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1、Chapter 18 Consolidation: controlled entities Prepared by Mark Vallely,Learning objectives,Explain the meaning of consolidated financial statements (p. 906) Discuss the meaning and application of the criterion of control (p. 909) Discuss which entities should prepare consolidated financial statement
2、s (p. 915) Explain the nature of an investment entity (p. 917) Outline the relationship between a parent and an acquirer in a business combination (p. 918) Explain the differences in disclosure requirements between single entities and consolidated entities (p. 920),Introduction,Consolidated financia
3、l statements Involves the preparation of a single set of financial statements Involves combining the financial statements of the individual entities in a group So that they show the financial position and financial performance of the group of entities Presented as if they were a single economic enti
4、ty Questions: Which entities do we include in the group? What are the accounting procedures to prepare consolidated accounts? What is the purpose of consolidated financial statements? Relevant standards: AASB 10 Consolidated Financial Statements AASB 3 Business Combinations,Consolidated financial st
5、atements,Consolidated financial statements are the financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity,Group a parent and its subsidiaries,Parent an entity that
6、 controls one or more entities,Subsidiaries an entity that is controlled by another entity,A Ltd,B Ltd,Parent,Subsidiary,“control” must exist (more on this later),The group is referred to as the “A Ltd Group”,Consolidated financial statements,Consolidated financial statements,Consolidation involves
7、combining financial statements of individual entities to show financial position and performance of group as if it were single entity Consolidated financial statements are prepared by (i) Aggregating (combining), line by line, like items of assets, liabilities, equity, income and expenses (ii) Adjus
8、ting these combined figures for inter-group transactions between entities within the group (covered in following chapters),Consolidated financial statements,Simple consolidation worksheet for the A Ltd group,Consolidation does not involve adjustments in the accounts of the entities. Consolidated fin
9、ancial statements are an additional set of financial statements and are prepared in a consolidation worksheet.,Consolidated financial statements,Reasons for consolidation: Supply of relevant information Comparable information Accountability Reporting of risks and benefits,Control as the criterion fo
10、r consolidation,A parent is an entity that controls one or more entities Control is the criterion for identifying when a parent-subsidiary relationship exists Significant judgement is often required in determining whether control exists An investor controls an investee when the investor is exposed,
11、or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee,Control as the criterion for consolidation,The following three elements are required in order for an investor to have control: 1. power over the i
12、nvestee 2. exposure, or rights, to variable returns from its involvement with the investee 3. the ability to use its power over the investee to affect the amount of the investors returns. All three elements must be present for control to exist,Control as the criterion for consolidation Power,Power i
13、s defined as existing rights that give the current ability to direct the relevant activities Power arises from rights. Most rights arise from a legal contract. Examples in AASB 10 include: Voting rights Rights to appoint, reassign or remove members of the investees key management personnel Rights to
14、 appoint or remove another entity that participates in management decisions Rights to direct the investee to enter into, or veto any changes to, transactions that affect the investees returns,Control as the criterion for consolidation Power,Power arises from rights. Rights must be substantive the ho
15、lder must have the practical ability to exercise the rights. Judgment is required in determining whether rights are substantive. Factors to consider per AASB 10 are: Whether the party that holds the rights would benefit from exercising the rights e.g. potential voting rights; Whether there are any b
16、arriers that prevent a holder from exercising rights. Where multiple parties are involved, whether there is a mechanism in place to enable those parties to practically exercise the rights.,Control as the criterion for consolidation Power,Power arises from rights. If a right is purely protective, then the holder does not have power. Protective rights are designed to protect the interest of the party holding those rights without giving the party power over the entity
