Author: indiafreenotes

Consolidation procedures

Intragroup balances, transactions, income, and expenses should be eliminated in full. Intragroup losses may indicate that an impairment loss on the related asset should be recognised. [IAS 27.24-25]

The financial statements of the parent and its subsidiaries used in preparing the consolidated financial statements should all be prepared as of the same reporting date, unless it is impracticable to do so. [IAS 27.26] If it is impracticable a particular subsidiary to prepare its financial statements as of the same date as its parent, adjustments must be made for the effects of significant transactions or events that occur between the dates of the subsidiary’s and the parent’s financial statements. And in no case may the difference be more than three months. [IAS 27.27]

Consolidated financial statements must be prepared using uniform accounting policies for like transactions and other events in similar circumstances. [IAS 27.28]

Minority interests should be presented in the consolidated balance sheet within equity, but separate from the parent’s shareholders’ equity. Minority interests in the profit or loss of the group should also be separately disclosed. [IAS 27.33]

Where losses applicable to the minority exceed the minority interest in the equity of the relevant subsidiary, the excess, and any further losses attributable to the minority, are charged to the group unless the minority has a binding obligation to, and is able to, make good the losses. Where excess losses have been taken up by the group, if the subsidiary in question subsequently reports profits, all such profits are attributed to the group until the minority’s share of losses previously absorbed by the group has been recovered. [IAS 27.35]

Partial disposal of an investment in a subsidiary

The accounting depends on whether control is retained or lost:

• Partial disposal of an investment in a subsidiary while control is retained. This is accounted for as an equity transaction with owners, and gain or loss is not recognised.
• Partial disposal of an investment in a subsidiary that results in loss of control. Loss of control triggers remeasurement of the residual holding to fair value. Any difference between fair value and carrying amount is a gain or loss on the disposal, recognised in profit or loss. Thereafter, apply IAS 28, IAS 31, or IAS 39, as appropriate, to the remaining holding.

Acquiring additional shares in the subsidiary after control is obtained

Acquiring additional shares in the subsidiary after control was obtained is accounted for as an equity transaction with owners (like acquisition of ‘treasury shares’). Goodwill is not remeasured.

Separate financial statements of the parent or investor in an associate or jointly controlled entity

In the parent’s/investor’s individual financial statements, investments in subsidiaries, associates, and jointly controlled entities should be accounted for either: [IAS 27.37]

• at cost, or
• in accordance with IAS 39.

The parent/investor shall apply the same accounting for each category of investments. Investments that are classified as held for sale in accordance with IFRS 5 shall be accounted for in accordance with that IFRS. [IAS 27.37] Investments carried at cost should be measured at the lower of their carrying amount and fair value less costs to sell. The measurement of investments accounted for in accordance with IAS 39 is not changed in such circumstances. [IAS 27.38] An entity shall recognise a dividend from a subsidiary, jointly controlled entity or associate in profit or loss in its separate financial statements when its right to receive the dividend is established. [IAS 27.38A]

Disclosure

Disclosures required in consolidated financial statements: [IAS 27.40]

• The nature of the relationship between the parent and a subsidiary when the parent does not own, directly or indirectly through subsidiaries, more than half of the voting power,
• The reasons why the ownership, directly or indirectly through subsidiaries, of more than half of the voting or potential voting power of an investee does not constitute control,
• The reporting date of the financial statements of a subsidiary when such financial statements are used to prepare consolidated financial statements and are as of a reporting date or for a period that is different from that of the parent, and the reason for using a different reporting date or period, and
• The nature and extent of any significant restrictions on the ability of subsidiaries to transfer funds to the parent in the form of cash dividends or to repay loans or advances.

Disclosures required in separate financial statements that are prepared for a parent that is permitted not to prepare consolidated financial statements: [IAS 27.41]

• The fact that the financial statements are separate financial statements; that the exemption from consolidation has been used; the name and country of incorporation or residence of the entity whose consolidated financial statements that comply with IFRS have been produced for public use; and the address where those consolidated financial statements are obtainable,
• A list of significant investments in subsidiaries, jointly controlled entities, and associates, including the name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held, and
• A description of the method used to account for the foregoing investments.

