Lecture 1:

Consolidated Financial
Statements



1
Introduction
What are consolidated financial
statements?

Who has to present consolidated financial
statements in Malaysia?






2
Introduction
Firstly:

What are consolidated financial statements?





3
Introduction
In a business combination:
Different business entities are brought under
common control
Different entities have to prepare their own
set of financial statements
But there is also demand for the consolidated
financial statements


4
Introduction
Thus, consolidated financial statements
are the financial statements of a group of
business entities under common control


5
Introduction
Secondly:

Who has to prepare consolidated financial
statements in Malaysia?



6
Introduction
MFRS 10:
A parent should present consolidated
financial statements
Parent is an entity that controls
another
7
Introduction
Control:
Power,
Variable returns, and
Ability to use power to affect the returns


8
Introduction
Power
Ability to direct the relevant activities (ie
activities that significantly affect returns)
To consider
Purpose and design of the investee
What the relevant activities are and how decision
about those activities are made
Whether the rights of the investor give it the
current ability to direct the relevant activities

9
Introduction
Power
Power arises from rights
Examples of rights that gives the power
Voting rights
Contractual rights
Decision making rights

10
Introduction
Power: Voting rights
Majority vs De facto power
Potential voting rights

11
Introduction
Power: Voting rights - majority
In most cases, the investor that has more
than 50% of the voting rights is deemed to
have power over the investee
IE 1.2 (pp 9)
However, FRS 110 also requires an investor
to consider the de facto power where
having less than 50% of voting rights may
give it power


12
Introduction
Power: Voting rights - De facto power
Where investors rights are in fact sufficient
to give it practical ability to direct relevant
activities unilaterally
In LMN Ltd: A Ltd has 46%, the rest widely
dispersed, <90% votes cast at recent AGMs
In XYZ Ltd: A Ltd has 46%, B Ltd has 30% and C
Ltd has 24%.


13
Introduction
Power: Voting rights - Potential voting
rights
Must be substantive (ie holder has practical
ability to exercise its rights)
Currently exercisable?
Financial ability to exercise?
Deeply out-of-the-money?
14
Introduction
Power: Contractual rights

A Ltd has 30% of B Ltd and has a contract to
supply raw material and to market finished
goods. 75% vote required to cancel the
contract.
15
Introduction
Power: Decision making right
An investor that has decision making rights
will have power
However, only if the decision maker who acts
as the principal has the ability to use power
to affect the returns (Agent does not have
the ability to use power to affect the returns)

16
Introduction
Returns
Investor is exposed, or has rights, to variable
returns (both positive and negative), as result
of investees performance

17
Introduction
Power and returns
Investor has the ability to use its power to
affect its returns from investee
IE 1.9 (pp 14)

18
Introduction
Power and returns decision maker
Investor with decision making right (eg fund
manager) has the ability to use its power to
affect its returns from investee only if he acts
as the principal
Agent does not have the ability to use its power to
affect its returns from investee

19
Introduction
Power and returns decision maker
Whether an investor with decision making
rights is a principal or agent:
The scope of its decision making authority
The rights held by other parties
Its remuneration
Its exposure to returns through other interest

20
Introduction
Power and returns decision maker
The scope of its decision-making authority
Level of involvement in decision making

The rights held by other parties
The number of parties required to act together
against the decision maker

21
Introduction
Power and returns decision maker
Its remuneration
The variability of its remuneration relative to
investees returns

Other interest
The magnitude of other interest

22
Introduction
For purposes of subsequent discussions, assume
that Entity A controls Entity B, if the former
holds more than 50% of the share capital of the
latter



23
Introduction

As mentioned earlier, the parent has to
prepare and present

However, not all parents have to present
consolidated financial statements (exemption)



24
A B C

Question: Will B Ltd have to present
consolidated accounts?

Yes, unless
25
MFRS 10 (para 4(a))
B is wholly owned by A, or NCI in B do
not object
B is not listed,
B is not in process of being listed; and
A produces consolidated accounts
available for public use



26
End of Lecture #1

Thank you
27