Consolidation of a foreign operation

In the past all kinds of different methods of translating foreign currency financial statements existed, called current rate method and temporal rate method.

IAS 21.39 defines the current (very practical) approach to translation of foreign currency financial statements for consolidation in the presentation currency as follows:

‘The results and financial position of an entity whose functional currency is not the currency of a hyperinflationary economy shall be translated into a different presentation currency using the following procedures:

  1. assets and
Continue reading

Consolidation: Assess control over an investment

In many cases, when decision-making is controlled by voting rights, and those voting rights entitle an entity to returns (e.g., voting shares), it is clear that whoever holds a majority of those voting rights controls the investee. However, in other cases (such as for structured entities, or when there are potential voting rights, or less than a majority of voting rights), it may not be so clear. In those instances, further analysis is needed and the factors in the definition … Continue reading

Allocation between Controlling and Non-controlling interest

When a parent entity first obtains control over another entity, it recognises any non-controlling interest in the new subsidiary’s net assets as illustrated in the example below. In subsequent periods the parent allocates to the non-controlling interest its proportion of:

Continue reading

Financial reports in consolidation have the same reporting date

The basic requirement in IFRS 10 is that each group entity’s financial statements are drawn up to the same reporting date for consolidation purposes. Where reporting dates differ, additional financial information is prepared for consolidation purposes, unless impractical [IFRS 10.B92].

IFRS 10 does allow some flexibility if it is impractical to obtain the additional information. In that situation the subsidiary’s financial statements are used for consolidation purposes, with adjustments for significant transactions or events occurring outside the period covered Continue reading

Uniform accounting policies for consolidation

For IFRS, the parent company and its subsidiaries must have and apply uniform (i.e. the same) accounting policies. If not, appropriate adjustments are made when preparing the consolidated financial statements to ensure conformity. The extent and complexity of this exercise depend on the nature of the group’s activities and the basis of preparation of individual group entities’ financial statements.

Many times overlooked is that not only subsidiaries need to apply the same accounting policies as the parent that consolidates Continue reading

Consolidation of overseas subsidiaries

IFRS 10 Consolidated Financial StatementsThe financial statements of foreign subsidiaries must be translated into the group’s presentation currency (which is often, but not always, the parent’s functional currency). The relevant requirements are included in IAS 21 ‘The Effects of Changes in Foreign Exchange Rates’.

In summary the process involves:

  • translating assets and liabilities at closing rate,
  • translating income and expenses at transaction date rates,
  • recording resulting exchange differences in other comprehensive income.
Continue reading

Elimination of the parent’s investment

The parent company will report the ‘investments in subsidiaries’ as an asset, with the subsidiary reporting the equivalent equity owned by the parent as equity on its own accounts. At the consolidated level, an elimination adjustment must be recorded so that the consolidated statement is not overstated by the amount of equity in subsidiaries recorded by the parent. The elimination adjustment is made with the intent of offsetting the intra-group transaction, such that the values are not double counted … Continue reading

Elimination of the parent’s investment

The parent company will report the ‘investments in subsidiaries’ as an asset, with the subsidiary reporting the equivalent equity owned by the parent as equity on its own accounts. At the consolidated level, an elimination adjustment must be recorded so that the consolidated statement is not overstated by the amount of equity in subsidiaries recorded by the parent. The elimination adjustment is made with the intent of offsetting the intra-group transaction, such that the values are not double counted at … Continue reading

Elimination of intra-group transactions

Intra-group transactions are transactions between entities within a group of entities and that group is consolidated into one set of Consolidated Financial Statements. Intra-group transactions are not with third parties outside the scope of consolidation. In the Consolidated Financial Statements only balances and transactions remain with third parties outside the scope of consolidation.… Continue reading

Consolidation in summary

Consolidated financial statements present the financial position and results of a group (a parent and its subsidiaries) as those of a single economic entity. The key steps to achieve this are:

  • currency conversion: assets, liabilities, equity, income, expenses and cash flow need to be translate into the reporting currency. Positions at closing rates and streams at average rates or transaction date rates,
  • combine like items of assets, liabilities, equity, income, expenses and cash flows from the financial statements of each
Continue reading