Disclosures required in the separate financial statements of a parent, investor in a jointly controlled entity, or investor in an associate: [IAS 27.42]

• The fact that the statements are separate financial statements and the reasons why those statements are prepared if not required by law,
• A list of significant investments in subsidiaries, jointly controlled entities, and associates, including the name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held, and
• A description of the method used to account for the foregoing investments.

Partial disposal of an investment in a subsidiary

The accounting depends on whether control is retained or lost:

• Partial disposal of an investment in a subsidiary while control is retained. This is accounted for as an equity transaction with owners, and gain or loss is not recognised.
• Partial disposal of an investment in a subsidiary that results in loss of control. Loss of control triggers remeasurement of the residual holding to fair value. Any difference between fair value and carrying amount is a gain or loss on the disposal, recognised in profit or loss. Thereafter, apply IAS 28, IAS 31, or IAS 39, as appropriate, to the remaining holding.

Acquiring additional shares in the subsidiary after control is obtained

Acquiring additional shares in the subsidiary after control was obtained is accounted for as an equity transaction with owners (like acquisition of ‘treasury shares’). Goodwill is not remeasured.

Separate financial statements of the parent or investor in an associate or jointly controlled entity

In the parent’s/investor’s individual financial statements, investments in subsidiaries, associates, and jointly controlled entities should be accounted for either: [IAS 27.37]

• at cost
• in accordance with IAS 39.

The parent/investor shall apply the same accounting for each category of investments. Investments that are classified as held for sale in accordance with IFRS 5 shall be accounted for in accordance with that IFRS. [IAS 27.37] Investments carried at cost should be measured at the lower of their carrying amount and fair value less costs to sell. The measurement of investments accounted for in accordance with IAS 39 is not changed in such circumstances. [IAS 27.38] An entity shall recognise a dividend from a subsidiary, jointly controlled entity or associate in profit or loss in its separate financial statements when its right to receive the dividend is established. [IAS 27.38A]

Disclosure

Disclosures required in consolidated financial statements: [IAS 27.40]

• The nature of the relationship between the parent and a subsidiary when the parent does not own, directly or indirectly through subsidiaries, more than half of the voting power.
• The reasons why the ownership, directly or indirectly through subsidiaries, of more than half of the voting or potential voting power of an investee does not constitute control
• The reporting date of the financial statements of a subsidiary when such financial statements are used to prepare consolidated financial statements and are as of a reporting date or for a period that is different from that of the parent, and the reason for using a different reporting date or period.
• The nature and extent of any significant restrictions on the ability of subsidiaries to transfer funds to the parent in the form of cash dividends or to repay loans or advances.

Disclosures required in separate financial statements that are prepared for a parent that is permitted not to prepare consolidated financial statements: [IAS 27.41]

• The fact that the financial statements are separate financial statements; that the exemption from consolidation has been used; the name and country of incorporation or residence of the entity whose consolidated financial statements that comply with IFRS have been produced for public use; and the address where those consolidated financial statements are obtainable,
• A list of significant investments in subsidiaries, jointly controlled entities, and associates, including the name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held, and
• a description of the method used to account for the foregoing investments.

Disclosures required in the separate financial statements of a parent, investor in a jointly controlled entity, or investor in an associate: [IAS 27.42]

• The fact that the statements are separate financial statements and the reasons why those statements are prepared if not required by law,
• A list of significant investments in subsidiaries, jointly controlled entities, and associates, including the name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held.
• A description of the method used to account for the foregoing investments.

Preparation of separate financial statements

Requirement for separate financial statements

IAS 27 does not mandate which entities produce separate financial statements available for public use. It applies when an entity prepares separate financial statements that comply with International Financial Reporting Standards. [IAS 27(2011).3]

Financial statements in which the equity method is applied are not separate financial statements. Similarly, the financial statements of an entity that does not have a subsidiary, associate or joint venturer’s interest in a joint venture are not separate financial statements. [IAS 27(2011).7]

An investment entity that is required, throughout the current period and all comparative periods presented, to apply the exception to consolidation for all of its subsidiaries in accordance with of IFRS 10 Consolidated Financial Statements presents separate financial statements as its only financial statements. [IAS 27(2011).8A]

[Note: The investment entity consolidation exemption was introduced into IFRS 10 by Investment Entities, issued on 31 October 2012 and effective for annual periods beginning on or after 1 January 2014.]

