GROUP STATEMENTS

Chapter 1
objectives

 To understand the reporting framework for groups

 Understand the concept of control
 Understand assessment of control
 Understand the scope of IFRS 10
 Understand the consolidation procedure and
 Accounting for subsidiaries in separate financial statements.
Emergence of a group of entities

Companies grow for different reasons, e.g. reduction of costs through economies
of scale, investing in competitors or suppliers to manage risk and gain access to
resources etc.
The growth may be in form of companies combining with other companies
resulting in business combinations.
It is for those business combinations that group statements would now need to be
presented.
Accounting for groups as determined by
the companies ACT
 Group - Holding company & all its subsidiaries
 Holding company - Juristic person that controls the subsidiary

Control means
✓ other company is a subsidiary
✓ Co. together with any related/interrelated party:
- directly or indirectly exercise majority voting rights
- right to appoint directors
Accounting for groups companies Act

A company is a Subsidiary company of another juristic company:

If the juristic co. or another subsidiary or one or more nominees:
 Directly or indirectly exercise or control major voting rights or
 Has ability to control appointment of directors who control major votes
A wholly owned subsidiary of another co. if it holds all general voting rights
(Entity controlled by another entity)
Reporting framework for groups

 There are different types of companies i.e. state owned, private (pty)
companies, personal liability companies and public company(ltd) which are
differently regulated.
 Private companies, public companies (listed/unlisted) are mainly provided to
be regulated by IFRS or IFRS for SMEs depending with the scoping
requirements.
 The focus in this instance is private owned profit companies hence financial
reporting is governed by IFRS and reference will therefor be made to the
requirements of the following standards:
 IFRS 10:Consolidated financial statements,IFRS12 disclosure of interests in
other entities, IFRS 3 Business Combinations and IAS 27 Separate financial
statements.
IFRS 10: Consolidated financial
statements (theory)
 Background of IFRS 10
 Until May 2011 the then standard IAS 27 Consolidated and Separate Financial
Statements was in use. The Board (IASB) removed the consolidation aspect
from IAS 27 leaving it as Separate Financial Statements. The consolidation
aspect of groups is now covered by IFRS 10 which is applicable to annual
financial statements from periods 1 January 2013 but earlier adoption was
permitted.
 THE MAIN CHANGES FROM IAS 27:
 Definition of control and control as the only basis for consolidation
 The 3 elements of control
 Control as the basis of consolidation in special purpose entities.
KEY TERMINOLOGY IN IFRS 10

 Consolidated Financial statements

The financial statements of a group in which the assets, liabilities,
equity, income, expenses and cash flows of the parent and its
subsidiaries are presented as those of a single economic entity.
 Control of Investee
An investor controls an investee when the investor 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.
 Parent
An entity that controls one or more entities.
KEY TERMINOLOGY (CONTINUATION)
 Power
Existing rights that give the current ability to direct the relevant
activities.
 Protective rights
Rights designed to protect the interest of the party holding those
rights without giving that party power over the entity to which those
rights relate.
 Decision maker
An entity with decision-making rights that is either a principal or an
agent of other parties.
 Group
A parent and its subsidiaries.
TERMINOLOGY (CONT)

 Non-controlling interest
Equity of a subsidiary not attributable directly or indirectly to a
parent.

 Relevant activities
Activities of the investee that significantly affect the investee’s
returns
The concept of control

Elements of control
 An investor determines whether it is a parent by assessing whether it controls
one or more investees. An investor considers all relevant facts and
circumstances when assessing whether it controls an investee.
 An investor controls an investee when it has all of the following:-
❖ Power over investee
❖ Exposure or rights to variable returns
❖ Ability to use power over investee to affect the amount of the
investor’s returns
Assessing control

 The broad categories of factors to be considered when

assessing control per IFRS10 are as follows:-
 Power over investee.
 Exposure (or rights) to variable returns.
 The link between power and returns.
 Relationship with other parties.
 The purpose and design of the investee.
 Continuous assessment.
Assessing control : power over an
investee
 According to IFRS10, the following examples of rights can
individually or in combination, give an investor power over an
investee.
❖ Voting rights.
❖ Rights to appoint, reassign or remove members of the investee’s
key personnel who have the ability to direct the relevant
activities.
❖ Rights to appoint or remove another entity (e.g. service provider)
that directs the relevant activities.
❖ Rights to direct the investee to enter (or veto any changes to)
transactions for the benefit of the investor.
❖ Other rights (e.g. contractual rights) that give the investor the
current ability to direct the relevant activities.
Substantive rights
 IFRS10 requires that when assessing whether it has power over
another entity, an investor considers its existing substantive rights.
 Substantive rights are those rights that the holder has the practical
ability to exercise.
 Substantive rights include ordinary shares that currently carry voting
power as well as potential ordinary shares (e.g. options to purchase
ordinary shares) that are practically exercisable at the date that
power is assessed.
 NB: It is only the investor’s substantive rights that are taken into
account when assessing power.
Protective rights

