A brief essence of International Accounting Standard 27

1. IAS 27
Consolidated financial
statements

2. GROUP THREE (EXID)
Serial No Name ID
1 Tafannoom
Chowdhury Piya
19087
2 Riyan Binte
Kamal
19095
3 Ardra Lailac 19115
4 Md. Shohan
Molla
19116
5 Maliha Jahan 19146

3. CONTENTS
 Introduction – Company groups
 Rationale for consolidated financial
statements
 Current practice
 Acquisition accounting
 Associated companies
 Joint ventures

4. GROUP FINANCIAL STATEMENTS
 Group (or consolidated) financial
statements are the financial statements of a
set of two or more enterprises organised as
an economic entity
 Group is defined according to concept of
“control”
 Control = power (de jure or de facto) to
govern the financial and operating policies
of an entity so as to obtain benefits from its
activities (IFRS)

5. COMPANY GROUPS
Company group characteristics
Vertical group
Horizontal group
Conglomerate
Group expansion
Development of new subsidiaries
Acquisition by takeover of other companies
Meger between companies

6. SHARES - RIGHTS
Membership rights :
Influence on management, voting power
Equity rights:
Right to participate in distribution of profits
+ equivalent part of liquidation balance
In principle: rights are proportional to
capital share
Exceptions: preference shares, limitations
to voting power, multiple votes per share,...

7. TYPES OF PARTICIPATING SHAREHOLDINGS
Type of
relationship
Amount of
voting rights
Qualification of
shareholdings
1 Control 50% +1 Subsidiary
2 Significant
influence
>= 20% Associated
company
3 Only financial < 20% Financial
investment

8. GROUP STRUCTURE
Enterprise A
100% 25%
51%
Enterpise B Enterprise C Enterprise D
9% 100%
Enterprise E
Enterprise F

9. RATIONALE FOR GROUP FINANCIAL
STATEMENTS
 Interdependent relationships within a group
(patrimonial, contractual, personal ties)
 Loss of part of their independence of individual
entities
 Common or unified management
 Economic interest of the group > individual
interests of legal entities involved
 It is economically more relevant to present the
financial statement of the economic whole as an
aggregate of all assets and liabilities under unified
control

10. FROM INDIVIDUAL TO GROUP ACCOUNTS
Co. W Co. X W Group
€’000 €’000 €’000
Tangible assets 500 1000 1500
Investment in subsidiary 500 - -
Current assets 250 350 600
Totals 1250 1350 2100
Shares 500 500 500
Reserves 300 (50) 250
800 450 750
LT debt 300 700 1000
Trade creditors 150 200 350
Totals 1250 1350 2100
Debt/Equity ratio 37.5% 155% 133%

11. CURRENT PRACTICE
 IAS 27 Consolidated and Separate Financial
Statements
 IFRS 3 Business Combinations
 IAS 28 Investments in Associates
 IAS 31 Investments in Joint Ventures
 Seventh EC Company law Directive

12. OFFSETTING THE INVESTMENT IN A SUBSIDIARY
Holding S Co. Elimination Group
€m €m €m €m
Net fixed assets 100 20 - 120
Investment in subsidiary 25 - (25)
Current assets 30 10 - 40
Totals 155 30 (25) 160
Share capital 70 25 (25) 70
Reserves 30 - - 30
100 25 (25) 100
Current liabilities 15 5 - 20
Long-term liabilities 40 - - 40
Totals 155 30 (25) 160

13. ACQUISITION ACCOUNTING
 Purchase method of accounting
 Fair value adjustments of acquired assets and
liabilities
 Subsequent measurement of goodwill
 Minority interests
 Merger accounting
 Group income statement

14. PURCHASE METHOD OF ACCOUNTING
 Acquisition (or purchase method of)
accounting is the method used to
account for business combinations
 Goodwill arises as a consolidation
difference if the purchase cost of the
investment is not equal to the book
value of equity in the subsidiary

15. GOODWILL AS CONSOLIDATION DIFFERENCE
Holding S Co. Elimination Group
€m €m €m €m
Net fixed assets 100 20 - 120
Investment in subsidiary 38 - (38)
Goodwill - - 13 13
Current assets 17 10 - 27
Totals 155 30 (25) 160
Share capital 70 20 (20) 70
Reserves 30 5 (5) 30
100 25 (25) 100
Current liabilities 15 5 - 20
Long-term liabilities 40 - - 40
Totals 155 30 (25) 160

16. FAIR VALUE ADJUSTMENTS OF
ACQUIRED ASSETS AND LIABILITIES
 The individual assets and liabilities of the
acquired company have to be revised to their fair
value at acquisition date
 This exercise may imply (de-)recognition of new
(old) assets and liabilities
 Goodwill will be the difference between the
revalued net assets and the investment by the
parent
 The fair value at acquisition date is considered to
be the historical cost from the point of view of the
parent

17. FAIR VALUE ADJUSTMENTS APPLIED
Book value
of S
Adjustment Fair value
balance sheet
€m €m €m
Fixed assets
- Intangible - 10 10
- Tangible 20 - 20
Current assets 10 - 10
Totals 30 10 40
Share capital 20 - 20
Reserves 5 10 15
25 10 35
Current liabilities 5 - 5
Totals 30 10 40

18. GOODWILL AFTER FAIR VALUE ADJUSTMENTS
Holding Revised S Elimination Group
€m €m €m €m
Net fixed assets
- Goodwill
- Other intangibles
- Tangibles
-
100
10
20
3
-
-
3
10
120
Investment in S 38 - (38) -
Current assets 17 10 - 27
Totals 155 40 (35) 160
Share capital 70 20 (20) 70
Reserves 30 15 (15) 30
100 35 (35) 100
Current liabilities 15 5 - 20
Long-term liabilities 40 - - 40
Totals 155 40 (35) 160

