CHAPTER 14
CONSOLIDATIONS, JOINT
ARRANGEMENTS, ASSOCIATES, AND SEPARATE FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL
STATEMENTS
Scope
IFRS 10, Consolidated Financial
Statements, requires that an entity that is a parent must present consolidated
financial statements that include all subsidiaries of the parent. Only two exceptions to this rule are
presently available. Firstly, a parent need not present consolidated financial
statement if all the following criteria are met:
·
The
parent itself is a wholly-owned subsidiary or it’s a partialy-owned subsidiary
of another entity and all of its owner, including those not normally entitled
to vote, have been informed about, and don’t object to, the parent not
presenting consolidated financial statements;
·
Its
debt and equity instruments are not
traded in a public market,
·
It
didn’t file, nor is it in the process of filling, its financial statements with
a securities exchange commissions or
other regulatory organization for the purpose of issuing any class of its
instruments in a public market,
·
Its
ultimate or intermediate parent produces consolidated financial statements that
are available for public use and comply with IFRS.
Secondly, postemployment benefit
plans or other long-term employee benefits plans to which IAS 19, Employee
Benefits, aplly are also excluded from the scope of IFRS 10.
Power. Power
arises from rights, and could arise in any of the following circumstances: (1)
and investor may have the majority of voting rights: (2) an investor may have
less than 50% of the voting rights, and (3) other arrangements. The lower on
moves down this hierarchy, the more complex the assessment becomes.
Exposure, or rights, to variable returns from an investee. An investor is exposed, or has
right to, variable returns when the investor’s returns from the involvement
have the potential to vary as a result of the investor’s performance, wheter
negative or positive.
Link between power and returns. The test or link of control is when the investor has the
ability to use the power to affect the investor’s returns through its
involvement, Therefore it is important to determine whether the investor is
actin as an agent or the principal.
Majority of voting rights. Control is presumed if the majority of voting rights is
held, unless other factors indicates that the majority of voting rights
normally result in control.
Less than a majority of voting rights. Control could exist when a party has less than a
majority of voting rights. The following are examples of instances where
control could exist even though less than a majority of voting rights is held:
·
A
contractual arrangement between the investor and other parties that provide the
investor with a right to direct the relevant activities.
·
Right
arising from the other contractual arrangements.
·
The
extent of the investor’s voting rights.
·
The
investor may hold potential voting rights that are substantive.
Other arrangements. Control can also exist through other contractual arrangements. This
would usually be the case with
structured entities. A structured entities is an entity that has been designed
so that voting or similar rights aren’t the dominant factor in deciding who controls
the entity.
Consolidation Procedures
Consolidated financial statements are
prepared using uniform accounting policies for like transactions and other
events in similar circumstances.
In preparing consolidated financial
statements an entity combines the item presented in the financial statements
line by line, adding together like items of assets, liabilities, equity,
income, and expenses. In order to present financial information about the group
as that of a single economic entity, the following procedures are followed:
·
Like
items of assets, liabilities, equity, income, expenses and cash flows of the
parent are combine with those of the subsidiary.
·
The
carrying amount of the parent’s investment in each subsidiary is eliminated
against the parent’s portion of equity of each subsidiary.
·
Intragroup
assets, and liabilities, equity, income, expenses and cash flows relating to
transaction of the entities in the group are eliminated.
Intercompany transactions and balances. In preparing consolidated financial statements, any
transactions among member of the group must be eliminated. The reason for this
requirement is to avoid grossing up the financial statements for transactions
or balances that don’t represent economic events with outside parties.
Income and expenses. Income and expenses of the subsidiary are included in the consolidated
financial statements from the date control is obtained until the date when
control is lost. The income and expenses are based on amounts of assets and
liabilities recognized at the acquisition date.
Potential voting rights. When voting rights exist, the portion of profit and loss
and changes in equity allocated to the parent and noncontrolling interest in
the consolidated financial statements are based solely on the existing ownership
interest and don’t reflect the potential changes in ownership.
Noncontrolling interest. In the consolidated statement of financial position
noncontrolling interest is presented within equity, separately from the equity
of the owners of the parents.
