1、CHAPTER 12 Group financial statements,Contents,Introduction Company groups Rationale for group financial statements Current practice Acquisition accounting Associated companies Joint ventures,Group financial statements,Group (or consolidated) financial statements are the financial statements of a se
2、t of two or more enterprises organised as an economic entity Group is defined according to concept of “control” Control = power (de jure or de facto) to govern the financial and operating policies of an entity so as to obtain benefits from its activities (IFRS),Company groups,Company group character
3、istics Vertical group Horizontal group Conglomerate Group expansion Development of new subsidiaries Acquisition by takeover of other companies Meger between companies,Shares - Rights,Membership rights : Influence on management, voting power Equity rights: Right to participate in distribution of prof
4、its + equivalent part of liquidation balance In principle: rights are proportional to capital share Exceptions: preferent shares, limitations to voting power, multiple votes per share,.,Types of participating shareholdings,Group structure,Enterprise A,Enterprise C,Enterpise B,Enterprise D,Enterprise
5、 E,51%,Enterprise F,100%,25%,100%,9%,Rationale for group financial statements,Interdependent relationships within a group (patrimonial, contractual, personal ties) Loss of part of their independence of individual entities Common or unified management Economic interest of the group individual interes
6、ts of legal entities involvedIt is economically more relevant to present the financial statement of the economic whole as an aggregate of all assets and liabilities under unified control,From individual to group accounts,Current practice,IAS 27 Consolidated and Separate Financial Statements IFRS 3 B
7、usiness Combinations IAS 28 Investments in Associates IAS 31 Investments in Joint Ventures Seventh EC Company law Directive,Offsetting the investment in a subsidiary,Acquisition accounting,Purchase method of accounting Fair value adjustments of acquired assets and liabilities Subsequent measurement
8、of goodwill Minority interests Merger accounting Group income statement,Purchase method of accounting,Acquisition (or purchase method of) accounting is the method used to account for business combinations Goodwill arises as a consolidation difference if the purchase cost of the investment is not equ
9、al to the book value of equity in the subsidiary,Goodwill as consolidation difference,Fair value adjustments of acquired assets and liabilities,The individual assets and liabilities of the acquired company have to be revised to their fair value at acquisition date This exercise may imply (de-)recogn
10、ition of new (old) assets and liabilities Goodwill will be the difference between the revalued net assets and the investment by the parent The fair value at acquisition date is considered to be the historical cost from the point of view of the parent,Fair value adjustments applied,Goodwill after fai
11、r value adjustments,Subsequent measurement of goodwill,IAS before 2004 + European Accounting Directives: Amortise goodwill on a systematic basis over the best estimate of its useful life Rebuttable assumption of a maximum of 20 years IFRS 3 “Business Combinations” (2004): Test goodwill for impairmen
12、t annually (or more frequently if indications),Minority interests,Minority interests (or non-controlling interests) appear if the group does not own 100% of the shares in a subsidiary They represent the part of the net assets and profit or loss of the subsidiary attributable to the equity interests
13、that are not owned,Minority interests applied,Merger accounting,Two companies can combine by merging their activities and managements without one of them acquiring the other Two types of merger Fusion Pooling of interests IFRS3 Business Combinations (2004) banned merger accounting methods,Illustrati
14、on - Merger accounting,Illustration - Acquisition accounting,Group income statement,In the group income statement, the effect of intra-group transactions has to be eliminated Only income and expenses recognized with regard to parties outside the group will be retained Follow-up effects of fair value
15、 adjustments over time have to be integrated Amortization of goodwill or impairment losses on goodwill may also significantly impact the group income statement,Intra-group transactions,Deduct amortization/ impairment losses on goodwill / Follow-up of fair value adjustments,Aggregation of financial s
16、tatements of all subsidiaries,Fig.12.1 Consolidation procedures,Adjust recognition criteria / measurements of financial statements of subsidiaries to uniform principles (IFRS),Fair value adjustments / Remove investment in subsidiaries / Identify goodwill and minority interests,Remove intra-group tra
17、nsactions and balances,Group financial statements,Associated companies,Associated companies are companies in which the investor company has “significant influence” Different types of relationships between investor company and investee company mainly according to voting rights under control Accountin
18、g rules differ according to the type of relationship,Types of participating shareholdings (bis),Illustration - Associated company,Company A buys 20% of Company C,Illustration - Equity method,Illustration - Proportionate consolidation,IAS 28 Investments in Associates,IAS 28 Investments in Associates
19、assumes significant influence if the investor holds at least 20 per cent of the voting rights of the investee IAS 28 requires the equity method to account for associated companies The part of the investor in the profit and loss of the associated company is introduced as a separate caption in the gro
20、up income statement (“income from associates”),Joint ventures,A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to jount control (IAS 31 Investments in Joint Ventures) IFRS recognizes three kinds of arrangement: Jointly controlled operations Jointly controlled assets Jointly controlled entities IFRS recommends use of proportionate consolidation for jointly controlled entities,
