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IAS 27, 28 and 31 - 1© 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

IAS 27IAS 27

SubsidiariesSubsidiaries

AUDITAUDIT

Presented by: Tony BoutrosPresented by: Tony Boutros


AgendaAgenda

Classification

Definitions

Accounting for subsidiaries

Classification

Definitions



Four scenarios

Possible methods of accounting for investmentsPossible methods of accounting for investments

IFRS 3IAS 27

Control

Consolidate

IAS 31 IAS 28

Significant influence

Proportionate consolidation

Equity accounting

IAS 39

Other

Fair value or cost

Jointcontrol


Levels of control of an investmentLevels of control of an investment

Level ofcontrol

100 %

20 %

50 %

0 %

Control

Joint control

Significant influence

No influence

It is possible to have control even if you own less that 50 % of the outstanding shares if there are other means than

the majority of voting rights that give

power to control


ControlControl

Rebuttable presumption: more than half of voting powerControl also exists even when the investor (the Parent) owns less than half of the voting rights of an investee:

Power over more than half of the voting rights by virtue of agreement with other investorsPower to govern financial and operating policies under a statute or agreementPower to appoint/remove majority of directorsPower to cast majority of votes at directors’ meetings or other governing body

The power to govern the financial and operating policies of an entity so as to obtain benefits from its activities


Control (continued)Control (continued)

Potential voting power ( ie an entity may own share warrants, share call options, debt or equity instruments that if converted into ordinary shares gives the entity voting power or reduce another party’s voting power. The existence and effect of potential voting rights that are currently exercisable are considered when assessing whether the an entity has the power to govern the financial and operating policies of another entity.

So in deciding whether to classify an entity as a subsidiary, the issue is to focus on power to control rather than actual (“de facto”) control. So consolidation is based on the power to control (ie ability of one entity to control another) regardless of whether the power is exercised in practice.

The power to govern the financial and operating policies of an entity so as to obtain benefits from its activities


Significant influence – associates Significant influence – associates

Significant influence may arise when an investor:

Holds 20% -50% in a Company

Holds less than 20% and this influence can be clearly demonstrated. For example, if someone were to own 10 – 15% of the shares of Siemens or GE this person probably would be considered to exercise significant influence since these companies are for the most part owned by a large number of smaller shareholders.

The power to participate in the financial and operating policy decisions of the investee but not to control them


Significant influence – associates (continued)Significant influence – associates (continued)

Indications

Representation on the board of directors

Participation in policy making process

Material transactions between investor and investee

Interchange of managerial personnel

The final decision is, however, subject to professional judgment and based on substance over form. All facts and circumstances should be considered when deciding

The power to participate in the financial and operating policy decisions of the investee but not to control them


Joint ventureJoint venture

A B

Joint

venture


Joint venture (continued)Joint venture (continued)

Joint ventures can be jointly controlled…

Operations where each venturer uses its own assets (ie building a ship, where each party uses its own assets, and bears its own costs, but the sales revenue from the activity will be shared.

Assets (ie an oil pipeline that is jointly controlled by two oil producing companies)

Entities (ie jointly-controlled oil pipeline may be transferred into a separate, jointly controlled entity.)


Joint venture – definitionsJoint venture – definitions

Joint Venture - contractual arrangement in which two or more parties undertake an economic activity subject to joint control

Joint Control - contractually agreed sharing of the power to govern the financial and operating policies of an economic activity.

Joint control does require each party to have equal voting power. Joint control can be created between more than two venturers and with various proportionate holdings. For example, three parties with holdings in the ratio 40:30:30 can exercise joint control if there is a contractual agreement that requires unanimous consent for all key decisions.


Establishes joint control.

No single venturer can

control activities unilaterally

Joint venture – contractual arrangementJoint venture – contractual arrangement

Evidenced by

Contract between venturers (signed)

Minutes of discussions between venturers

Incorporated in the articles (by-laws of a jointly controlled entity)

Usually in writing


AgendaAgenda

Classification

Definitions


Classification

Definitions



DefinitionsDefinitions

Consolidated financial statements are the financial statements of a Group presented as those of a single entity

The Cost method is a method of accounting for an investment wherebey the investment is recognized at cost. The investor recognizes income from investment only to the extent that the investor receives distributions from accumulated profits of the investee arising after the date of acquisition. Distribution received in excess of such profits are regarded as a recovery of investment and are recognized as a reduction of the cost of investment.


Definitions (Continued)Definitions (Continued)

A Parent is and entity that has one or more subsidiaries.

Separate financial statements are those presented by a parent, an investor in an associate or a venturer in a jointly controlled entity, in which the investments are accounted for on the basis of the direct equity interest rather than on the basis of the reported results and net assets of the investees.

The financial statements of an entity that does not have a subsidiary, associate or venturer’s interest in a jointly controlled entity are not separate financial statements.


Accounting for subsidiariesAccounting for subsidiaries

In group financial statements:

Consolidation of all subsidiaries

Including:

Acquired and held exclusively with view to its subsequent disposal (one year from the date of classification) based on IFRS 5.6.11 issued in March 2004 by IASB

Operating under severe long-term restrictions

No exemption

Venture capital organisations (Holding)

Mutual funds

Because subsidiaries activities are dissimilar. Additional disclosure are required (Segment reporting IAS 14)


Exemption from consolidationExemption from consolidation

Conditions changed for exemption to not prepare consolidated FS:

Entity is a wholly owned subsidiary, or a partially owned subsidiary and all owners do not object

No debt or equity instruments traded in a public market

Not in process of filing its FS with a regulatory organisation to issue any class of instruments

The ultimate or any intermediate parent of the parent produces consolidated FS that comply with IFRS and are available for public use


Why consolidate?

