When you put together a group’s financial statements, they should accurately show its cash flows, financial situation, and performance.

A group must not only present its consolidated financial statements fairly, but it should also combine the financial statements of its parent and its subsidiaries and show that information as if the group were a single economic unit.

In the accounting policy note, it should be clear what accounting rules are used for the combining process. When doing a consolidation, the following accounting rules need to be taken into account; many of them should be explained in the accounting policy note:

• The effective dates and methods of accounting used to consolidate new subsidiaries – that is, acquisition accounting and how to account for disposals.
• The treatment of any goodwill arising on consolidation and the treatment of other differences arising on consolidation.
• The translation of foreign subsidiaries’ financial statements.
• How to account for non-controlling interests.
• How associates and joint arrangements are dealt with.
• How any non-coterminous year ends of the parent and subsidiaries are dealt with.

Procedure for consolidation

The information from the separate financial statements of the companies that are being merged should be included in the consolidated statement of financial position and the consolidated statement of comprehensive income, with a few changes made for the consolidation. However, IFRS 10 doesn’t go into specifics about how this information should be put together.

There are several reasons a parent company may need to make changes to the financial statements of its subsidiaries in order to prepare the combined financial statements for the whole group. The next few lines will talk about some of these reasons and the rules that apply to these kinds of changes.

Consolidation adjustments

Uniform accounting policies

For similar transactions and events, the amounts that should be included in the consolidated financial records should be based on the same set of group accounting rules.

If a subsidiary’s transactions and other similar events were recorded using accounting rules that are different from those used by the group, changes must be made to the consolidated accounts.

When might adjustments be required to conform with amounts reported by subsidiaries? An adjustment may be necessary when a subsidiary, which follows local GAAP, values its land and buildings using a revaluation method specified by that GAAP. However, the group has chosen to treat these valuations as cost under IFRS 1 during the adoption of IFRS, and subsequently uses the cost model under IAS 16. In this scenario, the current combined financial statements, which follow the International Financial Reporting Standards (IFRS), must be modified to remove any further reassessments that are contained in the financial statements of the subsidiaries, which are prepared in accordance with the local Generally Accepted Accounting Principles (GAAP). If a group acquires a new subsidiary that has different accounting policies, the new subsidiary should modify its accounting policy for its separate financial statements and make a prior year adjustment in line with IAS 8. Alternatively, the new subsidiary has the option to maintain its existing accounting principles in its individual financial statements. However, when consolidating the subsidiary’s results with the group’s financial statements, the group would need to make an adjustment to align the subsidiary’s results with the group’s accounting standards.

Subsidiary year ends

Whenever possible, the financial statements of all subsidiaries should be prepared to align with the same financial year end as the parent company’s financial accounts. This is important for the preparation of consolidated financial statements.

The financial statements utilized must also encompass the identical financial period. If the reporting date of a subsidiary is different from that of the parent company, it is necessary to generate supplementary financial statements for the subsidiary that align with the reporting date of the parent company. These additional financial statements will be used by the parent company to prepare its consolidated financial statements.

Using supplementary financial statements is not feasible. Instead, the subsidiary’s financial statements should be utilized, as long as they are for a year that ended no more than three months before or after the parent company’s relevant year end. Any modifications that have occurred during the intervening period, which significantly impact the perspective provided by the consolidated financial statements, should be considered when making adjustments to the consolidated financial statements. Consistency in the duration of reporting periods and uniformity in reporting dates should be maintained over consecutive reporting periods.

What types of consolidation adjustment might be required for non-coterminous year ends? Consolidation adjustments may be necessary for dividends paid by the subsidiary to the parent and for settling outstanding intragroup accounts at the subsidiary’s year end. These adjustments are an integral component of the consolidation process. Some transactions may not be as obvious, such as a post balance sheet event occurring in the subsidiary. For instance, if a subsidiary incurs a significant loss on a contract between its year-end and that of its parent company, an adjustment would need to be made. Another instance where a subsidiary is established in a foreign country is when there is a decrease in the value of the currency it uses for trading between its year-end and that of its parent company.

Subsidiaries with non-coterminous year ends The parent company’s fiscal year ends on December 31, 20X1. One of its subsidiaries has a fiscal year ending on June 30, 20X1, while another subsidiary has a fiscal year ending on September 30, 20X1. Which specific financial figures should the parent company incorporate into its consolidated financial statements for these subsidiaries? The initial subsidiary must generate supplementary financial statements for the period ending on 31 December 20X1, which aligns with the parent company’s fiscal year. Despite the fact that the date of 30 November falls within three months of the parent company’s year end, it is unable to generate any more financial statements. The parent is prohibited from consolidating the subsidiary’s separate financial statements, unless the subsidiary is insignificant, due to the fact that the subsidiary’s year-end is more than three months prior to the parent’s.n regards to the second subsidiary, the parent company should include additional financial statements prepared by the subsidiary for the period ending on December 31, 20X1. However, if this is not feasible, the parent company can instead consolidate the subsidiary’s financial statements for the period ending on September 30, 20X1, as it falls within three months prior to the parent company’s year-end. When using the financial statements for 30 September 20X1, it is important to consider the need to make adjustments for significant transactions that occurred between the subsidiary’s year end and the parent’s year end..