Choice of accounting method

When an entity prepares separate financial statements, investments in subsidiaries, associates, and jointly controlled entities are accounted for either: [IAS 27(2011).10]

• at cost, or
• in accordance with IFRS 9 Financial Instruments (or IAS 39 Financial Instruments: Recognition and Measurement for entities that have not yet adopted IFRS 9),
• using the equity method as decribed in IAS 28 Investments in Associates and Joint Ventures. [See the amendment information below.]

The entity applies the same accounting for each category of investments. Investments that are accounted for at cost and classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations are accounted for in accordance with that IFRS. Investments carried at cost should be measured at the lower of their carrying amount and fair value less costs to sell. The measurement of investments accounted for in accordance with IFRS 9 is not changed in such circumstances.

If an entity elects, in accordance with IAS 28 (as amended in 2011), to measure its investments in associates or joint ventures at fair value through profit or loss in accordance with IFRS 9, it shall also account for those investments in the same way in its separate financial statements. [IAS 27(2011).11]

Investment entities

[Note: The investment entity consolidation exemption was introduced into IFRS 10 by Investment Entities, issued on 31 October 2012 and effective for annual periods beginning on or after 1 January 2014.]

If a parent investment entity is required, in accordance with IFRS 10, to measure its investment in a subsidiary at fair value through profit or loss in accordance with IFRS 9 or IAS 39, it is required to also account for its investment in a subsidiary in the same way in its separate financial statements. [IAS 27(2011).11A]

When a parent ceases to be an investment entity, the entity can account for an investment in a subsidiary at cost (based on fair value at the date of change or status) or in accordance with IFRS 9.  When an entity becomes an investment entity, it accounts for an investment in a subsidiary at fair value through profit or loss in accordance with IFRS 9. [IAS 27(2011).11B]

Recognition of dividends

An entity recognises a dividend from a subsidiary, joint venture or associate in profit or loss in its separate financial statements when its right to receive the dividend in established. [IAS 27(2011).12]

(Accounting for dividends where the equity method is applied to investments in joint ventures and associates is specified in IAS 28 Investments in Associates and Joint Ventures.)

Group reorganisations

Specified accounting applies in separate financial statements when a parent reorganises the structure of its group by establishing a new entity as its parent in a manner satisfying the following criteria: [IAS 27(2011).13]

• the new parent obtains control of the original parent by issuing equity instruments in exchange for existing equity instruments of the original parent
• the assets and liabilities of the new group and the original group are the same immediately before and after the reorganisation, and
• the owners of the original parent before the reorganisation have the same absolute and relative interests in the net assets of the original group and the new group immediately before and after the reorganisation.

A parent shall present consolidated financial statements in which it consolidates its investments in subsidiaries in accordance with this Standard. Where a parent is a company, the consolidated financial statements shall be in the form set out in Appendix C to this Standard or as near thereto as circumstances admit.

A parent presents separate financial statements in compliance with paragraphs 3843.

Scope of Consolidated Financial Statements

Consolidated financial statements shall include all subsidiaries of the parent.

Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than half of the voting power of an entity unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control. Control also exists when the parent owns half or less of the voting power of an entity when there is:

Footnotes:

If on acquisition a subsidiary meets the criteria to be classified as held for sale in accordance with Ind AS 105 Non-current Assets Held for Sale and Discontinued Operations, it shall be accounted for in accordance with that Indian Accounting Standard.

See also Appendix A Consolidation Special Purpose Entities.

(a) power over more than half of the voting rights by virtue of an agreement with other investors;

(b) power to govern the financial and operating policies of the entity under a statute or an agreement;

(c) power to appoint or remove the majority of the members of the board of directors or equivalent governing body and control of the entity is by that board or body; or

(d) power to cast the majority of votes at meetings of the board of directors or equivalent governing body and control of the entity is by that board or body.

An entity may own share warrants, share call options, debt or equity instruments that are convertible into ordinary shares3, or other similar instruments that have the potential, if exercised or converted, to give the entity voting power or reduce another partys voting power over the financial and operating policies of another entity (potential voting rights). The existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by another entity, are considered when assessing whether an entity has the power to govern the financial and operating policies of another entity. Potential voting rights are not currently exercisable or convertible when, for example, they cannot be exercised or converted until a future date or until the occurrence of a future event.

In assessing whether potential voting rights contribute to control, the entity examines all facts and circumstances (including the terms of exercise of the potential voting rights and any other contractual arrangements whether considered individually or in combination) that affect potential voting rights, except the intention of management and the financial ability to exercise or convert such rights.

