Initial measurement
Subsidiaries
The parent records newly established subsidiaries
at the historical cost of the amounts invested at
establishment. In its consolidated financial statements,
the parent records subsidiaries acquired in a business
combination at the fair value of the consideration
given plus directly attributable costs [IFRS3.24].
All identifiable assets acquired, and liabilities
and contingent liabilities assumed in a business
combination are initially recorded in the consolidated
financial statements at fair value [IFRS3.36]. The
excess of the cost of the business combination over
the parent's share of the fair value of the identifiable
assets and liabilities is goodwill
.
Associates
The accounting treatment for investments in associates
mirrors that of subsidiaries [IAS28R.20]. Associates
established by the investor (parent) are initially
recorded at the cost of the amount invested on establishment.
The parent records acquired associates at the fair
value of the consideration given plus directly attributable
costs. Any excess of the cost of investment over
the parent's interest in the fair value of the associate's
net assets is goodwill [IAS28R.23]. Goodwill and
fair value adjustments arising from investments
in associates are measured in the same way as those
arising from subsidiaries . These
adjustments do not change the carrying amounts in
the investee's accounts.
Joint ventures
Joint ventures that the venturer (parent) has established
are initially recorded at the cost of the amount
invested on establishment. The parent records acquired
joint ventures at the fair value of the consideration
given plus directly attributable costs. Any excess
of the cost of investment over the parent's interest
in the fair value of the joint venture's net assets
is goodwill. Goodwill and fair value adjustments
arising on joint ventures are measured in the same
way as those arising from subsidiaries.
Investments in joint ventures are often made through
the contribution or sale by the venturer of non-monetary
assets that might include individual assets or discrete
businesses [IAS31R.48-50]. The investment should
be recorded at the fair value of the contributed
assets [SIC-13.5-7] .
Where the contributed assets' fair value is in excess
of the book value of the other venturers' share
of those assets, the excess is a profit on disposal
. Where the fair value of the assets
contributed is in excess of the parent's share of
the fair value of the assets contributed by the
other venturers, the excess is goodwill .
Measurement subsequent to initial recognition
Consolidation
Two conventions underlie the preparation of consolidated
financial statements. These apply to the consolidation
of individual subsidiaries, associates and joint ventures.
First, the financial statements of all group entities
are prepared using common accounting policies. Where
this is not the case, appropriate adjustments are
made on consolidation, in order to ensure that uniform
accounting policies have been applied [IAS27R.28,29];
Second, the financial statements of all group entities
forming part of the group are prepared as of the
same date, unless this is impracticable. If any
of the financial statements have not been prepared
as of the same date (and in any case, the difference
should be no longer than three months), adjustments
should be made for significant transactions or events
between the different reporting dates [IAS27R.26,27]
.
Consolidation of subsidiaries
Consolidated financial statements are prepared by
combining the financial statements of the parent
and all its subsidiaries on a line-by-line basis,
adding together those items of assets, liabilities,
equity, income and expenses that are alike. The
following procedures are applied to present the
group as a single entity [IAS27R.22]:
| a) |
The carrying amount of the parent's investment
and the parent's share of equity in each subsidiary
are eliminated; |
|
| b) |
The minority's share of the net income
in the consolidated subsidiaries is identified
based on the minority's interest in each subsidiary
and presented as an allocation of net income
; |
|
| c) |
The minority's share of consolidated subsidiaries'
net assets is identified and presented in the
balance sheet, within equity but separate from
the parent shareholders' equity [IAS27R.33]
; |
|
| d) |
All intra-group balances and transactions
and resulting unrealised profits or losses are
eliminated in full, unless losses cannot be
recovered [IAS27R.24,25] ;
The results of transactions between the parent
and partially owned subsidiaries must be eliminated
in full. The proportion of the profit attributable
to the minority is deducted from the minority's
share of the subsidiary's profit and net assets
in the consolidated financial statements ;
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The elimination of unrealised profits and losses
will give rise to temporary differences. Deferred
tax should be calculated and accounted for in accordance
with IAS 12 [IAS12.38-45] [IAS27R.25].
