The document discusses several questions or cases related to consolidation of financial statements under IAS 27. It addresses questions about whether consolidated financial statements are required when subsidiaries are sold during the year or when a parent company has over 100 subsidiaries. It also discusses cases involving joint control of subsidiaries, situations where a parent owns over 50% voting power but does not intend to control the subsidiary, indirect ownership of a subsidiary, and how to treat intermediary subsidiaries that each own a portion of another subsidiary. Additional topics covered include goodwill calculation when control restrictions are later removed, whether consolidation is required if a company is fully funded but does not own equity, and definitions related to consolidated financial statements.

1. Consolidation of AccountsCA SandeshMundra,sandeshmundra@gmail.com IAS - 27 October 30, 2010 CA Sandesh Mundra, Chartered Accountants 1

2. Poser 1 M/s Urea Corporation Ltd sold all its three subsidiaries at different dates during the year. Whether is it required to present CFS? CA Sandesh Mundra, Chartered Accountants 2

3. Poser 2 M/s Bottles International Ltd has 100 subsidiaries. It is preparing CFS, would it be still required to attach all subsidiaries FS as per Section 212 of The Companies Act, 1956? CA Sandesh Mundra, Chartered Accountants 3

4. Poser 3 M/s HLS Ltd and M/s LHS Ltd each hold 50% equity in M/s HLHS Ltd. Each company exercises control over the board every alternate year. CA Sandesh Mundra, Chartered Accountants 4

5. Poser 4 M/s ICAI Ltd owns more than 50% voting power of M/s ICSI Ltd. However ICAI Ltd argues that though it owns more than 50% voting power, however it does not intend to control the enterprise and thus does not want to consolidated. Whether is it required to present CFS? CA Sandesh Mundra, Chartered Accountants 5

6. Poser 5 M/s Gujarat Ltd owns 60% in M/s Ahmedabad Ltd. M/s Ahmedabad Ltd owns 60% in M/s AMC Ltd. Thus indirectly M/s Gujarat Ltd owns 36% shares in M/s AMC Ltd. Is M/s AMC Ltd subsidiary of M/s Gujarat Ltd as per AS-21? CA Sandesh Mundra, Chartered Accountants 6

7. Poser 6 M/s Sonia Ltd A has four wholly owned subsidiaries which own 25% each in M/s Manmohan Ltd. Whether equity accounting would be required by the intermediary subsidiaries and then consolidated by M/s Sonia Ltd, or would it directly consolidate? CA Sandesh Mundra, Chartered Accountants 7

8. Poser 7 M/s China Ltd acquired 60% equity in M/s Hongkong Ltd on 31-03-2004. However due to control restrictions it could not consolidate the entity. But w.e.f 1-4-2008 all restrictions have gone . How should be the goodwill calculation be done? CA Sandesh Mundra, Chartered Accountants 8

9. Poser 8 M/s ISI Ltd is completely funded by M/s Pakistan Ltd, although it is not owning any equity/control whether directly or indirectly as per AS-21. Would it be required to consolidate the same? CA Sandesh Mundra, Chartered Accountants 9

10. Consolidation - Combination Acquisition Merger Hostile take-over Common Control Joint Venture De facto Control Need for consolidated information CA Sandesh Mundra, Chartered Accountants 10

11. Important Definitions:- Consolidated financial statements are the financial statements of a group presented as those of a single economic entity. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Non-controlling interest is the equity in a subsidiary not attributable, directly or indirectly, to a parent. Separate financial statements are those presented by a parent, an investor in an associate or a venturer in a jointly controlled entity, in which the investments are accounted for on the basis of the direct equity interest rather than on the basis of the reported results and net assets of the investees. A subsidiary is an entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the parent). CA Sandesh Mundra, Chartered Accountants 11

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14. GAAP Differences CA Sandesh Mundra, Chartered Accountants 14

15. GAAP Differences….. CA Sandesh Mundra, Chartered Accountants 15

16. GAAP Differences….. CA Sandesh Mundra, Chartered Accountants 16

17. GAAP Differences….. CA Sandesh Mundra, Chartered Accountants 17

18. Hope you are Ok!!! CA Sandesh Mundra, Chartered Accountants 18

20. the parent’s debt or equity instruments are not publicly traded.