A subsidiary is not excluded from consolidation simply because the investor is a venture capital organisation, mutual fund, unit trust or similar entity.

A subsidiary is not excluded from consolidation because its business activities are dissimilar from those of the other entities within the group. Relevant information is provided by consolidating such subsidiaries and disclosing additional information in the consolidated financial statements about the different business activities of subsidiaries. For example, the disclosures required by Ind AS 108 Operating Segments help to explain the significance of different business activities within the group.

A parent company that presents its consolidated financial statements must consolidate all of its subsidiaries, foreign as well as domestic.

Where a company doesn’t have any subsidiary, however, has associates and/or joint ventures such company also needs to prepare consolidated financial statements as per Accounting Standard 23 – Accounting for Associates in Consolidated Financial Statements and Accounting Standard 27 – Financial Reporting of Interests in JVs respectively.

Scope

• This Standard shall be applied in the preparation and presentation of consolidated financial statements for a group of entities under the control of a parent.
• This Standard does not deal with methods of accounting for business combinations and their effects on consolidation, including goodwill arising on a business combination (see Ind AS 103 Business Combinations).
• This Standard shall also be applied in accounting for investments in subsidiaries, jointly controlled entities and associates when an entity elects, or is required by law, to present separate financial statements.

Derecognition refers to the removal of an asset or liability (or a portion thereof) from an entity’s balance sheet. Derecognition questions can arise with respect to all types of assets and liabilities. This project focuses on financial instruments. Questions regarding derecognition of assets and liabilities often arise in the context of certain special purpose entities and whether those entities should be included in a set of consolidated financial statements.

Derecognition is the removal of a previously recognized financial asset or financial liability from an entity’s balance sheet. A financial asset should be derecognized if either the entity’s contractual rights to the asset’s cash flows have expired or the asset has been transferred to a third party (along with the risks and rewards of ownership). If the risks and rewards of ownership have not passed to the buyer, then the selling entity must still recognize the entire financial asset and treat any consideration received as a liability.

The IASB agreed to consider both a comprehensive project on derecognition or all types of assets and liabilities and also a separate, narrower scope project that would explore the need to revise guidance in IAS 39 Financial Instruments: Recognition and Measurement in the area of derecognition of financial instruments. This limited scope project would address questions that have arisen with regard to the application of conflicting aspects of IAS 39’s guidance on derecognition. The project would result in an amendment to IAS 39 possibly through issuance of a separate standard on derecognition that supersedes that section of IAS 39.

Standard IAS 39 provides extensive guidance on derecognition of a financial asset. Before deciding on derecognition, an entity must determine whether derecognition is related to:

1. A financial asset (or a group of similar financial assets) in its entirety, or
2. A part of a financial asset (or a part of a group of similar financial assets). The part must fulfil the following conditions (if not, then asset is derecognized in its entirety):

• The part comprises only specifically defined cash flows from a financial asset (or group)
• the part comprises only a fully proportionate (pro rata) share of the cash flows from a financial asset (or group)
• the part comprises only a fully proportionate (pro rata) share of specifically identified cash flows from a financial asset (or group)

An entity shall derecognize the financial asset when:

• The contractual rights to the cash flows from the financial asset expire, or
• an entity transfers the financial asset and the transfer qualifies for the derecognition

Transfers of financial assets are discussed in more details. First of all, an entity must decide whether the asset was transferred or not. Then, if the financial asset was transferred, the entity must determine whether also risks and rewards from the financial asset were transferred.

Derecognition of a financial liability

A financial liability should be removed from the balance sheet when, and only when, it is extinguished, that is, when the obligation specified in the contract is either discharged or cancelled or expires. [IAS 39.39] Where there has been an exchange between an existing borrower and lender of debt instruments with substantially different terms, or there has been a substantial modification of the terms of an existing financial liability, this transaction is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. A gain or loss from extinguishment of the original financial liability is recognised in profit or loss. [IAS 39.40-41]

Financial instrument: a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

Financial Assets

Any asset that is:

• Cash
• An equity instrument of another entity
• A contractual right

1. to receive cash or another financial asset from another entity; or
2. to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity; or