Changes in ownership interest resulting in loss of control. Control of a subsidiary can be lost
as a result of a parent’s decision to sell its shares in the subsidiary to a
third party or as a result of a subsidiary selling its shares in the
marketplace.
JOINT ARRANGEMENTS
A joint arrangements is defined as an
arrangement of which two or more parties have joint control. Spesifically, a
joint arrangement has two or more parties have joint control. Specifically, a
joint arrangement has two characteristics: (1) the parties must be bound by
contractual arrangement, and (2) the contractual arrangement must give two or
more of the parties joint control over the arrangement. Therefore not all
parties need to have joint control.
Joint control is defined as the contractually
agreed sharing of control of an arrangement, which exist only when decisions
about the relevant activities require the unanimous consent of the parties
sharing control.
Types of Joint Arrangements
|
Type
|
Right Obligations
|
|
Joint Operation
|
Rights to the assets, and obligations
for the liabilities, relating to the arrangement.
|
|
Joint Venture
|
Rights to the net assets of the
arrangements.
|
Accounting for Joint Operations
A joint operation will account for
the following:
·
Its
assets, including its share of any assets held jointly
·
Its
liabilities, including it share of any liabilities incurred jointly
·
Its
revenue from the sale of its share of the output arising from the joint
operation
·
Its
share of the revenue from the sale of the output by the joint operation
·
Its
expenses, including its share of any expense incurred jointly.
Accounting for Joint Ventures
A joint venture recognize its
interest In a joint venture as an investment by applying the equity method of
the accounting as describe in IAS 28.
Separate Financial
Statements
The accounting for a joint operation
in the consolidated and separate financial statements is the same. A party that
participates in a joint operation that does not have joint control must also
apply the same principles as discussed above to account for its interest.
Equity accounting is only applied in the consolidated financial statements of
the joint venture. In the separate financial statements IAS 27, is applied.
ASSOCIATES
Identification of an Associate
An associate is an entity over which
an investor has significant influence. Significant influence is the power to
participate in the financial and operating policy decision of the investee but
is not control or joint control of those policies.
Accounting for an
Associate
An entity recognize its interest in a
associate by applying the equity method of IAS 28, Investment in Associates and
Joint Ventures, except if an axception is applicable.
EQUITY METHOD OF
ACCOUNTING
Scope and Application
The
equity method of accounting is applied to investments in associates and joint
ventures. The cost method for accounting for associates would simply not
reflect the economic reality of the investor’s interest in an entity whose
operations were indicative, in part at least, of the reporting entity’s
management decision and operational skills.
The Equity Method
Basic principles. The equity method permits an entity controlling a certain share of the
voting interest in another entity to incorporate its pro rata share of the
investee’s operating result into its profit or loss.
Intercompany transaction between investor and investee. Transaction between the investor
and investee may require that the investor make certain adjustments when it
records its share of the investee earnings. In preparing consolidated financial
statements, all intercompany transaction are eliminated. However, when the
equity method is used to account for investment, only the profit component of
intercompany transactions is eliminated.
Contribution of nonmonetary asets. If an investee makes a contribution of a nonmonetary asset
to an associate or joint venture in exchange for an equity interest, the fair
value of the asset is in principle capitalized as part of the
investment.However, fair value gains or losses are only recognize by the
investor to the extent of the unrelated investor’s interest in the associate or
joint venture.
Accounting for changes
in Ownership Interest
Loss of significant influence. Significant influence is lost when an investee losses the
power to participate in the financial and operating policy decisions of the
investee.
Discontinuing the equity method. The equity method is discontinued from the date when the
investment ceases to be an associate or joint venture. When the equity method
is discontinued, any equity share of the associate or joint venture recognized
in other comprehensive income must be removed by regarding this as a part of
the sale of the transaction, the effect is that the gain and loss previously
recognized in other comprehensive income is reclassified to profit or loss.
CHAPTER 15
BUSINESS COMBINATIOS
BUSINESS COMBINATIONS AND
CONSOLIDATIONS
IFRS 3(R) and IAS 27(R)
and International Accounting Convergence
In
January 2008, the IASB issued a revised version of IFRS 3, Business
Combinations, which in this publication is being referred to as IFRS 3(R), as
well as an amended version of IAS 27, Consolidated an Separate Financial
Statements, which is being referred to as IAS 27(R).