19. SUBSEQUENT MEASUREMENT OF
GOODWILL
IAS before 2004 + European Accounting Directives:
Amortise goodwill on a systematic
basis over the best estimate of its
useful life
Rebuttable assumption of a maximum
of 20 years
IFRS 3 “Business Combinations” (2004):
Test goodwill for impairment annually
(or more frequently if indications)

20. MINORITY INTERESTS
 Minority interests (or non-controlling
interests) appear if the group does not
own 100% of the shares in a subsidiary
 They represent the part of the net assets
and profit or loss of the subsidiary
attributable to the equity interests that
are not owned

21. MINORITY INTERESTS APPLIED
L Co. M. Co Elimination Group
€’000 €’000 €’000 €’000
Intangibles - - 280 280
Tangibles 1200 300 - 1500
Investment in M 600 - (600) -
Current assets 550 225 - 775
Totals 2350 525 (320) 2555
Share capital 800 300 (300) 800
Reserves 1150 100 (100) 1150
Minority interests 80 80
1950 400 (320) 2030
Current liabilities 200 125 - 325
LT Creditors 200 - - 200
Totals 2350 525 (320) 2555

22. MERGER ACCOUNTING
 Two companies can combine by merging
their activities and managements without
one of them acquiring the other
 Two types of merger
Fusion
Pooling of interests
 IFRS3 Business Combinations (2004)
banned merger accounting methods

23. ILLUSTRATION - MERGER ACCOUNTING
Company A
before merger
Issue
shares
Company A
after merger
Company B Adjust Group
€m €m €m €m €m €m
Assets
Tangibles 1200 1200 900 2100
Investment in B +500 500 - -500 -
Current assets 420 420 350 770
Totals 1620 +500 2120 1250 -500 2870
Financing
Share capital 300 +500 800 300 -300 800
Reserves 420 420 730 -730
+530
950
Debt 600 600 - - 600
Trade payables 300 300 220 - 520
Totals 1620 +500 2120 1250 -500 2870

24. ILLUSTRATION - ACQUISITION ACCOUNTING
Company A
before merger
Issue
shares
Company A
after merger
Company B Adjust Group
€m €m €m €m €m €m
Assets
Goodwill - - - - + 470 470
Tangible assets 1200 - 1200 900 - 2100
Investment in B - +1500 1500 - -1500 -
Current assets 420 - 420 350 770
Totals 1620 +1500 3120 1250 -1030 3340
Financing
Share capital 300 +500 800 300 -300 800
Reserves 420 +1000 1420 730 -730 1420
Debt 600 - 600 - - 600
Trade payables 300 - 300 220 - 520
Totals 1620 +1500 3120 1250 -1030 3340

25. GROUP INCOME STATEMENT
In the group income statement, the effect of
intra-group transactions has to be eliminated
Only income and expenses recognized with regard to
parties outside the group will be retained
Follow-up effects of fair value adjustments
over time have to be integrated
Amortization of goodwill or impairment losses
on goodwill may also significantly impact the
group income statement

26. INTRA-GROUP TRANSACTIONS
Subsidiary A
Expenses 1200
Sales to B 1500
Profit 300
Subsidiary B
Purchases from A 1500
Other expenses 5000
Sales to C 7500
Profit 1000
Subsidiary C
Purchases from B 7500
Other expenses 500
Sales to retailers 8500
Profit 500
Totals 15700 17500 1800

27. FIG.12.1 CONSOLIDATION PROCEDURES
Adjust recognition criteria / measurements of financial statements of
subsidiaries to uniform principles (IFRS)
Aggregation of financial statements of all subsidiaries
Fair value adjustments / Remove investment in subsidiaries /
Identify goodwill and minority interests
Deduct amortization/ impairment losses on goodwill /
Follow-up of fair value adjustments
Remove intra-group transactions and balances
Group financial statements

28. ASSOCIATED COMPANIES
Associated companies are companies in
which the investor company has
“significant influence”
Different types of relationships between
investor company and investee
company mainly according to voting
rights under control
Accounting rules differ according to the
type of relationship

29. TYPES OF PARTICIPATING
SHAREHOLDINGS (BIS)
1 Control 50% +1 Subsidiary Acquisition
accounting
2 Significant influence >= 20% Associated
company
?
3 Only financial < 20% Financial
investment
“Fair Value”
Or “At Cost
(Locom)”

30. ILLUSTRATION - ASSOCIATED COMPANY
Company C
ASSETS
Tangible fixed assets 600
Current assets 300
Total 900
FINANCING
Share capital 400
Reserves 50
450
Payables 200
Debt 250
Total 900
Company A
buys 20% of
Company C

31. ILLUSTRATION - EQUITY METHOD
Co A Co C Group
Net fixed assets 1050 1050
Investment in C 150 - 150
Goodwill - +60 60
Equity value +90 90
Current assets 420 420
Totals 1620 - 1620
Share capital 300 300
Reserves 420 420
720 720
Payables 300 300
Debt 600 600
Totals 1620 1620

32. ILLUSTRATION - PROPORTIONATE CONSOLIDATION
Co A Co C (20%) Eliminations Group
Net fixed assets 1050 120 - 1170
Investment in C 150 - -150
Goodwill - - + 60 60
Current assets 420 60 - 480
Totals 1620 180 -90 1710
Share capital 300 80 -80 300
Reserves 420 10 -10 420
720 90 -90 720
Payables 300 40 - 340
Debt 600 50 - 650
Totals 1620 180 -90 1710