Change in period for subsidiary with non-coterminous year end A parent company with a fiscal year ending on March 31 has been combining the financial statements of its subsidiary, which are prepared up until December 31, for several years. The decision has been made to utilize the management accounts of the subsidiary until 31 March 20X2 for the purpose of consolidating the group’s financial statements until the same date. The consolidated financial statements for the fiscal year ending on March 31, 20X2 would incorporate the subsidiary’s trade activities for a period of 15 months. In contrast, the financial statements produced by the group for the period ending on 31 March 20X1 include the subsidiary’s trading activity for the entire 12 months, which ended on 31 December 20X0. Hence, the consolidated financial statements prepared for the fiscal year ending on March 31, 20X2 include comparative data that is not genuinely comparable. Additionally, if the subsidiary had a significant impact on the overall performance of the group, it could be misleading to assert that the group’s consolidated financial statements reflect the group’s trading activities for only a period of 12 months. If the subsidiary’s trading is particularly material to the group, there are two possible approaches: ·        Include the result of the material subsidiary for the 15-month period ending on 31 March 20X2, but show the impact that the additional three months has on the reported results. This can be done in a variety of ways. One approach would be to split the trading into three columns and show the subsidiary’s trading for the three months to 31 March 20X1 in one column, the trading for the 12 months to March 20X2 (including the subsidiary) in the next column, and a total column. ·        Include the result of the material subsidiary for the 12-month period ending 31 March 20X2, and disclose the subsidiary’s trading for the three months to 31 March 20X1. The comparatives remain unchanged. Some would argue that the comparatives are not truly comparable under either approach. To resolve this issue, it would also be necessary to make additional disclosures. However, the need for additional disclosure will depend on the individual circumstances.

The following information should be given for each subsidiary that is included in the consolidated financial statements on the basis of information prepared to a different date or for a different reporting period from that of the parent:

• Its reporting date.
• The reason for using a different reporting date or period.

Elimination of intra-group transactions

Intra-group balances, transactions, income and expenses should be eliminated in full. The rules are as follows:

• Intra-group balances and transactions, including income and expenses and dividends, should be eliminated in full.

• Profits and losses resulting from intra-group transactions that are recognized in assets, such as inventory and fixed assets, should be eliminated in full.
• Intra-group losses indicate the possibility of an impairment that might need to be recognized in the consolidated financial statements.

• IAS 12 should be applied to any temporary differences that arise from the elimination of profits and losses resulting from intra-group transactions.

Why are unrealized profits or losses eliminated in full where transactions are between subsidiaries with non-controlling interests? The rationale for completely removing unrealized earnings or losses, particularly in cases where the transactions involve subsidiary firms with minority ownership, may not be immediately apparent. Nevertheless, the parent firm has complete authority over transactions between its subsidiaries that are part of the consolidation, regardless of whether the subsidiaries are fully owned. The consolidation process includes the inclusion of all assets, liabilities, and transactions of a subsidiary, regardless of whether they are fully owned or not. Consequently, as the group encompasses all the assets and liabilities of each subsidiary, any transactions within the group that generate unrealized profits or losses at the balance sheet date are entirely unrealized for the group. These transactions do not result in any change in the group’s net assets. Consequently, it is necessary to completely eradicate them, especially in cases where the transactions involve subsidiaries with minority ownership. The regulations are applicable to any profit that may be included in the non-current assets of the group, which occurs when one company within the group sells assets to another firm within the group at a profit.

Elimination of intra-group profit on sale of assets by a subsidiary to its parent A parent owns 60% of a subsidiary. The subsidiary sells some inventory to the parent for C70,000, and it makes a profit of C30,000 on the sale. The inventory is in the parent’s balance sheet at the year end. The parent should eliminate 100% of the unrealized profit on consolidation. The inventory will, therefore, be carried in the group’s balance sheet at C40,000 (C70,000 – C30,000). The consolidated income statement will show a corresponding reduction in profit of C30,000. The double entry on consolidation is as follows: C’000 C’000 Dr Revenue 70 Cr Cost of sales 40 Cr Inventory 30 The reduction of group profit of C30,000 is allocated between the parent company and non-controlling interest in the ratio of their interests: 60% and 40%.

Elimination of intra-group profit on sale of assets by a parent to its subsidiary A parent owns 60% of a subsidiary. It sells some inventory to the subsidiary for C70,000 and makes a profit of C30,000 on the sale. The inventory is in the subsidiary’s balance sheet at the year end. The parent should eliminate 100% of the unrealized profit on consolidation. The inventory will, therefore, be carried in the group’s balance sheet at C40,000 (C70,000 – C30,000). The consolidated income statement will show a corresponding reduction in profit of C30,000. The double entry on consolidation is as follows: C’000 C’000 Dr Revenue 70 Cr Cost of sales 40 Cr Inventory 30 In this case, since it is the parent that has made the sale, the reduction in profit of C30,000 is allocated entirely to the parent company.