Effective Date and Transition Provisions
IFRS
3(R) and IAS 27(R) came into effect for the first annual reporting period
beginning on after July 1, 2009. Early application was permitted, although the
new pronouncements couldn’t be applied to periods beginning prior to June 30,
2007.
Objectives
The
overriding objective of the new standards is to improve the relevance,
representational faithfulness, transparency, and comparability of information
provided in financial statements about business combinationsand their effect on
the reporting entity by establishing principles and requirements with respect
to how an acquirer, in its consolidated financial statements.
BUSINESS COMBINATIONS
The
revised standards IFRS 3(R ) replaces the cost principle of accounting for the
business combinations with the fair value principle. Under the cost principle,
which was apllied under IFRS 3, the exchange transaction was tobe recorded as
cost. That cost was tobe allocated to the assets acquiredand liabilities
assumed, and goodwill was to be recognized for the difference between the cost
and the fair value of the identifiable net assets acquired.
Determining Fair Values
Accounting
for acquisitions requires a determinationof the fair value for each of the
acquired entity’s identifiable tangible and intangible asets and for each of
its liabilities at the date of combination.
Transactions and Events Accounted for as Business Combinations
A
business combination result from the occurrence of a transaction or other event
that results in an acquirer obtaining control of one or more business. This can
occur in many different ways that include the following examples individually
or in some cases, in combinations:
·
Transfer
of cash, cash equivalents, or other assets, including the transfer of assets of
another business of the acquirer
·
Incurring
liabilities
·
Issuance
of the equity instruments
·
Providing
more than one type of consideration, or
·
By
contract alone without the transfer of consideration.
Techniques for Structuring Business Combintions
A
business combination can be structured in a number of different ways that
satisfy the acquirer’s strategic, operational, legal, tax, and risk management
objectives.
Accounting for Business Combination Under theAacquisition Method
The
acquirer is to account for a business combination using the acquisition method.
This term repreents an expansion of the now-outdate term, “purchase method”.
The following steps are required to apply the acquisition method:
1. Identify the acquirer
2. Determine the acquisition date
3. Identify the assets and liabilities,
if any, requiring separate accounting because they result from transactions
that aren’t part of the business combination, and account for them in
accordance with their nature and the applicable IFRS.
4. Identify assets and liabilities that
require acquisition date classification or designation decisions to facilitate
application of IFRS in postcombination financial statements and make those
classification or designations based on
a.
Contractual
terms;
b.
Economic
conditions
c.
Acquirer
operating or accounting policies;
d.
Other
pertinent conditions existing at the acquisition date.
5. Recognize and measure the
identifiable tangible and intangible assets acquired and liabilities assumed.
6. Recognize and measure any
noncontrolling interest in the acquire.
7. Measure the consideration transferred
8. Recognize and measure goodwill or, if
the business combination result in bargain purchase, recognize a gain from the
bargain purchase.
Step 1- Identify the acquirer. The provisions of IAS 27(R ),
Consolidated and Separate Financial Statements, should be used to identify the
acquirer-the entity that obtains control of the acquiree. If applying the
guidance in IAS 27(R ) doesn’t clearly indicate the party that is the acquirer,
IFRS (3) provides factors to consider in making that determination under
different fact and circumstances.
Step 2- Determine the acquisition date.
The general rulenis that the acquisition date is the date on which the acquirer
legally transfers consideration, acquires the assets, and assume the
liabilities of the acquire. This date, in a relatively straightforward transaction
is referred to as the closing date. Not all transactions are that
straightforward, however.
Step 3- Recognize and measure
the identifiable tangible and intangible assets acquired and liabilities
assumed. IFRS 3 (R)
provides the acquirer with choice of two methods to measure noncontrolling
interest arising in a business combination:
1. To measure the noncontrolling
interest at a fair value, or
2. To measure the noncontrolling
interest at the noncontrolling interest’s share of the acquire;s net assets.
Step 4- Identify assets and
liabilities requiring separate accounting. IFRS 3(R ) provides a basic recognition principle
that, as of the acquirer is to recognize, separately from goodwill, the fair
values of all identifiable assets acquired, the liabilities assumed, and if
applicable, any noncontrolling interest in the acquire.
