Group Financial Statements

S9-ACG
2023-2024
Pr. Khalid EL BADRAOUI

Contents
• Introduction – Company groups
• Rationale for group financial statements
• Current practice
• Consolidation methods

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 Group financial statements

• Group (or consolidated) financial statements are the

financial statements of a set 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 characteristics
– Vertical group
– Horizontal group
– Conglomerate
• Group expansion
– Development of new subsidiaries
– Acquisition by takeover of other companies
– Meger between companies

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 Shares - Rights
• Membership rights :
 Influence on management, voting power
• Equity rights:
 Rightto participate in distribution of profits +
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

Type of Amount of Qualification of

relationship voting rights shareholdings

1 Control 50% +1 Subsidiary

2 Significant >= 20% Associated

influence company
3 Only financial < 20% Financial
investment

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 Group Structure
Enterprise A

100% 25%
51%

Enterpise B Enterprise C Enterprise D

9% 60% 100%

Enterprise F Enterprise E

Group Structure (Cont’d)

Company % % Qualificati In or out Consolid

Control Ownership on of the ation
scope Method
A 100% 100% Parent IN FC
company
B 100% 100% Subsidiary IN FC
C 51% 51% Subsidiary IN FC
D 25% 25% ASSOCIATE IN EM
E 100% 51% SUBSIDIAR IN FC
Y
F 9% 24% INVESTME OUT NA
NT

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 Rationale for group financial statements
• Interdependent relationships within a group (patrimonial,
contractual, personal ties)
• Common or unified management
• Economic interest of the group > individual interests of legal
entities involved
 It is economically more relevant to present the financial
statement of the economic whole as an aggregate of all assets
and liabilities under unified control
• Including or excluding certain entities in the financial
statements is critical.
• Enron scandal is an example of what happens when we don't

Current practice
• IAS 27 Separate Financial Statements
• IAS 28 Investments in Associates and Joint Ventures
• IFRS 3 Business Combinations
• IFRS 10 : Consolidated Financial Statements
• IFRS 11: Joint Arrangements
• IFRS 12: Disclosure of Interests in Other Entities

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Consolidation Methods

• Full/Global Consolidation

• Proportional Consolidation (IAS 31:not applicable

since 2011) .

• Equity Method

Full Consolidation
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(example A owns 80% of B)

Company A Consolidated
entity

Company B Minority
interest

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Full Consolidation
(example A owns 80% of B)
• Assets: A B A+B
• Net fixed assets 420 150 570
• Investments 80 -- 0
• Inventories 200 50 250
• Receivables 100 30 130
• Cash 50 20 70
850 250 1020

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Full Consolidation (example)

• Equity A B A+B
• Common Stock 400 100 400
• Retained Earnings 200 50 240
• Net Income 100 20 116
700 170 756
• Minority Interest
• - - 34
• Liabilities
• Debt 100 50 150
• Payables 50 30 80
150 80 230

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Full Consolidation (explanations)

• Assets
• Consolidating the Assets was easy, since there were no internal operations
between the firms. That is none of the receivables of A were payables of B
(and vice versa) and none of the debt of B was loaned by A (and vice
versa). Therefore, all Assets were added to each other to deliver the
consolidated Assets of the Group, with one exception!
• The investments of A in B had to be excluded from the consolidation. Ask
yourself how much investments does the group hold? Can you claim that
internal investments count for that item? That’s why we exclude the 80 of
investments of A in B. With the argument that the Group doesn’t really
have any investments in outside assets.
• Notice that in the Assets side we are consolidating Assets from A and from
B disregarding the fact that A only owns 80% of B. All considerations on
how much the shareholders of A can claim of the Assets of B is only made
in the Equity side of the Balance Sheet. That should not be a surprise to
you! Remember that the Assets are everything that is on the table, the
other side of the Balance Sheet is exactly where we think about who
these assets belong to and who can claim them… The argument here is
that the shareholders of A do in fact completely control B and therefore
do control all Assets of B, even if they cannot claim them all.

