shareholders)

Question 7

What does the consolidated statement of profit or loss (CSPL) show?

Answer 7

Shows the profit generated by the group’s resources in the related consolidated statement of financial position

Question 8

What does IFRS 12 Disclosure of Interests in Other Entities require disclosure of?

Answer 8

• Significant judgements and assumptions made in determining the nature of an interest in another entity or arrangement, and in determining the type of joint arrangement in which an interest is held
• Information about interests in subsidiaries, associates, joint arrangements and structured entities that are not controlled by an investor

Question 9

For subsidiaries, what disclosure is required?

Answer 9

• The interest that the non-controlling interest has in the group’s activities and cash flows
• The nature and extent of significant restrictions on an investor’s ability to use group assets and liabilities
• The nature of the risks associated with an entity’s interests in consolidated structured entities
• The consequences of changes in ownership interest in subsidiaries