Had the question asked for the cost of the investment that would be recorded in the parent’s books, this would be it – hence the inclusion of the distracter, and incorrect answer D. This could be asked as an OT question but is more likely to be a MTQ where you will be calculating and submitting a figure for each of the component parts of the goodwill  calculation – cost, NCI and net assets. You should look at the specimen exam and extra MTQs available on the ACCA website.

Potential voting rights, which could stem from convertible instruments, options, or other mechanisms, grant the holder the right to obtain voting rights of an investee. They are considered when assessing control only if they are substantive (IFRS 10.B22-B25). It’s crucial to understand that potential voting rights can confer power to a minority shareholder as well as strip power from a majority shareholder. Two large investors hold more than 5% of the voting rights each, with the remaining shares dispersed among unknown individual shareholders. If we consider each component in turn, the first thing to identify is how much the parent company has paid to acquire control over the subsidiary. In this question, Red Co acquires control by paying $3.50 cash per share acquired.

Potential voting rights

Consolidated financial statements report the aggregate reporting results of separate legal entities. The final financial reporting statements remain the same in the balance sheet, income statement, and cash flow statement. Each separate legal entity has its own financial accounting processes and creates its own financial statements. These statements are then comprehensively combined by the parent company to final consolidated reports of the balance sheet, income statement, and cash flow statement. Because the parent company and its subsidiaries form one economic entity, investors, regulators, and customers find consolidated financial statements helpful in gauging the overall position of the entire entity.

• The depreciation method is straight-line and based on a standard useful life of between two and three years.
• Thus, power is assigned to the party most closely resembling the controlling entity (IFRS 10.BC85-BC92).
• The IFRIC update noted that IFRS 10 does not exempt any rights from this requirement.
• Our starting point is an example provided in IFRS 3 for the calculation of goodwill.

In fact, for typical entities that are controlled through voting rights, possessing the majority of these rights is sufficient for a parent to ascertain that it controls the investee. Consolidated financial statements are presumed to be more meaningful than separate statements – based on the foundational principle that consolidated statements are usually needed for a fair presentation when one company controls another. Berkshire Hathaway Inc. (BRK.A, BRK.B) and Coca-Cola (KO) are two company examples.

Summary of IFRS 10

This should mean that you immediately consider adding together 100% of Pink Co’s balances and Scarlett Co’s balances to reflect control. Illustration (2)
Pink Co acquired 80% of Scarlett Co’s ordinary share capital on 1 January 20X2. © 2023 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company https://www.bookstime.com/ limited by guarantee. This Handbook provides an in-depth look at consolidation and consolidation procedure. It guides you through some of the most complex literature in US GAAP and provides insight and examples to assist you in making the critical judgments necessary to execute on the principles of consolidation. Using Q&As and examples, KPMG provides interpretive guidance on consolidation-related accounting issues in applying ASC 810.

The main one mandates that the parent company or any of its subsidiaries cannot transfer cash, revenue, assets, or liabilities among companies to unfairly improve results or decrease taxes owed. Depending on the accounting guidelines used, standards may differ for the amount of ownership that is required to include a company in consolidated subsidiary financial statements. Consolidation procedures are typically executed via specialised software wherein subsidiaries input their data for consolidation. As per IFRS 10.B93, the period between the financial statement dates of the subsidiary and the group should not exceed three months.

8 Combined financial statements

The subsidiaries must provide the parent company with accurate and timely financial information to ensure that the Consolidated Financial Statements are complete and accurate. Intangible assets are included at their historical value, reduced by depreciation. The depreciation method is straight-line and based on a standard useful life of between two and three years. Amortization of the asset begins when development is complete and the asset is available for use. The carrying value of the intangible assets is tested for impairment annually. Realized gains and losses upon the disposal of investment securities are recognized in financial income and expenses, respectively, using the weighted average cost method.

Consequently, if a subsidiary’s reporting date differs from that of the parent company, it needs to provide additional information to ensure that this time gap does not influence the consolidated financial statements. Consolidated financial statements are financial what are consolidated financial statements statements for a group of separate legal entities that are controlled by one company (the parent company). The consolidated financial statements report the financial results of the entire group’s transactions with people and companies outside of the group.

Consolidated organisations

Here, we have mentioned the major financial statements that a company prepares in a financial year. These reports are prepared according to the US GAAP and other accounting standards. In the financial statement of Walmart, we can comprehend that they have mentioned all the major data in proper formatting, which is accepted worldwide.

For example, company A buys goods for one price and sells them to another company inside the group for another price. Thus, company A has earned some revenue from selling, but the group as a whole did not make any profit out of that transaction. Until those goods are sold to an outsider company, the group has unrealised profit.

IASB completes post-implementation review of IFRS 10-12

It would be a fundamental mistake in any consolidation question to ever pro-rate a subsidiary’s statement of financial position where there is less than 100% ownership. If a parent company has 50% or more ownership in another company, that other company is considered a subsidiary and should be included in the consolidated financial statement. This also applies if the parent company has less than 50% ownership but still has a controlling interest in that company. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities which would be affected in future periods.

Concluding exam tips
Remember that at FA/FFA level, a good solid platform of understanding the principles of consolidation is required. Illustration (3)
Purple Co acquired 70% of the voting share capital of Silver Co on 1 October 20X1. Answer A completely omits the elimination of the intra-group balances and answer B does not cancel the corresponding payable within liabilities. Answer
From the question, we can see that Pink Co has control over Scarlett Co.