 As protective rights by definition do not provide a holder with power over the
investee, an investor that holds only protective rights cannot have power nor
prevent another party from having power over an investee. The following are
examples of protective rights :-
 Rights of a lender under a loan covenant – a loan agreement may place
restrictions on new borrowings or the payment of dividends.
 The right of a party holding non-controlling interest to approve for example:-
 capital expenditure greater than required in the ordinary course of business etc.
 NB: Thus the holder of protective rights cannot interfere with significant
day-to-day decisions related to relevant activities of the investee.
Voting rights
 Voting rights are the most common way in which the activities of an investee are
directed. The following issues should be considered where this is the case.
1) Power with a majority of voting rights
Generally speaking, an investor holding more than half of the voting rights of an
investee has power when the holder of the majority voting rights can:
 direct the relevant activities; or
 appoint a majority of members of the governing board that directs the relevant
activities.
2) A majority of voting rights, but no power
Such a situation arises if:-
 the investor’s voting rights are not substantive;
 the voting rights do not provide the investor with the current ability to direct
the relevant activities; or
 another entity, that is not an agent of the investor, holds existing rights that
provide it with the current ability to direct the relevant activities.
Voting rights (cont)

3) Power without a majority of voting rights

An investor may hold power without a majority of voting rights even
though the investee’s relevant activities are normally directed through
voting rights, for example:-
 Contractual arrangements between the investor and other
vote holders.
 Rights arising from other types of contractual agreements
e.g. a management contract.
 The existence of potential voting rights. These are,
considered only, when they are substantive. Voting rights are
substantive if the holder has the practical ability to exercise
these rights.
Exposure or rights to variable returns.

 IFRS10 requires an investor to assess whether its returns from involvement

with the investee are variable as well as how variable those returns are on
the basis of the substance of the arrangement (substance over legal form).
NB: An investor is exposed (or has rights) to variable returns from its
involvements with the investee, when the investor’s returns from the investee
have the potential to vary as a result of the investee’s performance. Variable
returns may affect both the degree of potential returns (e.g. magnitude of
returns) and/the direction of the returns (i.e. whether the returns are positive or
negative). Examples of returns:
✓ Dividends
✓ Remuneration
✓ Fees & exposure to loss from providing credit/liquidity support
✓ Other distributions i.e. interest from debt instruments
Link between power and returns/ ability
to use power
 An investor controls an investee if the investor not only
has power over the investee and exposure (or rights) to
variable returns from its involvement with the investee,
but also has the ability to use its power to affect the
returns it receives.
Assessing control: Relationships with other
parties
 In order for an investor to control the investee, it should be able to
exercise control unilaterally. If the consent of one or more other investors
is required in order to exercise control so that no investor individually
controls the investee, IFRS10 is NOT applied to the investment. Instead,
the investor considers if it is a party to a joint arrangement in terms of
IFRS11 or if it has significant influence in terms of IAS28.

 An investor with decision making rights determines whether it acts as

principal or as an agent of other parties. An agent is a party primarily
engaged to act on behalf and for the benefit of another party and
therefore does not control the investee when it exercises its decision-
making authority. An essential characteristic of an agent is that it
receives market-related remuneration for exercising its decision-
making power.
Relationship with other parties (cont)
 Besides the remuneration to which the decision-maker is entitled the investor
should also consider all of the following factors when determining whether
the decision-maker is its agent:
o The activities that are permitted in terms of the decision-making agreement and
specified by law and;
o The discretion that the decision-maker has when making decisions about these
activities.
o By carrying out this evaluation, it can be established whether the decision-maker
has the ability to direct the relevant activities.
 The rights held by the investor and other parties
 Substantive rights held by the investor and other parties may affect the
decision maker’s ability to direct the relevant activities of the investee.
 If the investor holds substantive removal rights and can remove the decision-
maker without cause, this in isolation, is sufficient to determine that the
decision-maker is an agent of the investor, and no further evaluation is
required
Relationship with other parties(cont)