Application of the equity method
Application of the equity method of accounting,
whether used for joint ventures or associates, follows
the same principles and similar procedures as the
consolidation of subsidiaries [IAS28R.20]. The entity
presents its interest in the associate's net assets
and net income in a single line in the balance sheet
and income statement respectively [IAS28R.2,11]
[IAS31R.40]. The following procedures are applied
to recognise the results of associates or joint
ventures using the equity method [IAS28R.11,23]:
| a) |
The investment in the associate
(or joint venture) is initially recognised at
cost. Cost includes goodwill and fair value
of assets and liabilities identified on acquisition
so no adjustment is required to cost to reflect
these. |
|
| b) |
The initial investment
is increased or decreased to recognise: |
|
| |
 |
the investor's share of
the associate's/joint venture's net income.
This share of net income is included in the
investor's income statement ;
|
| |
|
the investor's
share of the associate's/joint venture's changes
in equity that are not included in the investor's
income statement. This is included directly
in the investor's equity in the applicable component,
for example the cash flow hedging reserve; |
| |
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the impairment of goodwill
included in the carrying amount. Impairment
charges against the investment are recognised
in the investor's income statement; and |
| |
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the impact of notional depreciation,
amortisation and impairment of the fair value
of the assets through the consolidation adjustments
(referred to in 21.3.2. Associates, above).
These adjustments are recognised in the investor's
income statement or in equity according to the
nature of the underlying item to which the fair
value difference relates, and do not change
the amounts recognised by the associate in its
accounts. |
|
| c) |
Any distributions
from the associate to the entity are a reduction
of the associate's carrying value [IAS28R.11]; |
|
| d) |
Transactions between
the entity and the associate or joint venture
are not eliminated, but any profits arising
from intra-group transactions that are included
in inventory or fixed assets should be eliminated
to the extent of the entity's interest in the
associate .
Any unrealised losses should also be eliminated
unless they provide evidence of impairment;
|
|
| e) |
There is no minority
interest to be considered; |
|
| f) |
Deferred tax should
be provided for in accordance with IAS 12 [IAS12.38-45]; and |
|
| g) |
The entity should
record its share of its associates' losses until
the carrying amount of its investment is reduced
to nil. No further losses should be recorded
unless the entity has an obligation, legal or
constructive, or has made payments, to satisfy
the associate's liabilities [IAS28R.30] . |
Capital transactions and other reserve movements
such as revaluations or fair value adjustments are
captured when comparing the investment's carrying
value to the investor's share of the underlying
net assets . Any increase or decrease
is recorded as a change in the investment's carrying
value with the gain or loss reported directly in
equity. Only the investor's share of the associate's
net income is reported in the income statement.
Proportionate consolidation of jointly controlled
entities
Proportionate consolidation follows the same principles
as the consolidation of subsidiaries with two different
reporting formats available to the venturer [IAS31R.30].
The venturer may combine its proportionate interest
in the individual line items with those of itself
and its subsidiaries (for example, by including
its share of cash with the consolidated group's
cash). Alternatively the venturer may present its
proportionate interests separately (say side by
side in a columnar format). Both formats will result
in the identical amounts of assets, liabilities,
revenue and expenses [IAS31R.34]. To adopt proportionate
consolidation, the following procedures are applied:
| a) |
The carrying amount of the venturer's investment
and the venturer's share of equity in each joint
venture are eliminated [IAS27R.22] [IAS31R.33];
|
|
| b) |
The venturer's proportionate
share of each line item of assets, liabilities,
income and expense is included either in the
corresponding line items for the parent and
its subsidiaries, or in an aggregation of line
items of all joint venturers, depending on the
reporting format selected [IAS31R.34]; |
|
| c) |
All intra-group balances and
transactions and resulting unrealised profits
or losses are eliminated to the extent of the
venturer's interest, unless losses are evidence
of impairment [IAS27R.24,25]
[IAS31R.48]; |
|
| d) |
Taxes payable on distribution
of the joint venture's earnings to the venturer
are accounted for in accordance with IAS 12
[IAS12.38-45]. |
Derecognition
Elements of consolidated financial statements are
derecognised on disposal or dilution.
