In traditional accounting terminology, a group of companies consists of a parent company and one or more subsidiary companies that are controlled by the parent company. We will be looking at six accounting standards in this and the next few chapters.

  • IFRS 3 (revised) Business combinations
  • IFRS 13 Fair value measurement
  • IFRS 10 Consolidated financial statements
  • IAS 28 Investments in associates and joint ventures
  • IFRS 11 Joint arrangements
  • IFRS 12 Disclosure of interests in other entities

In May 2011 the IASB issued a set of five new or revised standards, IAS 28 and IFRSs 10, 11, 12, and 13.

These amend and clarify definitions and concepts but do not make changes to the accounting processes involved in group accounting.

Control. The power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. (IFRS 3 (revised), IFRS 10,)

Subsidiary. An entity that is controlled by another entity (known as the parent). (IFRS 10)

Parent. An entity that has one or more subsidiaries. (IFRS 10)

Group. A parent and all its subsidiaries. (IFRS 10)

Associate. An entity, including an unincorporated entity such as a partnership, in which an investor has significant influence and which is neither a subsidiary nor an interest in a joint venture. (IAS 28)

Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. (IAS 28)

Joint arrangement. An arrangement of which two or more parties have joint control. (IAS 28)

Joint control. The contractually agreed sharing of control of an arrangement, which exists only when

decisions about the relevant activities require the unanimous consent of the parties sharing control. (IAS 28)

Joint venture. A joint arrangement whereby the parties that have joint control (the joint venturers) of the arrangement have rights to the net assets of the arrangement. (IAS 28, IFRS 11)

Acquiree. The business or businesses that the acquirer obtains control of in a business combination

(IFRS 3 (revised))

Acquirer. The entity that obtains control of the acquiree (IFRS 3 (revised))

Business combination. A transaction or other event in which an acquirer obtains control of one or more businesses. (IFRS 3 (revised))

Contingent consideration. Usually, an obligation of the acquirer to transfer additional assets or equity

(IFRS 3 (revised)) interests to the former owners of an acquiree as part of the exchange for control of the acquiree if specified future events occur or conditions are met. (IFRS 3 (revised))

Equity interests. Broadly used in IFRS 3 (revised) to mean ownership interests.

Fair value. The price that would be received to sell an asset or paid to transfer a liability in an orderly

transaction between market participants at the measurement date. (IFRS 13)

Non-controlling interest. The equity in a subsidiary is not attributable, directly or indirectly, to a parent. (IFRS 3 (revised))

According to IFRS 10:

Consolidated Financial Statements are the financial statements of a parent and its subsidiaries presented as if they are the financial statements of a single economic entity.

Exemption from preparing consolidated financial statements

A parent need not prepare consolidated financial statements providing:

  • It is itself a wholly-owned subsidiary, or is partially-owned with the consent of the non-controlling interest (Non -Controlling interest); and
  • It debt or equity instruments are not publicly traded; and
  • It did not or is not in the process of filing its financial statements with a regulatory organization for the purpose of publicly issuing financial instruments; and
  • The ultimate or any intermediate parent produces consolidated finical statements available for public use that comply with IFRS.

Factors that are indicative of significant influence.

The following factors are indicative of significant influence:

  • Representation on the board of directors or equivalent governing body;
  • Participation in the policy-making process, including decisions about dividends and other distributions;
  • Material transactions between parties;
  • Interchange of managerial personnel; and
  • Provision of essential technical information.

Control is identified by IFRS10 Consolidated Financial Statements as the sole basis for consolidation and comprises the following three elements:

  • Power over the investee, where the investor has the current ability to direct activities that significantly affect the investee’s returns;
  • Exposure, or right to, variable returns from involvement in the investee; and
  • The ability to use the power over the investee to affect the amount of the investor’s returns.

Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Control is presumed where the acquirer acquires more than one-half of that other entity’s voting rights (unless it can be demonstrated that such ownership does not constitute control).

Control may also have been obtained, even when one of the combining entities does not acquire more than one-half of the voting rights of another, if, as a result of the business combination, it obtains:

  • Power over more than one-half of the voting rights of the other entity by virtue of an agreement with other investors; or
  • Power to govern the financial and operating policies of the other entity under a statue or an agreement; or
  • Power to appoint or remove the majority of the members of the board of directors or equivalent governing body of the other entity; or
  • Power to cast the majority of votes at meetings of the board of directors or equivalent governing body of the other entity.

Factors that account for a negative goodwill and treatment of negative goodwill.

Where the cost of the business combination is greater than the net assets acquired, the investor has paid for something more than the net assets of the acquired business. The difference is called goodwill and is measured in accordance with (IFRS 3: Business Combinations – revised).

Purchased goodwill is positive when the cost of investments exceeds the net fair value of identifiable assets, liabilities, and contingent liabilities. In accordance with IFRS 3; Business combination, negative goodwill occurs when the acquired net assets exceed the cost of investment.

Factors accounting for negative goodwill includes but not limited to:

  1. The acquirer may be good in the negotiations of the purchase consideration than the acquiree.
  2. The acquiree has no knowledge of the value of its business before and during the sale transaction
  3. The acquire is desperate to sell in a force sale transaction

Accounting treatment of purchased goodwill

Positive purchased goodwill is capitalised on the consolidated balance sheet or statement of financial position and subject to an impairment test annually. Subsequent impairment test is charged to profit or loss as expenses. Impairment tests are conducted at least at each year end. Any resulting impairment loss is first recognized against consolidated goodwill.

However, purchased goodwill if negative is not capitalized since it represents a gain to the acquirer and hence IFRS3 business combination requires that it is recognized in the statement of profit or loss immediately after the reassessment and confirmation.