Click to edit Master title style

Accounting Standards Board of Bhutan

Training Program on Consolidation

Conducted by
The Institute of
Chartered Accountants of
Sri Lanka

Presenter:
Nishan Fernando FCA

1
Accounting Standards Board of Bhutan

Training Program on Consolidation

Click to edit Master title style

Accounting Standards Board of Bhutan

Where are we now?

BAS 27 / IAS 27 (pre 2012

version)
Consolidated and Separate
Financial Statements

Presenter:
Nishan Fernando FCA

2
 Requirement to consolidate
subsidiaries
•A subsidiary is an entity (including an unincorporated entity) …controlled by (the
parent)

•If entity has a subsidiary then must consolidate

•Exemption
–If parent is itself wholly owned or if minority interest have been informed
and do not object; and
–Securities not publicly traded or not in process of issuing publicly traded
securities; and
–Higher parent publishes consolidated financial statements that comply
with IFRS

What is Control?
•Control is the power
–to govern financial & operating policies so as to
–obtain benefits from activities

•Note: “power to” rather than “actually exercises”

•Control is presumed to exist if own > 50% votes (Rebuttable)

•If own < 50% votes, control still presumed if:

–power over >50% votes by agreement with other investors
–power under statute/ agreement to govern financial & operating policies
–power over majority of board appointments
–power to cast majority of board votes

3
 Potential voting rights
•Count potential voting rights currently exercisable

• Assume: options are exercised to acquire more shares

• Considered even if cannot afford to exercise (eg, out-of-the-money)
• But not if it is so deeply out-of-money that it has no substance
• Ignore management intentions

•But only for control assessment not accounting

Potential voting rights

Company A
Others
40%
60%

Company B

4
Potential voting rights

Company A
Others
40%
60%
60%
40%
Company B

“Power to” rather than “Actually

exercises”

Company A
Others
40%
60%

Company B

5
 IASB Update October 2005
•………..in its view, the control concept in IAS 27 includes de facto control. …..also
acknowledged that professional skill and judgement is required in applying the control
concept including determining if de facto control exists. ……some who apply IFRSs
hold the view that, in the circumstances described, IAS 27 requires an entity to have
legal control over a majority of the voting rights to consolidate another entity.

•……..accepts that it would have been helpful if IAS 27 had included guidance to assist
preparers in exercising the judgement to apply the control concept. ……there is a
greater risk that two entities faced with the same set of circumstances might reach
different conclusions on whether they control another entity. …… differences in the
application of IAS 27 might also be influenced by the practices followed in jurisdictions
before adopting IFRSs.

•……. could issue an exposure draft to propose amending IAS 27 by adding guidance
on de facto control. …… prefers to address comprehensively issues related to control
in any possible proposal to amend or replace IAS 27. ….. this approach means that
differences in how IAS 27 is applied might persist until its project on control is
completed.

No profit implications when change in

interest without losing control

•Requirements specify that changes in a parent’s ownership interest in a

subsidiary that do not result in a loss of control must be accounted for as
equity transactions.

6
 Example X - Sell down of
subsidiary
• Big Ltd has a 60% investment in Little Ltd with carrying amount of $60,000.
• Big Ltd sells 9% of Little Ltd for $50,000, therefore reducing its holding in Little
Ltd to 51% while retaining control.

• What do we already have in the consolidated financial statements of Big Ltd?

• Net assets 100,000 (60,000 x 100/60)
• NCI 40,000 (100,000 x 40%)

What journal do we process re the sale of 9% interest in this subsidiary?

Dr Cash 50,000
Cr NCI 9,000 *
Cr Equity - Parent 41,000 #
* 100,000 x 9% = 9,000
# 50,000 – increase in NCI (9,000) = 41,000

Profit implications when change in

interest that results in losing control

•Requirements specify how an entity measures any gain or loss arising on the
loss of control of a subsidiary.
•Any such gain or loss is recognised in P/L.
•Any investment retained in the former subsidiary is measured at its fair value at
the date when control is lost.

•Example Y - Sell down of subsidiary

•Big Ltd has a 60% investment in Little Ltd with carrying amount of $100,000 (ie
non-controlling interest is $40,000.
•Big Ltd sells 11% of Little Ltd for $50,000, therefore reducing its holding in Little
Ltd to 49%.
•Big Ltd no longer has control.

7
 Example Y
Sell down of subsidiary

•60% to 49%
IAS 27 (As Amended 2008) ‘Old GAAP’

DR Proceeds $50,000 DR Proceeds $50,000

Journal DR Associate* $222,727 DR Associate $49,000

Entries
DR NCI $40,000 DR NCI $40,000

CR Net Assets in Sub $100,000 CR Net assets in Sub $100,000

CR P&L $212,727 CR P& L $39,000

P&L Impact $212,727 $39,000

* ($50,000 / 11%) x 49% = 222,727

Remember?

Subsidiary to Subsidiary Subsidiary to Associate

Change in level of 60%-51% 60% - 49%
ownership

Journal entries Example X Example Y

P&L Impact Nil $212,727

8
 Other significant aspects
•Unlimited allocation of losses to NCI
•An entity must attribute total comprehensive income to the owners of the parent
and to the NCI even if this results in the NCI having a deficit balance.

•“Temporary” control
•No exemption BUT classify as ‘held for sale’ If IFRS 5 criteria are met:
i.e. consolidate – but as discontinued operation

•Investor a VC, mutual fund, unit trust or similar

–No exemption IAS 27.16

•Loss of control (and not associate or jointly controlled entity)

–financial assets under IAS 39

Accounting Standards Board of Bhutan

Training Program on Consolidation

•Where are we heading?

Presenter:
Nishan Fernando FCA

9
 Fate of IAS 27 (R2008)

IFRS 10
Consolidated Financial Statements

IAS 27 (2008)
IAS 27
Consolidated and Separate
Separate Financial Statements
financial statements

IFRS 12
Disclosure Interests in Other Entities

SLFRS 10 Consolidated Financial

Page 19
Statements

Consolidation Package – The Big

Picture

Consolidate
(IFRS 3 & 10)

SLFRS 10 Consolidated Financial

Page 20
Statements

10
 Objectives
IFRS 3 – To improve the relevance reliability and comparability of the information that a
reporting entity provides in its financial statements about a business combination and its
effects

IFRS 10 - To establish principles for the presentation and preparation of consolidated

financial statements when an entity controls one or more other entities

IFRS 11 – To establish principles for financial reporting by entities that have an interest in
arrangements that are controlled jointly (ie joint arrangements)

IFRS 12 - To require an entity to disclose information that enables users of its FS to

evaluate (i) the nature of, and risks associated with, its interests in other entities and (ii)
the effects of those interests on its financial position, financial performance & cash flows

LKAS 27 – to prescribe the accounting and disclosure requirements for investments in

subsidiaries, joint ventures and associates when an entity prepares separate financial
statements

LKAS 28 – To prescribe the accounting for investments in associates and to set out the
requirements for the application of the equity method when accounting for investments
in associates and joint ventures

21

THANK YOU

Presenter:
Nishan Fernando FCA

11