Disposal of subsidiaries, associates or joint ventures
Subsidiaries, associates and joint ventures are
consolidated, equity accounted or proportionately
consolidated in the consolidated financial statements,
up until the date when such accounting is no longer
appropriate, generally, up to the date of the loss
of control, significant influence or joint control,
respectively [IAS27R.13,30]
[IAS28R.18] [IAS31R.36,37,41].
Gains or losses on the disposal of a subsidiary,
associate or joint venture are all calculated by
comparing the proceeds received with the carrying
amount of the investor's share of the investee's
net assets, including any goodwill
. The disposal of all of the related
investment for cash results in a straightforward
calculation [IAS27R.30]. The disposal of a partial
interest will result in the parent retaining control
of a subsidiary, or a previous subsidiary becoming
an associate or an associate becoming a passive
investment .
Disposal agreements may provide for future adjustments
to the sale price, which are dependant on the occurrence
of certain future events, such as: profitability,
sales revenues of the sold entity during a specified
period of time, etc. The contingent consideration
should not be recognised by the seller unless it
is virtually certain [IAS37R.33] .
Disposals where non-monetary consideration is received
must be assessed to see if the transaction has commercial
substance. No gain or loss is recognised if a transaction
lacks commercial substance. A transaction lacks
commercial substance if the future cash flows are
not expected to change as a result of the transaction.
Disposal of a partial interest in a subsidiary
that results in the parent retaining control requires
the elimination of an appropriate proportion of
goodwill and those fair value adjustments that have
not been consumed, impaired, or amortised, together
with an appropriate change in the minority interest
. A subsidiary that becomes an associate,
or partial disposal of an associate, requires the
elimination of an appropriate proportion of goodwill
and those fair value adjustments that have not yet
been consumed, impaired or amortised
.
Where a parent disposes of an interest in a subsidiary,
associate or joint venture such that it no longer
retains control, significant influence or joint
control, the interest becomes an investment and
is subject to the guidance in IAS 39 [IAS27R.31]
[IAS28R.18] [IAS31R.51] . Such investments
are generally classified as available-for-sale and
recorded at fair value . The
gain or loss on a partial disposal is the difference
between the proceeds received and the carrying amount
of the investment sold .
Subsidiaries, associates and joint ventures are
consolidated, equity accounted or proportionately
consolidated in the consolidated financial statements,
up until the date when such accounting is no longer
appropriate, generally, up to the date of the loss
of control, significant influence or joint control,
respectively [IAS27R.30] [IAS31R.37] [IAS28R.18].
Subsidiaries which meet the definition of an asset
held for sale are consolidated and measured and
accounted for in accordance with IFRS 5 [IFRS5.BC53].
Associates and joint ventures which meet the definition
of an asset held for sale are not equity accounted
(or proportionately consolidated in the case of
joint ventures), but accounted for in accordance
with IFRS 5 [IAS28R.13(a)] [IAS31R.42].
Partial disposals
Parent company approach and economic entity
approach
An entity may account for its investments in subsidiaries
following either the 'parent company' or the 'economic
entity' approach. The 'parent company' approach
looks at consolidated financial statements from
the parent's perspective, under which gains and
losses on the disposal of subsidiaries are shown
in the consolidated income statement. The 'economic
entity' approach looks at consolidated financial
statements from the perspective of a single economic
entity. Gains and losses on the disposal of interests
in subsidiaries where the parent retains control
are reported within shareholders' equity when the
economic entity approach is adopted.
The disposal of interest in a subsidiary where
control is lost, results in gains and losses recognised
in the consolidated income statement even if the
'economic entity' approach is followed [IAS27R.30].
An investee which is no longer controlled is not
part of the reporting entity following a partial
disposal. Any gain or loss on partial disposal represents
a transaction with third parties not shareholders
of the reporting entity.
Dilution gains and losses
A parent may effectively dispose of part of its
interest in a subsidiary, proportionately consolidated
joint venture or associate through the sale of additional
equity (new shares) in the subsidiary or the joint
venture. The new investor may contribute cash or
other assets. Such a transaction is a dilution of
the parent's interest and will result in a gain
or loss. The gain or loss is calculated by comparing
the value of the parent's holding before and after
the dilution . Any loss should be
considered an indicator of impairment, and the carrying
value of the subsidiary or joint venture should
be evaluated in accordance with IAS 36 .
