Indian Accounting Standard (Ind AS) 110 Summary
The objective of Indian Accounting Standard (Ind AS) 110, Consolidated Financial Statements is to establish principles for the presentation and preparation of consolidated financial statements when the entity controls one or more entities.
Ind AS 110 requires the entity that controls one or more entities presents consolidated financial statements unless it is a qualifying investment entity or specific exemption criteria are met.
An investor controls an investee when the investor is exposed to (has rights to) variable returns from its involvement with the investee, and has the ability to affect those returns through its power over the investee. Control involves power, exposure to variability of returns and a linkage between the two
Step 1: Understanding the investee:
- Control is generally assessed at the level of the legal entity. However, an investor may have control over only specified assets and liabilities of the legal entity (referred to as a silo), in which case control is assessed at that level.
- The purpose and design of the investee does not in itself determine whether the investor controls the investee. However, it plays a role in the judgement applied by the investor in areas of the control model. Assessing purpose and design includes considering the risks that the investee was designed to create and to pass on to the parties involved in the transaction, and whether the investor is exposed to some or all of those risks.
- The ‘relevant activities’ of the investee – i. e. the activities that significantly affect the investee’s returns- need to be identified. In addition, the investor determines whether decisions about the relevant activities are made based on voting rights.
Step 2: Power over relevant activities:
- Only substantive rights are considered in assessing whether the investor has control over the relevant activities.
- If voting rights are relevant for assessing power, then the investor considers potential voting rights that are substantive, rights arising from other contractual arrangements and factors that may indicate de facto power e.g. the investor has a dominant shareholding and the other vote holders are sufficiently dispersed.
- If voting rights are not relevant for assessing power, then the investor considers evidences of the practical ability to direct the relevant activities, indicators of special relationship (more than passive interest) with the investee, and the size of the investor’s exposure to variable returns from its involvement with the investee.
Step 3: Exposure to variability: An investor is exposed, or has rights, to variable returns from its involvement with the investee when the investor’s returns from its involvement have the potential to vary as a result of the investee’s performance. The investor’s returns can be only positive, only negative or both. Returns should be interpreted broadly and it could be said to encompass synergistic returns as well as direct returns.
Step 4: Linkage: If the investor is an agent, then the link between power and returns is absent and the decision maker’s delegated power is treated as if it were held by the principal. The entity takes into account the rights of parties acting on its behalf in assessing whether it controls an investee.
To determine whether it is an agent, the decision maker considers:
- Substantial removal and other rights held by a single or multiple parties,
- Whether its remuneration is on arm’s length terms,
- Whether its remuneration is on arm’s length terms,
- Its other economic interests, and
- The overall relationship between itself and other parties.
The entity takes into account the rights of parties acting on its behalf in assessing whether it controls an investee.
The difference between the reporting date of a parent and its subsidiary cannot be more than three months. Adjustments are made for the effects of significant transactions and events between two dates.
Uniform accounting policies are used throughout the group.
Ind AS 110, requires losses relating to subsidiaries to be attributed to Non-Controlling Interests (NCI) even if it results in a negative balance.
Intra-group transactions are eliminated in full.
On loss of control of a subsidiary, the assets and liabilities of the subsidiary and the carrying amount of the NCI are derecognised. The consideration received and any retained interest (measured at fair value) are recognised. Amounts recognised in Other Comprehensive Income (OCI) are reclassified as required by other Ind ASs. Any resultant gain or loss is recognised in profit or loss.
Ind AS 110, requires that changes in the ownership interest of equity holders of the parent in a subsidiary, that do not result in a loss of control are accounted for as equity transactions (transactions between shareholders).
An entity preparing consolidated financial statements should mutatis mutandis follow the requirements of Schedule III to the 2013 Act, as applicable to an entity preparing stand-alone financial statements (i.e. balance sheet, statement of changes in equity and statement of profit and loss).
All Indian and foreign subsidiaries, associates and joint ventures will be covered under consolidated financial statements. The entity is required to disclose the list of subsidiaries or associates or joint ventures which have not been consolidated in the consolidated financial statements, along with the reasons of not consolidating.
In the consolidated financial statements, entities are required to disclose the following as additional information for the parent, Indian and foreign subsidiaries, NCI in all subsidiaries, Indian and foreign associates and joint ventures:
- Amount and percentage of net assets to the consolidated net assets (net assets is total assets minus total liabilities),
- Amount and percentage of share in profit or loss to the consolidated profit or loss,
- Amount and percentage of share in OCI to the consolidated OCI, and
- Amount and percentage of total comprehensive income to the consolidated total comprehensive income.