21. the parent is not filing its statements for the purpose of issuing any class of instruments in a public market.

22. the ultimate parent (or any intermediate parent) of the entity produces publicly available consolidated financial statements that are IFRS compliant.CA Sandesh Mundra, Chartered Accountants 19

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24. Special purpose entities Features of SPE :- • Auto-pilot arrangements that restrict the decision-making capacity of the governing board or management • Use of professional directors, trustees or partners. • Thin capitalization, the proportion of ‘real’ equity is too small to support the SPE’s overall activities. • Absence of an apparent profit-making motive, • Domiciled in ‘offshore’ capital havens. • Have a specified life. • Exists for financial engineering purposes. • The creator or sponsor transfers assets to the SPE, as part of a derecognition transaction involving financial assets CA Sandesh Mundra, Chartered Accountants 21

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26. Accounting Principles SIC 12 requires that an SPE should be consolidated when the substance of the relationship indicates that the SPE is a subsidiary. For consolidation:- • follow usual procedures • elimination of inter-company activity • presentation of minority interests. IAS 27 requires specific disclosures for subsidiaries that are consolidated for reasons other than majority of voting power. These disclosure requirements apply to subsidiaries consolidated under SIC 12. CA Sandesh Mundra, Chartered Accountants 23

27. Consolidation procedures Start consolidation – when control commences Combining the accounts of the parent and it’s subsidiaries Accounting Policy Adjustments Line by Line Addition Inter-company Transactions / Balances Unrealised Profit Elimination Other Adjustments Elimination of parent’s investment Disclose minority interests separately Base on present ownership interests Stop consolidation – when control ceases CA Sandesh Mundra, Chartered Accountants 24

28. Consolidation – Example A + Not F- CA Sandesh Mundra, Chartered Accountants 25

29. Consolidation – Elimination of inter-company purchases and sales CA Sandesh Mundra, Chartered Accountants 26

30. Significant changes - goodwill Acquired business measured at fair value as a whole 100% goodwill recognised Consistent with treatment of other assets Goodwill allocated between acquirer and non-controlling interest (was minority interest) Allocation of goodwill to acquirer based on: Fair value of acquirer’s equity interest LESS Fair value of share of net assets acquired Balance to NCI CA Sandesh Mundra, Chartered Accountants 27

31. IFRS : Goodwill example P acquires 75% (750 000 shares) of S for CU7.5m Shares in S trading about $8 per share Expectation of synergies Independent valuation  value of S = CU9.7m Fair value of net assets acquired = CU8m CA Sandesh Mundra, Chartered Accountants 28

32. IFRS : Goodwill example CA Sandesh Mundra, Chartered Accountants 29

33. Step acquisitions Change in accounting for step acquisitions A owns an investment in B B = associated comp to A (i.e. A doesn’t control B) If A increase its stake & gains control over B it must Determine fair value of associate Recognise profit/loss in income statement Follow the provisions of IFRS 3 Cost would include fair value of B CA Sandesh Mundra, Chartered Accountants 30

34. Step acquisition – illustration A owns 35% stake in B at 31 Dec 2007 Book value at 31 Dec 2007 = CU2,500 Buying additional 40% on 31 Dec 2007 at CU4,000 Fair value (FV) of total B = CU10,000 31 Dec 2007 A recognise gain of CU1,000 [(35%*CU10,000)- CU2,500] A accounts for 40% purchase under ED IFRS 3 FV of all of B = CU10,000 and FV of 75% of B = CU7,500 Subsequent purchases = equity transaction CA Sandesh Mundra, Chartered Accountants 31

35. A owns 60% of B On 1 January 20Y0 A disposes of 20% of B for 400 and loses control. Carrying amount of NCI of B on 1 January 20Y0 is 700. Carrying amount of net assets of B on 1 January 20Y0 is 1,750. Fair value of remaining 40% is 800. Loss of Control CA Sandesh Mundra, Chartered Accountants 32