If the consolidated financial statements are prepared
on the 'parent company' basis, then dilution gains
and losses are shown in the consolidated income
statement. If the consolidated financial statements
are prepared on the 'economic entity' basis, then
dilution gains and losses are reported within shareholders'
equity, except when as a result of the dilution,
control is lost. Gains and losses in this case,
are recognised directly in the income statement,
since the investee no longer forms part of the single
economic entity.
Impairment
Any potential impairment of the assets of subsidiaries
or proportionately consolidated joint ventures is
assessed on the individual line items using the
appropriate guidance in IFRS. For example, a provision
for impairment of accounts receivable would be recorded
in accordance with the requirements of IAS 39R [IAS39R.63-65]
. Impairment of goodwill related
to acquired subsidiaries is assessed under the requirements
of IAS 36R [IAS36R.80-99] .
If there is an indication that an investment in
an associate may be impaired, IAS 36 is applied.
The investment's carrying amount including any goodwill
is compared to either the present value of the investor's
share of the associate's future cash flows, together
with estimated disposal proceeds, or the present
value of the expected future dividend flows, together
with estimated disposal proceeds [IAS28R.23,33].
Use of financial instruments
The use of financial instruments, although relevant
for the financial statements as a whole, is not
specifically relevant to the preparation of consolidated
financial statements. Hedging of a net investment
in a foreign entity is discussed in section 81 [IAS39R.102].
Presentation and disclosure
Associates and joint ventures accounted for under
the equity method should be classified within non-current
assets, as a separate item in the balance sheet
[IAS28R.38].The
after-tax results of associates and joint ventures
under the equity method can be combined in the consolidated
financial statements, but are presented as a separate
line item, before income tax [IAS1R.81(c)].
Disclosures specifically relating to consolidated
financial statements include :
| a) |
A listing of significant subsidiaries and
relationships between parents and subsidiaries
[IAS24R.12-14]; |
|
| b) |
The reasons why the ownership
of more than 50% of voting rights does not constitute
control for unconsolidated subsidiaries [IAS27R.40(d)]; |
|
| c) |
The nature of the relationship
with any subsidiaries where the parent holds
less than the majority of the voting power [IAS27R.40(c)]; |
|
| d) |
The fair value of investments
in associates for which there are published
price quotations [IAS28R.37(a)]; |
|
| e) |
Summarised financial information
of associates including assets, liabilities,
revenues and profit or loss [IAS28R.37(b)]; |
|
| f) |
The reasons why the ownership
of more than 20% of voting rights does not constitute
significant influence for investments in entities
which are not accounted for as associates [IAS28R.37(d)]; |
|
| g) |
The reasons why the ownership
of less than 20% of voting rights constitutes
significant influence for investments in associates
[IAS28R.37(c)]; |
|
| h) |
The unrecognised share of losses
of an associate when the investor has discontinued
the recognition of its share of losses [IAS28R.37(g)]; |
|
| i) |
The investor's share of changes
in the carrying amount of the investment in
the associate recognised directly in equity
[IAS28R.39]; |
|
| j) |
A venturer should disclose the
aggregate amount of contingent liabilities that
it has in relation to its investment, its share
in the contingent liabilities incurred jointly
with other venturers, and contingent liabilities
for which it is contingently liable [IAS31R.54]; |
|
| k) |
A venturer should disclose a
listing and description of its interests in
significant joint ventures and the proportion
of ownership interests in jointly controlled
entities [IAS31R.56]; |
|
| l) |
If it is not apparent from the
method chosen, a venturer should disclose its
aggregate share of current assets, long-term
assets, current liabilities, long-term liabilities,
income and expenses related to joint ventures
[IAS31R.56]; and |
|
| m) |
A venturer should disclose its
share of capital commitments it has made to
its joint ventures, and its share of its joint
ventures' contingent liabilities and capital
commitments [IAS31R.54,55]. |
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