• a contract that will or may be settled in the entity’s own equity instruments and is:
• a non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own equity instruments
• a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose the entity’s own equity instruments do not include instruments that are themselves contracts for the future receipt or delivery of the entity’s own equity instruments
• puttable instruments classified as equity or certain liabilities arising on liquidation classified by IAS 32 as equity instruments

Financial Liabilities

Any liability that is:

1. a contractual obligation:

• To deliver cash or another financial asset to another entity;
• To exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity; or

2. a contract that will or may be settled in the entity’s own equity instruments and is

• a non-derivative for which the entity is or may be obliged to deliver a variable number of the entity’s own equity instruments or
• a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose the entity’s own equity instruments do not include: instruments that are themselves contracts for the future receipt or delivery of the entity’s own equity instruments; puttable instruments classified as equity or certain liabilities arising on liquidation classified by IAS 32 as equity instruments

Equity instrument: Any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

Fair value: The amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

The definition of financial instrument used in IAS 32 is the same as that in IAS 39.

Puttable instrument: a financial instrument that gives the holder the right to put the instrument back to the issuer for cash or another financial asset or is automatically put back to the issuer on occurrence of an uncertain future event or the death or retirement of the instrument holder.

Classification as liability or equity

The fundamental principle of IAS 32 is that a financial instrument should be classified as either a financial liability or an equity instrument according to the substance of the contract, not its legal form, and the definitions of financial liability and equity instrument. Two exceptions from this principle are certain puttable instruments meeting specific criteria and certain obligations arising on liquidation. The entity must make the decision at the time the instrument is initially recognised. The classification is not subsequently changed based on changed circumstances. [IAS 32.15]

A financial instrument is an equity instrument only if (a) the instrument includes no contractual obligation to deliver cash or another financial asset to another entity and (b) if the instrument will or may be settled in the issuer’s own equity instruments, it is either:

• A non-derivative that includes no contractual obligation for the issuer to deliver a variable number of its own equity instruments; or
• A derivative that will be settled only by the issuer exchanging a fixed amount of cash or another financial asset for a fixed number of its own equity instruments. [ias 32.16]

Objective of IAS 32

The stated objective of IAS 32 is to establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and liabilities. [IAS 32.1]

IAS 32 addresses this in a number of ways:

• Clarifying the classification of a financial instrument issued by an entity as a liability or as equity
• Prescribing the accounting for treasury shares (an entity’s own repurchased shares)
• Prescribing strict conditions under which assets and liabilities may be offset in the balance sheet.

Parties to Financial Instruments: In case of Financial Instruments, the two parties are called:

• Issuer of an Instrument who presents it on the Liability side of the Balance Sheet as per Schedule III- Division II.
• Holder of an Instrument who presents it on the Asset side of the Balance Sheet as per Schedule III- Division II.

An analysis of Schedule III- Division II gives us an insight as under:

1. Asset segregated into non-current and current; further segregated in terms on non-financial and financial in nature.
2. Liability is segregated into Equity and Liability; liabilities are split in terms of non-current and current and further segregated in terms of non-financial and financial in nature.

IAS 32 applies in presenting and disclosing information about all types of financial instruments with the following exceptions: [IAS 32.4]

• Interests in subsidiaries, associates and joint ventures that are accounted for under IAS 27 Consolidated and Separate Financial Statements, IAS 28 Investments in Associates or IAS 31 Interests in Joint Ventures (or, for annual periods beginning on or after 1 January 2013, IFRS 10 Consolidated Financial Statements, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures). However, IAS 32 applies to all derivatives on interests in subsidiaries, associates, or joint ventures.
• Employers’ rights and obligations under employee benefit plans (see IAS 19 Employee Benefits)
• Insurance contracts (see IFRS 4 Insurance Contracts). However, IAS 32 applies to derivatives that are embedded in insurance contracts if they are required to be accounted separately by IAS 39
• Financial instruments that are within the scope of IFRS 4 because they contain a discretionary participation feature are only exempt from applying paragraphs 15-32 and AG25-35 (analysing debt and equity components) but are subject to all other IAS 32 requirements
• Contracts and obligations under share-based payment transactions (see IFRS 2 Share-based Payment) with the following exceptions:
• This standard applies to contracts within the scope of IAS 32.8-10 (see below)
• Paragraphs 33-34 apply when accounting for treasury shares purchased, sold, issued or cancelled by employee share option plans or similar arrangements