Subsidiary

Holding

Subsidiary

Holding

Before AfterSubstantial amount of information

disappears from the parent Financial

statements


Consolidation weak points Consolidation weak points

20 % GM GM is n/a50 % GM

M - Segment F - SegmentR - Segment

Financial Services

Unit

RetailUnits

ManufacturingUnit

HOLDING

Consolidated financial statements may be less

satisfactory as a basis for Financial analysis in a

diverse group because of the averaging effect of the consolidation on financial

ratios

IAS 14 Segment reporting solve this weakness through extensive disclosure for the

primary and secondary segments


Example – consolidationExample – consolidation

Company A

Company B

Company C

Eliminations Group

PPE 100 50 30 180

Shares in subsidiaries

500 - - -500 -

Intercompany receivables

100 - - -100 -

Receivables - 400 300 700

Intercompany debt

- -100 - 100 -

Debt -100 -50 -130 -280

Equity -600 -300 -200 500 -600

Group consists of entity A and its subsidiaries B and CB has a loan with A of 100


Typical eliminationsTypical eliminations

Income statement

Inter-company purchases and sales

Inter-company dividends

Inter-company interest

Balance sheet

Inter-company loans

Inter-company receivables/payables


Consolidation – elimination of inter-company dividends

A

B

Dividend$ 10

Dividend Income

Equity$ 10 $ 10


Consolidation – elimination of inter-company dividends

What happened?

SP 120Cost 60GM 60

A

C

B 3rd party

Sale 100Cost 60GM 40

Sale 90Cost 55GM 35

Sale 120Cost 100GM 20


Minority interestMinority interest

“Minority interest is that portion of the profit or loss and net assets of a subsidiary attributable to equity interests that are not owned, directly or indirectly through subsidiaries, by the parent.”Loss applicable to the minority in a consolidated subsidiary may exceed the minority interest in the subsidiary’s equity. The excess, and any further losses applicable to the minority, are allocated against the majority interest except to the extent that the minority has a binding obligation and is able to make an additional investments to cover the losses. If the subsidiary subsequently reports profits, such profits are allocatd to the majority interest until the minority’s share of losses absorbed by the majority has been recovered


Presentation of minority interestPresentation of minority interest

Group financial statements

Income statementProfit and loss should be allocated to the parent and minority interest on the face of income statement

Balance sheetMinority interest within equity, but separate from parent shareholders’ equity


Example – minority interestExample – minority interest

Entity A (parent) –excluding entity B

Entity B

Revenue 100 50

Expenses -50 -30

Profit 50 20

Assets 324 200

Liabilities 200 70

Equity 124 130

A Group consists of entity A and its subsidiary B. A owns 80% of the shares in B, that were acquired on formation of B for 24 (at that point equity was 30). Since then the B has made profits of 100.

A accounts for B at cost in its own financial statements

Inter-company transactions are not considered. Comparative figures are not presented



Parent financial statements

Group financial

statements

Revenue 100 150

Expenses -50 -80

Profit for the period 50 70

Attributable to

Parent shareholders’ equity 50 66

Minority interest - 4

Presentation of the income statement



Parent financial statements

Group financial

statements

Shares in subsidiary 24 -

Other assets 300 500

Total assets 324 500

Liabilities 200 270

Total liabilities 200 270

Equity

- parent’s share 124 204

- minority interest - 26

Presentation of the balance sheet


IssuesIssues

Different reporting dates: In any case, the difference between the reporting date of the subsidiary and that of the parent shall be no more than three months. In case the financial statements of a subsidiary used in the preparation of consolidated financial statements are prepared as of a reporting date different from that of the parent. Adjustments shall be made for the effects of significant transactions that occur between that date and the date of the parents financial statements.

Different accounting policies: Consolidated financial statements shall be prepared using uniform accounting policies for like transactions


Immaterial subsidiariesImmaterial subsidiaries

Must have insignificant impact

Monitor

Disclosure

No disclosure


Separate financial statementsSeparate financial statements

When separate financial statements are prepared, investments in subsidiaries, jointly controlled entities and associate that are not classified as held for sale in accordance with IFRS 5 shall be accounted for either:

At costIn accordance with IAS 39

An investments in an entity shall be accounted for in accordance with IAS 39 from the date that it ceases to be a subsidiary, provided that it does not become an associate as defined in IAS 28 or a jointly controlled entity as described in IAS 31.The carrying amount of the investment at the date the entity ceases to be a subsidiary shall be regarded as the cost on initial measurement of a financial asset in accordance with IAS 39


Disclosure requirementDisclosure requirement

More disclosures required

Nature of relationship when parent does not own more than half of the voting power in a subsidiary

Reasons why owning more than half of voting power of an investee does not constitute control

Reporting date of the FS of a subsidiary if different from the parent

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2006 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

Contact details

KPMG IFRG Limited

+44 (0)20 7694 8871

www.kpmgifrg.com

Contact details

KPMG IFRG Limited

+44 (0)20 7694 8871

www.kpmgifrg.com

© 2006 kpmg ifrg limited, a uk registered company, limited by guarantee, and a member firm of kpmg...

Documents

joint control

joint venture

contractual agreement

timely information

contractual arrangement

various proportionate

economic activitythat

particular situation