IFRS Accounting Standards Dealing with Group Accounts
There are 6 IFRS standards dealing with group accounts:
1. IAS 27 Separate Financial Statements
This standard prescribes how the investor shall present its investments in the individual or separate
(non-consolidated) financial statements.
2. IAS 28 Investments in Associates and Joint Ventures
IAS 28 prescribes the accounting treatment of associates, or the entities in which the investor has
significant influence (but not control or joint control).
Also, it prescribes applying equity method of accounting for both associates and joint ventures
(those are one type of joint arrangements under IFRS 11 Joint Arrangements).
3. IFRS 3 Business Combinations
IFRS 3 outlines the accounting when the investor obtains a control over its investment.
People are often confused because both IFRS 3 and IFRS 10 deal with this situation, but each of
these standards deals with its own aspects of the same thing.
IFRS 3 tells us what the business combination is, how to account for it at the recognition (but not
when you perform consolidation afterwards – then it’s IFRS 10), how to measure goodwill, non-
controlling interest and assets and liabilities acquired.
4. IFRS 10 Consolidated Financial Statements
This is the second standard dealing with the situation when the investor obtains a control over its
investment.
As opposed to IFRS 3 mentioned above, IFRS 10 defines the control and gives a guidance to identify
whether there is a control or not.
Then it also prescribes the consolidation procedures for preparing consolidated financial
statements.
5. IFRS 11 Joint Arrangements
IFRS 11 deals with the third type of investment – joint arrangement, which could be a joint
operation or joint venture. In both cases, investor obtains joint control over some business with
some other investor.
Before 2013, IAS 28 included the rules for joint arrangements, but now, we should look to IFRS 11.
6. IFRS 12 Disclosure of Interests in Other Entities
IFRS 12 relates to all types of interests in other entities: subsidiaries, associates, joint arrangements
and unconsolidated structured entities.
It requires disclosures of various kind of information about these interests.
How to Account for Your Investment
As I’ve already mentioned above, you should first determine WHAT TYPE of investment you deal
with and based on the type, apply specified accounting treatment.
There are the 4 basic types of investments:
1. Subsidiaries
IFRS 10 defines a subsidiary as “an entity controlled by another entity”.
The basic indicator of having a control over subsidiary is the size of your share in it. If you own more
than 50% of investment’s shares, then it indicates you control it.
However, that’s not always the truth and sometimes, investor does NOT have a control even if it
owns more than 50% of shares. The opposite may be true: investor can have a control despite the
share lower than 50%.
If there is a control, then investor must account for such an investment using the acquisition
method and apply full consolidation procedures when making consolidated financial statements.
2. Associates
IAS 28 defines an associate as “an entity over which an investor has significant influence and which
is neither a subsidiary nor an interest in joint venture”.
Here, the basic indicator of significant influence is the investors share between 20% and 50%, but
similarly as with subsidiaries and control, there are situations where significant influence might or
might not be demonstrated regardless the size of ownership.
If there’s a significant influence, then investor must account for such an investment using the equity
method.
3. Joint Arrangements
IFRS 11 defines joint arrangement as “arrangement of which 2 or more parties have joint control”.
It does not make any sense to quantify the “share” here, because it should be equal for all the
parties. So if there are 2 parties of arrangement, each party has 50% share. If there are 3 parties,
each party has 33.3% share – you get the idea.
Instead, parties need to exercise joint control over the arrangement. It means that important
decisions require unanimous consent of all parties of the arrangement and no single party can
decide independently.
IFRS 11 requires accounting for joint arrangement based on its specific type:
If parties established joint venture, then each party accounts for its investment using
the equity method in line with IAS 28, and
If parties established joint operation, then each party accounts for its own assets, liabilities,
expenses, revenues and its share on all items incurred jointly.
4. Other Investments
If an investor acquires any other investment that does not fall into any of above categories, then it is
accounted for as a financial instrument in line with IFRS 9.
Consolidation in accounting: A comprehensive guide
Consolidation accounting is a vital aspect of financial reporting for companies that have subsidiary
entities. It involves combining the financial statements of the parent company and its subsidiaries to
present a comprehensive picture of the entire group's financial performance. In this blog post, we
delve into the concept of consolidation in accounting, explore the consolidation method and
process, and discuss the rules that govern this practice.
What is consolidation in accounting?
Consolidation in accounting refers to the process of combining the financial statements of a parent
company and its subsidiary entities. When a company owns a controlling interest in another entity,
usually more than 50 percent, it is required to consolidate the financial information of both entities.
This ensures that the financial statements present a holistic view of the group's financial position,
performance, and cashflows.
