Business Accounting

Exclusion From Consolidation Under IAS 27

A parent company is exempted from presenting consolidated financial statements where it is:

(a)  a wholly owned subsidiary; or

(b)  a virtually wholly owned subsidiary and it obtains the approval of the owners of the minority interest not to present consolidated financial statements. A virtually-own subsidiary is one in which the parent owns 90% or more of the voting power.

IAS 27 allows only two(2) circumstances when a subsidiary is excluded from consolidation. They are when:

(a)  control is temporary because the subsidiary is acquired and held exclusively with a view to its subsequent disposal in the near future; or

(b)  it operates under severe long-term restrictions which significantly impair its ability to transfer funds to its parent.

Definition Of Subsidiary

Companies Act defines a subsidiary company as one:

(a) in which the investor company

     (i)    controls the composition of the board of directors of the investee company;

     (ii)   controls more than one half of the voting power of the investee company; or

     (iii)  holds more than one half of the issued shared capital ( excluding preference   shares); or 

(b) which is a subsidiary of a subsidiary of the investor company.

Illustration:

The investor company is the holding company of the investee company if the investee company is its subsidiary. For example H holds more than 50% of the equity shares of S1,S2,S3. Therefore H, S1, S2 and S3 form a group, with H being the holding company and the other companies being subsidiaries of H.

IAS 28 :Accounting for Investments in Associates

1. An associate is an enterprise, other than a subsidiary or joint venture, over which the investor has significant influence. Significant influence means the power to participate in financial and operating policy decisions. Such influence is presumed to exist if the investor owns more that 20 per cent of the associate.

2. Associates should be accounted for by the equity method in consolidated financial statements. However, if an investment was acquired and held exclusively with an intent to dispose of it in the near future, it should be accounted for by the cost method.

3. Under the equity method, the investor recognises its proportionate share of the associate’s reported net profit or loss whether or not remitted as a dividend. The investor must amortise any goodwill implicit in the investment.

4. An investor should discontinue using the equity method if (a) it ceases to have significant influence over the associate or the associate operates under long-term restrictions that impair its ability to transfer funds to the investor.

5. Long-term investments should be valued at cost, at revalued amount, or for marketable equity securities at the lower of cost or market on a portfolio basis.

6. Permanent diminutions in value should be recognised and measured on an individual basis.