36. Loss of Control ……… Disposal of the 20% interest is recorded as follows Dr. Cash 400 Dr. Non-controlling interest 700 Dr. Investment in B 800 Cr. Net assets of B (including goodwill) 1,750 Cr. Gain on disposal 150 Gain is based on the following calculation Gain on 40% retained 100 (800 - (40% x 1,750)) Gain on 20% disposed of 50 (400 - (20% x 1,750)) Total gain 150 Assuming that the remaining 40% represents an associate, the fair value of 800 represents cost on initial recognition and IAS 28 applies going forward. CA Sandesh Mundra, Chartered Accountants 33

37. Separate Financial Statements of the Parent or Investor in an Associate orJointly Controlled Entity In the parent's/investor's individual financial statements, investments in subsidiaries, Associates, and jointly controlled entities should be accounted for either: [IAS 27.37] · at cost; or · in accordance with IAS 39. Such investments may not be accounted for by the equity method in the parent's/investor's separate statements. CA Sandesh Mundra, Chartered Accountants 34

38. Disclosures. the nature of the relationship when the parent owns < 50% Voting Power, the reasons why the ownership > 50% Voting Power does not constitute control, the reporting date of the financial statements of a subsidiary that is different from that of the parent with reasons, the nature and extent of significant restrictions to transfer funds to the parent. Disclosures required in separate financial statements that are prepared for a parent that is permitted not to prepare consolidated financial statements: [IAS 27.41] the fact that the financial statements are separate; that the exemption from consolidation has been used; the name and country of incorporation or residence of the entity whose consolidated financial statements that comply with IFRS have been produced for public use; and the address where those consolidated financial statements are obtainable, a list of significant investments in subsidiaries, jointly controlled entities, and associates, including the name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held, and a description of the method used to account for the foregoing investments. Disclosures required in the separate financial statements of a parent, investor in a jointly controlled entity, or investor in an associate: [IAS 27.42] the fact that the statements are separate financial statements and the reasons why those statements are prepared if not required by law, a list of significant investments in subsidiaries, jointly controlled entities, and associates, including the name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held, and a description of the method used to account for the foregoing investments. CA Sandesh Mundra, Chartered Accountants 35

39. IAS 28 - Associates Associate: an entity in which an investor has significant influence but not control or joint control. A holding of 20% or more of the voting power (directly or through subsidiaries) will indicate significant influence. Applying the Equity Method of Accounting Basic principle. Under the equity method of accounting, an equity investment is initially recorded at cost and is subsequently adjusted to reflect the investor's share of the net profit or loss of the associate. [IAS 28.11] Distributions Distributions received from the investee reduce the carrying amount of the investment. Implicit goodwill and fair value adjustments. Any difference between the cost of acquisition and the investor's share of the fair values of the net identifiable assets of the associate is accounted for like goodwill in accordance with IFRS 3 Business Combinations. Appropriate adjustments to the investor's share of the profits or losses after acquisition are made to account for additional depreciation or amortisation of the associate's depreciable or amortisable assets based on the excess of their fair values over their carrying amounts at the time the investment was acquired. [IAS 28.23] CA Sandesh Mundra, Chartered Accountants 36

40. IAS 31 – Joint Ventures Joint control: the contractually agreed sharing of control over an economic activity. Joint control exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the venturers. Jointly Controlled Operations involve the use of assets and other resources of the venturers rather than a separate entity. Jointly Controlled Assets involve the joint control, and often the joint ownership, of assets dedicated to the joint venture. Each venturer may take a share of the output from the assets and each bears a share of the expenses incurred. Jointly Controlled Entity is a corporation, partnership, or other entity in which two or more venturers have an interest, under a contractual arrangement that establishes joint control over the entity. [IAS 31.24] IAS 31 allows two treatments of accounting for an investment in jointly controlled entities – except as noted below: proportionate consolidation [IAS 31.30] equity method of accounting [IAS 31.38] CA Sandesh Mundra, Chartered Accountants 37

41. Time for an exercise…. CA Sandesh Mundra, Chartered Accountants 38

42. Any Questions…….. CA Sandesh Mundra, Chartered Accountants 39

43. 40 CA Sandesh Mundra, Chartered Accountants 40