Introduction to group accounts

Learning objectives

By the end of this chapter, you should be able to:

• Define and describe the following terms in the context of group accounting: Parent, Subsidiary, Control, Consolidated (group) financial statements, Non-controlling interests, and Trade (simple) investment

Introduction

Businesses often grow by buying shares in other businesses, rather than only by expanding their own operations. This is called an acquisition (or take-over).

Definitions

Acquisition

It occurs when one entity takes ownership of another entity’s share capital or equity interests.

The number of shares acquired (either at a point in time or over a period) by the acquiring entity (the investor) determines how the acquisition or investment is accounted for in the financial statements.

Forms of acquisition

A business acquisition can result in any of the following arrangements:

1. Joint arrangements
2. Trade investment
3. Associate
4. Group

Definitions

Joint arrangements

A joint arrangement exists where two or more parties share control under a contractual agreement that requires their unanimous consent for key decisions. Joint arrangements are not examined in this syllabus.

Definitions

Trade investment

An investment of less than 20% that gives the investor neither control nor significant influence. It is simply shown as an investment (asset) in the investor’s own statement of financial position and is not consolidated.

Associate

An associate is an entity over which an investor has significant influence but not control or joint control. This typically means the investor acquired 20-50% of voting rights. The investor accounts for associates using the equity method (IAS 28 Investments in Associates and Joint Ventures).

Group

Typically, a company controls another by owning (acquiring) more than 50% of voting rights. The acquirer is said to be the parent and the acquiree, the subsidiary. The parent company together with its subsidiary(ies) is called a group. An associate is not part of the group and is not consolidated.

The parent and the subsidiary operate independently, and each prepares separate financial statements. However, they are also required to present financial information for the entities as a single economic unit (a group). This is done through consolidated financial statements, which IFRS 10 requires a parent to prepare.

Consolidation is accounted for using IFRS 10: Consolidated financial statements and IFRS 3: Business combinations.

This syllabus focuses on the last three (3) forms. For a group, we’ll focus on a basic consolidated financial statement.

The table below summarises how the size of a shareholding typically determines the accounting treatment. Control, not the percentage, is the deciding test.

Holding	Relationship	Treatment
Less than 20%	No significant influence	Trade investment - shown as an investment asset
20%-50%	Significant influence	Associate - equity method (IAS 28)
More than 50% (or control)	Control	Subsidiary - consolidated (IFRS 10 / IFRS 3)

Group accounting

Definitions

Parent

An entity that controls one or more entities or an entity that has one or more subsidiaries.

Subsidiary

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

Consolidated (group) financial statements

The financial statements of a group, in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity.

Non-controlling interest

The equity in a subsidiary not attributable, directly or indirectly, to the parent, i.e. the share owned by the other shareholders.

Notice that these definitions all revolve around one central idea: control. If there is no control, there is no parent-subsidiary relationship, and consolidation (group) does not apply.

So, the key skill is being able to decide - based on a scenario - whether control exists and whether consolidated financial statements are required.

Control

Definitions

Control

Under IFRS 10, an investor controls an investee if and only if it has all three of the following elements:

• power over the investee
• exposure, or rights, to variable returns from its involvement with the investee
• the ability to use its power over the investee to affect the amount of the investor’s returns.

An investor decides whether it is a parent by assessing whether it controls one or more investees. When making this assessment, the investor considers all relevant facts and circumstances.

Definitions

Power

An investor has power over an investee when the investor has existing rights that give it the current ability to direct the relevant activities, i.e., the activities that significantly affect the investee’s returns

Power can be obtained directly from ownership of the majority of voting rights or can be derived from other rights, such as:

• Rights to appoint, reassign, or remove key management personnel who can direct the relevant activities
• Rights to appoint or remove another entity that directs the relevant activities
• Rights to direct the investee to enter into, or veto changes to, transactions for the benefit of the investor

Other means by which control can be established

Control is not limited to situations where the investor holds more than 50% of the voting rights. Control can also exist with less than 50% voting rights in several scenarios:

• When an investor can effectively exercise majority voting power despite owning less than 50% (such as through proxies or agreements with other shareholders).
• Through contractual arrangements that grant the investor the decision-making authority over relevant activities.
• In situations where the investor holds a significant minority stake (less than 50%), while the remaining ownership is widely dispersed among many small shareholders.
• When the investor possesses instruments like options, warrants, or convertible securities that, if exercised, would provide sufficient voting rights to establish control.

These circumstances reflect the substance-over-form principle, recognising that effective control can exist without majority ownership.

Example: Identifying subsidiaries in a group

P Ltd holds shares in four companies:

• 60% of the voting rights in A Ltd
• 45% of the voting rights in B Ltd, and a contractual right to appoint 5 of B Ltd’s 8 directors
• 25% of the voting rights in C Ltd, and a seat on C Ltd’s board
• 12% of the voting rights in D Ltd, with no board seat and no part in its policy decisions

Answer:

• A Ltd is a subsidiary: P Ltd holds a majority of the voting rights.
• B Ltd is a subsidiary: P Ltd holds less than 50%, but it can appoint most of the board, which gives it power over B Ltd’s relevant activities.
• C Ltd is an associate, not a subsidiary: P Ltd has significant influence but not control, so C Ltd is not consolidated.
• D Ltd is a trade (simple) investment: P Ltd has neither control nor significant influence.

So the group is P Ltd and its two subsidiaries, A Ltd and B Ltd.