Ind AS-110: Consolidated Financial Statements

Consolidated financial statements are prepared in accordance with Ind AS 110, “Consolidated Financial Statements,” which requires an entity (the parent) that controls one or more other entities (subsidiaries) to present consolidated financial statements. Here is a comprehensive overview of the process and key considerations involved in preparing consolidated financial statements under Ind AS 110.

Objective of Ind AS 110

The objective is to provide financial information about the group as a single economic entity that represents the combined financial position, financial performance, and cash flows of the parent and its subsidiaries. This enables users of the financial statements to assess the financial health, performance, and cash flows of an entity and its subsidiaries as if they were a single entity.

Process of Preparing Consolidated Financial Statements

1. Identify the Parent-Subsidiary Relationship: The first step is to identify which entities are part of the group. This involves assessing whether the parent controls the subsidiary. Control exists when the parent has power over the subsidiary, is exposed to, or has rights to variable returns from its involvement with the subsidiary, and has the ability to use its power to affect its returns.
2. Prepare the Financial Statements of Parent and Subsidiaries: Before consolidation, ensure that the financial statements of the parent and each subsidiary are prepared using consistent accounting policies. If necessary, adjustments should be made to align accounting policies.
3. Consolidation Adjustments:
   • Combine Like Items: Add together like items of assets, liabilities, equity, income, expenses, and cash flows of the parent and its subsidiaries.
   • Eliminate Intra-group Balances and Transactions: Eliminate all intra-group balances, transactions, earnings, and cash flows to ensure the consolidated financial statements present only external transactions and balances.
   • Non-controlling Interests (NCI): Calculate and present non-controlling interests in the consolidated balance sheet and consolidated statement of profit and loss separately from the equity attributable to the owners of the parent.
4. Goodwill and Fair Value Adjustments:
   • Goodwill: Calculate goodwill as the excess of the consideration transferred, the amount of any non-controlling interest in the acquiree, and, in a business combination achieved in stages, the fair value of the acquirer’s previously held equity interest in the acquiree, over the net identifiable assets acquired.
   • Fair Value Adjustments: Adjust the identifiable assets and liabilities of the subsidiary to their fair values at the acquisition date. Depreciate or amortize these adjustments as appropriate over their useful lives.
5. Consolidated Financial Statements Presentation:
   • Statement of Financial Position: Present a consolidated statement of financial position that includes the total assets and liabilities of the group, including non-controlling interests.
   • Statement of Profit and Loss: Present a consolidated statement of profit and loss that includes the total income and expenses of the group, distinguishing the profit or loss attributable to non-controlling interests and owners of the parent.
   • Statement of Changes in Equity: Show the changes in equity for the reporting period, including the amounts attributable to owners of the parent and non-controlling interests.
   • Statement of Cash Flows: Present a consolidated statement of cash flows, indicating the cash flows from operating, investing, and financing activities of the group as a whole.
6. Disclosures: Provide adequate disclosures to enable users to understand the basis of consolidation, the financial effects of acquisitions or disposals of subsidiaries, and the interests of the parent and non-controlling interests.

Problems on Consolidated Financial Statements (as per Ind AS 110)

Creating detailed problems on Consolidated Financial Statements as per Ind AS 110 (Consolidated Financial Statements) involves understanding the principles and mechanics behind consolidation. Below, I’ll outline a simplified problem scenario involving a parent company and its subsidiary to illustrate the consolidation process. This exercise will focus on key aspects such as calculating goodwill, non-controlling interest, and consolidating balances.

Problem Scenario:

ParentCo acquires 80% of SubsidiaryCo on January 1, 202X, for ₹100,000. On this date, SubsidiaryCo’s identifiable net assets are valued at ₹80,000. Assume all identifiable assets and liabilities of SubsidiaryCo are recorded at fair value except for an item of plant that had a fair value of ₹10,000 more than its carrying amount. The plant has a remaining useful life of 10 years. SubsidiaryCo’s financial statements at the acquisition date show equity comprising:

• Share Capital: ₹50,000
• Retained Earnings: ₹30,000

During the year, SubsidiaryCo earned a profit of ₹20,000 and declared dividends of ₹5,000. Assume ParentCo’s standalone financials show a profit of ₹60,000 and no transactions with SubsidiaryCo.

Objectives:

1. Calculate Goodwill.
2. Determine Non-controlling Interest (NCI) at acquisition.
3. Prepare consolidated financial statements extracts (equity and profit for the year).

Solution Steps:

1. Calculate Goodwill:

Goodwill = Consideration Transferred – (Share in Net Identifiable Assets of Subsidiary)

= ₹100,000 – (80% of (₹80,000 + ₹10,000 adjustment for plant))

= ₹100,000 – (80% of ₹90,000)

= ₹100,000 – ₹72,000

= ₹28,000

2. Determine Non-controlling Interest (NCI) at Acquisition:

NCI at Fair Value = NCI Percentage * (Net Identifiable Assets + Fair Value Adjustments)

= 20% * (₹80,000 + ₹10,000)

= 20% * ₹90,000

= ₹18,000

3. Prepare Consolidated Financial Statements Extracts:

• Consolidated Retained Earnings:

ParentCo’s Profit: ₹60,000

SubsidiaryCo’s Profit attributable to ParentCo (80% of ₹20,000): ₹16,000 Consolidated Retained Earnings: ParentCo’s Retained Earnings + Share in SubsidiaryCo’s Profit – Depreciation Adjustment – Dividends from SubsidiaryCo

= ₹60,000 + ₹16,000 – [(₹10,000 / 10 years) * 80%] – 0

= ₹76,000 – ₹800

= ₹75,200

• Consolidated Equity:

Share Capital (ParentCo): Assume ₹100,000

Retained Earnings: ₹75,200

NCI: ₹18,000 + (20% of SubsidiaryCo’s Profit – 20% of Dividends)

= ₹18,000 + (20% of ₹20,000) – (20% of ₹5,000)

= ₹18,000 + ₹4,000 – ₹1,000

= ₹21,000 Total Equity: ₹100,000 + ₹75,200 + ₹21,000

= ₹196,200

Notes:

• The depreciation adjustment for the fair value uplift of the plant (₹10,000 / 10 years = ₹1,000 per year) affects both the subsidiary’s profit attributable to the parent and the NCI.
• This simplified example doesn’t account for intra-group transactions, potential deferred taxes from fair value adjustments, or changes in the NCI post-acquisition.