Consolidation method of accounting
The consolidation method of accounting is the standard approach used to consolidate financial
statements. Under this method, the assets, liabilities, equity, revenue, and expenses of the parent
company and its subsidiaries are combined as if they were a single entity. The key principle behind
the consolidation method is to eliminate intercompany transactions, investments, and balances to
avoid double counting.
Consolidation process in accounting
The consolidation process involves several steps to ensure accurate and meaningful financial
reporting. Let's take a closer look at the typical steps involved:
Step one: Identifying subsidiaries
The first step is to identify the subsidiary entities that need to be consolidated. A subsidiary
is a company controlled by another entity, known as the parent company.
Step two: Gathering financial statements
The next step is to collect the financial statements of the parent company and its
subsidiaries. These statements include the balance sheet, income statement, statement of
cash flows, and statement of changes in equity.
Step three: Adjustments and eliminations
Once the financial statements are collected, adjustments and eliminations are made to
remove intercompany transactions and balances. This ensures that the consolidated
financial statements reflect only transactions with external parties.
Step four: Minority interest
If the parent company does not own 100% of a subsidiary, the portion of equity attributable
to non-controlling interests, also known as minority interest, needs to be recognized in the
consolidated financial statements.
Step five: Preparation of consolidated financial statements
After making necessary adjustments and eliminations, the consolidated financial
statements are prepared. These statements include the consolidated balance sheet,
consolidated income statement, consolidated statement of cash flows, and consolidated
statement of changes in equity.
Consolidation accounting rules
Consolidation accounting is governed by various rules and principles, including Generally Accepted
Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). These rules
ensure consistency and comparability in financial reporting. Here are some fundamental elements to
consider relative to these two sets of rules:
Equity method
Under the equity method, the parent company recognizes its investment in the subsidiary at cost
and adjusts it based on its share of the subsidiary's earnings or losses. This method is used when the
parent company has significant influence but does not have a controlling interest in the subsidiary.
Intercompany transactions
Intercompany transactions refer to sales, purchases, loans, or other financial activities between the
parent company and its subsidiaries. These transactions must be properly accounted for and
eliminated to prevent double counting in the consolidated financial statements.
Non-controlling interest
Non-controlling interest, also known as minority interest, represents the portion of the equity in a
subsidiary not owned by the parent company. Recognizing and disclosing this interest separately in
the consolidated financial statements is important.
Consolidated financial statements
The consolidated financial statements are a combination of the parent company's financial
statements and those of its subsidiaries. These statements provide a comprehensive view of the
group's financial performance and position. They include the consolidated balance sheet, income
statement, statement of cash flows, and statement of changes in equity.
Intragroup transactions
Intragroup transactions refer to transactions between entities within the consolidated group. These
transactions must be eliminated to prevent double counting. Examples of intragroup transactions
include intercompany sales, intercompany loans, and intercompany expenses.
Decision-making and stakeholder reporting
Consolidated financial statements are crucial for decision-makers, such as management and
shareholders, as they provide a complete overview of the group's financial performance.
Stakeholders, including investors and lenders, rely on these statements to assess the group's
financial health and make informed decisions.
Legal entity and financial reporting
Consolidation accounting treats the parent company and its subsidiaries as a single economic entity.
However, it is important to note that each entity within the group remains a separate legal entity.
Therefore, while consolidated financial statements provide a comprehensive view, individual entities
still have their own respective financial reporting requirements.
Centralize and streamline
Consolidation accounting allows companies to centralize financial reporting and streamline the
reporting process. By consolidating the financial statements of multiple entities, companies can
avoid duplicative efforts and create a more efficient and standardized reporting structure.
Financial consolidation software
The consolidation process can be time-consuming and complex, especially for organizations with
multiple subsidiaries or complex ownership structures. It requires careful analysis, adjustments, and
eliminations to ensure accurate and meaningful financial reporting.
To streamline the consolidation process and ensure accuracy, many companies utilize financial
consolidation software. These software solutions automate the consolidation process, facilitate
intercompany eliminations, and generate consolidated financial statements more efficiently.
Conclusion
Consolidation accounting is a must-have practice for companies with subsidiary entities. It involves
combining the financial statements of the parent company and its subsidiaries to provide a
comprehensive view of the group's financial performance. The consolidation method of accounting,
governed by rules such as GAAP and IFRS, ensures accurate and meaningful financial reporting.
While the consolidation process can be complex and time-consuming, it plays a vital role in decision-
making and stakeholder reporting. By understanding and implementing consolidation accounting,
companies can present consolidated financial statements that reflect the true financial position and
performance of the entire group.