Step 5- Classify or designate
identifiable assets acquired and liabilities assumed. In order to facilitate the combine
entity’s future application of IFRS in its postcombination financial
statements, management is required to make decisions on the acquisition date
relative to the classification or designation of certain items.
Step 6- Recognize and measure
any noncontrolling interest in the acquire. IFRS 3 (R ) provides the acquirer with a choice of
two method to measure noncontrolling interest at the acquisition daate arising
in a business combination:
1. To measure the noncontrolling
interest at fair value or
2. To measure the noncontrolling
interest at the present ownership instruments share the recognize amounts of
the acquiree’s identifiable net assets.
Step 7- Measure the
consideration transferred. In general, consideration transferred by the acquire is measured at its
acquisition-date fair value. Examples of consideration that could be
transferred include cash, other assets, a business, a subsidiary of the
acquirer, contingent consideration, ordinary or preference equityninstruments,
options, warrants, and member interest of mutual entities.
Step 8- Recognize and measure
goodwill or gain from a bargain purchase. Goodwil represent an intangible that isn’t spesifically
identifiable. It result from situation when the amount the acquirer is willing
to pay to obtain its controlling interest exceeds the aggregate recognize
values of the net asset acquired measured following the pronciples of IFRS3(R
).
GW (or GBP) = (CT+NI+PE)-NA
GW =
Goodwill
GBP =
Gain from a bargain purchase
NI =
Noncontrolling interest in the acquire
CT =
Consideration transferred, generally measured at acquisition-date fair value
PE =
Fair value of the acquirer’s previously held interest in the acquire if the
acquisition was
achieved in stages
NA =
Net Assets acquired.
Bargain purchase. A bargain purchase occurs when the
value of net assets acquire is in excess of the acquisition date fair value of
the consideration transferred plus the amount of any noncontrolling interest
and plus fair value of the acquirer’s previously held equity interest.
Acquisition-related cost. Cost incurred by an acquirer to
enter into a business combination.
Goodwill and Gain from Bargain Purchase.
Goodwill. Goodwill represents the
difference between the acquisition date fair value of the consideration
transferred plus the amount of any noncontrolling interest in the acquire plus
the acquisition date fair value of the acquiree’s previously held equity
interest in the acquire.
Gain from a bargain purchase. In certain business combination,
the consideration transferred is less than the fair valueof net assets
required.
CHAPTER 29
RELATED-PARTY DISCLOSURES
INTRODUCTION
Transactions
between entities that are considered related
parties, as defined by IAS 24, Related-Party
Disclosures, must be adequately disclosed in financial statements of the
reporting entity. Such disclosures have long been a common feature of financial
reporting, and most national accounting standard-setting bodies have imposed
similar mandates.
A
related party is a person or entity that is related to the entity that is
preparing its financial statements (in this Standard referred to as the
‘reporting entity’).
A
person or a close member of that person’s family is related to a reporting
entity if that person:
1.
has
control or joint control over the reporting entity;
2.
has
significant influence over the reporting entity; or
3.
is
a member of the key management personnel of the reporting entity or of a parent
of the reporting entity.
An entity is related to a reporting
entity if any of the following conditions applies:
1.
The
entity and the reporting entity are members of the same group (which means that
each parent, subsidiary and fellow subsidiary is related to the others).
2.
One
entity is an associate or joint venture of the other entity (or an associate or
joint venture of a member of a group of which the other entity is a member).
3.
Both
entities are joint ventures of the same third party.
4.
One
entity is a joint venture of a third entity and the other entity is an
associate of the third entity.
5.
The
entity is a post-employment benefit plan for the benefit of employees of either
the reporting entity or an entity related to the reporting entity. If the
reporting entity is itself such a plan, the sponsoring employers are also
related to the reporting entity.
6.
The
entity is controlled or jointly controlled by a person identified above
7.
A
person identified in 1. Above has significant influence over the entity or is a
member of the key management personnel of the entity (or of a parent of the
entity)
Scope of the Standard
IAS 24 is to be applied applied in
dealing with related parties and transactions between a reporting entity and
its related partie. The requirements of this standard apply to the financial
statements of each reporting entity.
Applicability
The requirements of the standard should
be applied to related parties as identified in the definition of a related
party.
