Consolidated Financial Statements (Part 1)

Basic Consolidation Procedures

Learning Objectives:
1. Statement the elements of control
2. Prepare consolidated financial statements at the acquisition date.
3. Prepare consolidated financial statements at a subsequent date.

Introduction

PFRS 3 deals with the accounting for a business combination at the acquisition date, while PFRS 10 deals with the preparation and
presentation of consolidated financial statements after the business combination.
 Consolidated financial statements – “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.”
 Group – “a parent and its subsidiaries”
 Parent – “an entity that controls one or more entities
 Subsidiary – an entity that is controlled by another entity.

All parent entities are required to prepare consolidated financial statements, except as follows:
1. A parent is exempt from presenting consolidated financial statements if:
a. It is a subsidiary of another entity (whether wholly-owned or partially- owned) and all its other owners do not object too its
non-presentation of consolidated financial statements.
b. Its debt or equity instruments are not traded in a public market (or being processed for such purpose); and
c. Its ultimate or any intermediate parent produces consolidated financial statements that are available for public use and
comply with PFRSs.
d. Post-employment benefit plans or other long-term employee benefit plans to which PAS 19 applies.

Control
Control is the basis for consolidation. PFRS 10 requires an investor to determine whether it is a parent by assessing whether it controls
the investee.

 Control of an investee – an investor controls and 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.

Controls exist if the investor has all of the following:

a. Power over the investee;
b. Exposure, or rights, to variable returns from the investee; and
c. Ability to the affect returns through use of power.

Only one entity is identified to have control over an investee. If two or more investors collectively control and investee, such as when
they must act together to direct the investee’s relevant activities, none of them individually controls the investee.

Accordingly, each investor accounts for its interest in the investee in accordance with PFRS 11 Joint Arrangements, PAS 28
Investments in Associates and Joint Ventures or PFRS 9 Financial Instruments, as appropriate.

Example:
ABC Co. holds 70% of the voting shares of Alphabets, Inc. XYZ, Inc., the former majority owner of Alphabets, holds 10% of the voting
shares of Alphabets but retain its power to appoint the majority of the board of directors of Alphabets. The other 20% is held by various
shareholders holding shares of 1% or less. Decisions about the relevant activities of Alphabets require the approval of a majority of
votes cast at relevant shareholders’ meetings – 75% of the voting rights of the investee have been cast at recent relevant shareholders’
meetings.

Analysis:
Neither ABC Co. nor XYZ, Inc. has control over Alphabets Co.