 Exposure to variability of returns from other interests

 If the decision-maker holds other interests (e.g. investments, guarantees) in
an investee and these, are over and above the remuneration it receives, the
decision-maker is likely to be a principal and not an agent of the investor or
another party. This exposure of the decision-maker should be evaluated
relative to the total variability of returns of the investee.
 NB: A decision-maker that is a principal in its own right, while not an agent
of the investor may still be a de facto agent of another. A de facto agent can
control an investee and be required to present consolidated financial
statements even though the ultimate control over the investee rests
elsewhere e.g. an interim parent may be a de facto agent of the ultimate
parent.
Assessment of control: The purpose and design of the
investee
 By considering the purpose and design of the investee it may be clear
that, an investee is controlled through proportionate voting rights
attached to equity instruments i.e. voting rights would be dominant
factor in determining control of the investee.
 In some situations, holding the majority of voting rights does not
necessarily provide the investor with control over the investee. The
design of the investee may be such that a contractual agreement
provides the ability to direct the relevant activities of the investee to
a party that hold little (or even no) voting power, while the voting
rights of other parties relate only to insignificant activities outside the
scope of the contractual agreement.
Group Financial Statements

 Present financial statements of group as one entity

 Consolidated financial statements to address users needs
on financial information of the group
 Consolidated financial statements must comply with IAS 1
Scope of consolidated fin stats –IFRS 10
 Need to present consolidated financial statements
 Begin consolidation from time of obtaining control i.e date of
acquisition

Parent allowed not to present consolidated financial statements if all this

is met:
 It’s a wholly owned subsidiary, or partially owned subsidiary of
another entity & all its owners have been informed & they have no
objection
 Debt or equity instruments are not traded in a public market
 It did not file or is in the process of filing for issuing instruments in a
public market
 Its ultimate or intermediate parent produces consolidated financial
statements available for public use.
Consolidation procedures
 Eliminate investment in subsidiary & portion of equity(elimination of
common items)
 Eliminate intra-group transactions - assets & liabilities, equity,
income, expenses & cash flows
 Combination of remaining items: assets, liabilities, equity, income,
expenses & cash flows
 Same reporting periods
 Uniform accounting policies
 Income & expenses to be consolidated based on assets & liabilities at
acquisition date
Consolidation procedures

 Attribute component of OCI owners of parent & non-controlling interest

 Compute share of P/L after adjusting for preference shares in arrears

Exceptions
 Dissimilar accounting policies- adjust financial statements of that group
member
 Different reporting periods –subsidiary to prepare additional information as at
reporting date of parent. If impractical, adjust most recent subsidiary
financial statements for significant events or transactions. Difference in
reporting date may not be more than 3 months.
Disclosure of interest in other entities

Disclose;
 Judgements & assumptions on determining control
- no control even though owns more than half of voting rights
- controls even though owns less than half of voting rights
- it is an agent or a principal
 Composition of group, non controlling interest, nature & extent of significant
restrictions & risks
 Different reporting dates- disclose subsidiary reporting date & reason for
different date
Disclosure of interest in other entities

For each subsidiary with a material non-controlling interest disclose:

 Name of subsidiary
 Principal place of business
 Proportion of ownership interest by non-controlling interests
 Non controlling interest voting rights (if diff)
 P/L allocated to non controlling interest
 Accumulated non controlling interests
 Dividends paid to non controlling interest & summarized assets, liabilities,
P/L & cash flows
Disclosure of interest in other entities

Restrictions, disclose:
 Restrictions to transfer cash or other assets
 Guarantees or other requirements restricting dividends or other capital
distributions being paid
 Carrying amounts of assets & liabilities to which those restrictions apply
Accounting & disclosure in separate
financial statements
 Account for the investment at cost or IFRS 9
 Recognize dividend in P/L on establishment of right to receive

IFRS 9 Financial instruments

 Investment in shares either is accounted for as financial assets at FV through P/L
or at fair value through OCI
 Fair valued through P/L:
- held for trading
- designated as a financial asset at FV through P/L (quoted market price &
reliable measurement of FV)
 Fair valued through OCI:
- Investment in equity instrument that is is not held for trading
Accounting & disclosure in separate fin
stats
Initial measurement:
❑ Financial assets at FV through P/L:
Recognize at cost(which is equal to FV) & expense transaction costs
❑ Financial assets at FV through OCI:
Recognize at cost (which is equal to FV plus transaction costs)
❑ No quoted prices in an active market if FV cannot be reliably
measured:
Recognize at cost & initial transaction costs are capitalized
Accounting & disclosure in separate fin
stats
Subsequent measurement:
❑ Financial assets at FV through P/L:
Remeasure at FV & any P or L is recognized in P/L
❑ Financial assets at FV through OCI:
Remeasure at FV & any P or L is recognized in OCI i.e. create a mark
to market reserve
❑ No quoted prices in an active market if FV cannot be reliably
measured:
Retained at initial cost & check for impairment
Examples in Group statements volume 1.

Example 1.9 – 1.11