INTRODUCTION TO CONSOLIDATION AND GROUP ACCOUNTS

Group accounts, consolidation and accounting for investments in general, seem to be very popular IFRS topics. I know they are examined frequently during any accounting exam, including ICAN or ACCA. Also, when any company acquires some new investment, then consolidation, group
accounts or similar techniques become the topic of the day. Well, there are several types of investments like subsidiaries, associates, or just some small share in another company. You need to specify WHAT investment you acquired and then determine HOW to account for them.

Moreover, there are 6 IFRS dealing with consolidation and group accounts, so we need to know how to find the way around.

Many people refer to consolidation when they speak about their share in other business in general.

However, we need to differentiate between the individual types of investments in other businesses, because every type of the investment is accounted for in its own way.
 

First, you need to determine what type of investment you’re dealing with.

Then, you need to look in the appropriate IFRS standard and apply the appropriate rules.

I’d like to outline the basic types of investments, their accounting methods and the IFRS standards you should be looking at.
 
IFRS Standards Dealing with Group Accounts

There are 6 IFRS standards dealing with group accounts:
 

1. IAS 27 Separate Financial Statements

This standard prescribes how the investor shall present its investments in the individual or separate (non-consolidated) financial statements. Before 2013, IAS 27 covered also consolidated financial statements, but this part has been superseded and starting 1 January 2013, you should look to IFRS 10 for the rules about consolidated financial statements.

2. IAS 28 Investments in Associates

IAS 28 prescribes the accounting treatment of associates, or the entities in which the investor has significant influence (but not control or joint control).
 

3. IFRS 3 Business Combinations

IFRS 3 outlines the accounting when the investor obtains a control over its investment.

People are often confused because both IFRS 3 and IFRS 10 deal with this situation, but each of these standards deals with its own aspects of the same thing. IFRS 3 tells us what the business combination is, how to account for it at the recognition (but not when you perform consolidation afterwards – then it’s IFRS 10), how to measure goodwill, non-controlling interest and assets and liabilities acquired.
 

4. IFRS 10 Consolidated Financial Statements

This is the second standard dealing with the situation when the investor obtains a control over its investment. As opposed to IFRS 3 mentioned above, IFRS 10 defines the control and gives a guidance to identify whether there is a control or not. Then it also prescribes the consolidation procedures for preparing consolidated financial statements.
 

5. IFRS 11 Joint Arrangements

IFRS 11 deals with the third type of investment – joint arrangement, which could be a joint operation or joint venture. In both cases, investor obtains joint control over some business with some other investor. Before 2013, IAS 28 included the rules for joint arrangements, but now, we should look to IFRS 11.
 

6. IFRS 12 Disclosure of Interests in Other Entities

IFRS 12 relates to all types of interests in other entities: subsidiaries, associates, joint arrangements and unconsolidated structured entities.

It requires disclosures of various kind of information about these interests.


 

How to Account for Your Investment

As I have already mentioned above, you should first determine WHAT TYPE of investment you deal with and based on the type, apply specified accounting treatment. There are 4 basic types of investments:
 

1. Subsidiaries

IFRS 10 defines a subsidiary as “an entity controlled by another entity”. The basic indicator of having a control over subsidiary is the size of your share in it. If you own more than 50% of investment’s shares, then it indicates you control it. However, that’s not always the truth and sometimes, investor does NOT have a control even if it owns more than 50% of shares. The opposite may be true: investor can have a control despite the share lower than 50%. If there is a control, then investor must account for such an investment using the acquisition method and apply full consolidation procedures when making consolidated financial statements.
 

2. Associates

IAS 28 defines an associate as “an entity over which an investor has significant influence and which is neither a subsidiary nor an interest in joint venture”. Here, the basic indicator of significant influence is the investors share between 20% and 50%, but similarly as with subsidiaries and control, there are situations where significant influence might or might not be demonstrated regardless the size of ownership. If there’s a significant influence, then investor must account for such an investment using the equity method.
 

3. Joint Arrangements

IFRS 11 defines joint arrangement as “arrangement of which 2 or more parties have joint control”.

It does not make any sense to quantify the “share” here, because it should be equal for all the parties. So if there are 2 parties of arrangement, each party has 50% share. If there are 3 parties, each party has 33.3% share – you get the idea. Instead, parties need to exercise joint control over the arrangement. It means that important decisions require unanimous consent of all parties of the arrangement and no single party can decide independently.

IFRS 11 requires accounting for joint arrangement based on its specific type:

• If parties established joint venture, then each party accounts for its investment using the equity method in line with IAS 28, and
  
• If parties established joint operation, then each party accounts for its own assets, liabilities, expenses, revenues and its share on all items incurred jointly.

4. Other Investments

If an investor acquires any other investment that does not fall into any of above categories, then it is accounted for as a financial instrument in line with IAS 39 or IFRS 9.

 This is just a very quick and short introduction to the world of group accounts and consolidation and as I’ve written above, relevant IFRS summaries and explanations will follow.