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Summary Financial Reporting 2 (ACC2012W) - GROUP ACCOUNTING
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Great summary of the basics of group accounting
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GROUP ACCOUNTINGINTRODUCTION
Group accounting is effectively combining the economic interests of a collection of
businesses and presenting these businesses as ONE entity or ONE group.
INVESTMENT IN SUBSIDIARY
An investment in subsidiary is a financial instrument.
A subsidiary is one entity that is controlled by another entity.
- All these subsidiaries make up the investment in subsidiary balance on the holding
company’s balance sheet.
The percentage shareholding in each of these subsidiaries indicate that the holding
company has control over the assets and liabilities of that subsidiary.
- Even if the percentage shareholding is less than 50%, the company may have an
agreement with another shareholder that they control all the assets and liabilities.
GROUP
A group consists of a parent and all of its subsidiaries.
A parent is one entity that controls another entity.
- In the context of group accounting, the word control means the parent holds 50%
plus one share of the other entity.
IN THE FINANCIAL STATEMENTS
In the group financial statements, there will be no investment in subsidiaries balance. In
the group column, instead of showing the investment in subsidiary or the investment in
subsidiaries, we rather show the assts and the liabilities controlled by the parent through
its various subsidiaries.
- This presents more useful information to the users of the financial statements.
The group financial statements, we are combining the financial statements of individual
entities so that the financial position and performance were presented as if they are a
single economic entity.
GROUP VERSUS COMPANY
They are similar in that both reflect the assets, equity and liability sections of the
respective reporting entity.
,However, there are different types of assets and liabilities presented.
- The investment in subsidiary balance is in the company, but not the group.
- The subsidiaries’ asset and liability balances are in the group, not the company.
Parent
Subsidiary Subsidiary
1 2
ASSET DEFINITION
An asset is a present economic resource controlled by the entity as a result of past events.
Therefore, we do not need to own the asset in order to recognise it as an asset. We can
control some assets without purchasing the asset directly.
In the context of group accounting, if one entity controls another, this implies that the first
entity is able to control the assets of the second entity. Thus the assets (resources) of the
subsidiary are controlled by the parent (via the shareholding).
Therefore, if we purchase more than half of ordinary the shares (voting rights) in a
company we can control the company, and thus all its assets.
NOTE: more than half means to own 50% of the shares plus one vote.
DOUBLE COUNTING
WHY DOES THE PARENT NOT SHOW THE EQUITY, ASSETS AND LIABILITIES
OF THE SUBSIDIARY ON ITS STATEMENTS?
This is because it would be double counting.
, E=A–L
NAV = E
NAV= A–L
If we were to show both equity and the assets and liabilities, we would be double counting.
We must either show the equity, or the assets and liabilities.
- It is then more decision-useful information to show the assets and liabilities only,
as this shows which assets are actually generating a return.
BUSINESS COMBINATIONS
A business is an integrated set of activities and assets that is capable of being conducted
and managed for the purpose of providing goods or services to customers, generating
investment income (such as dividends or interest) or generating other income from
ordinary activities.
A business combination is a transaction or other event in which an acquirer obtains
control of one or more businesses.
- Mergers and mergers of equals are business combinations.
One can buy a business by purchasing all the assets and liabilities after doing due
diligence, or by purchasing shares.
TERMINOLOGY – APPENDIX A
An acquirer is the entity that obtains control of the acquiree.
The acquiree is the business or businesses that the acquirer obtains control of in a
business combination.
The acquisition date is the date on which the acquirer obtains control of the acquiree.
CONTROL - IFRS 10.5-6
“An investor regardless of nature of its involvement with an entity, the investee shall
determine whether it is a parent by assessing whether it controls the investee.
An investor controls an investee when it is exposed, or has rights to, variable returns from its
involvement with the investee and has the ability to affect those returns through its power over
the investee.”
Control is presumed when the acquirer purchases more than half (50% plus 1) of voting
rights of the acquiree.
Control is the power to govern the financial and operating policies of an entity (or
business) so as to obtain benefits from its activities.
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