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Full Consolidation (explanations)

• Equity
• Common Stock 400
• only account for the Common Stock of A, when you consolidate. 80% of the
common stock of B was what was originally acquired by A for 80. Therefore,
as you exclude the investments in the Assets side, you also need to exclude
this 80. Now the total common stock of B was 100, not 80, so where do the
remaining 20 end up? (see below)
• Retained Earnings 240
• The retained earnings of B are accumulated earnings by the firm since it was
created. Only 80% of these earnings belong to A, the rest shows up below...
• Net Income 116
• For the net income, the best way is to look at the income statement and
understand that of this income, only 80% belongs to A and the rest is for the
minority interests.
• Minority Interest 34
• This value is whatever was not considered above as equity belonging to the
shareholders of A. In other words, this is the part of B that CANNOT BE
CLAIMED by A or its shareholders. It is equal to 20% of the Common Stock of
B (20) + 20% of the retained earnings of B (10) + 20% of the net income of B
(4).
• Liabilities
• The Liabilities consolidation is easy since we assume that there were no
Internal Operations between A and B. No money was owed by A to B or vice
versa.

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Full Consolidation (example)

• Revenues A B A+B
• Sales 950 300 1250
• Interest revenue 50 -- 50
1000 300 1300
• Expenses
• COGS 400 100 500
• Services 200 50 250
• Employees 200 50 250
• Depreciation 100 80 180
900 280 1180
• Net income (consol.) 100 20 120
• Net income (min.int.) 4
• Net income (A) 116

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Full Consolidation (explanations)

• Income Statement
• Two notes on the income statement full consolidation:

• First, none of the Sales of A were done to B and vice versa.

Otherwise, we would need to exclude internal Sales and
corresponding internal COGS.
• Second, as we mentioned for the net income, only 80% of this
net income can be claimed by A and its shareholders. 20%
belongs to the minority shareholders of B.

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 Equity Method
• IAS 28 (as amended in 2011) applies to all entities that are investors
with joint control of, or significant influence over, an investee (joint
venture or associate).
• IAS 28 assume significant influence if the investor holds at least 20 per
cent of the voting rights of the investee.

• A joint venture is a contractual arrangement whereby two or more

parties undertake an economic activity that is subject to joint control.

• IAS 28 requires the equity method to account for associated companies

and joint ventures.

• The part of the investor in the profit and loss of the associated company
(respectively joint venture) is introduced as a separate caption in the
group income statement “income from associates” (respectively
“Income from joint venture”)

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Equity Method
• As the investment is made in the participated firm, the
investment is recorded at cost.

• Afterwards, at the end of each accounting period, the value of

the investment is updated to include a share of the income
generated in the participated firm.

• This share is proportional to the share of equity held by the

controlling firm.

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Equity Method
(example A owns 30% of B)
• Assets: A B A*
• Net fixed assets 420 150 420
• Investments 30 -- 51
• Inventories 250 50 250
• Receivables 100 30 100
• Cash 50 20 50
850 250 871

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Equity Method (example)

• Equity A B A*
• Common Stock 400 100 400
• Retained Earnings 200 50 215
• Net Income 100 20 106
700 170 721
• Liabilities
• Debt 100 50 100
• Payables 50 30 50
150 80 150

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 Equity Method (example)
• Revenues A B A*
• Sales 950 300 950
• Interest revenue 50 -- 50
• Income from associates (30% * 20) -- -- 6
1000 300 1006
• Expenses
• COGS 400 100 400
• Services 200 50 200
• Employees 200 50 200
• Depreciation 100 80 100
900 280 900
Net income 100 20 106
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Equity Method
(explanations)
• We aren’t really consolidating. All we did was
to claim that 30% of the equity of B was ours
and revalue our investments accordingly…

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