Indian Accounting Standard 110, Consolidated Financial Statements
The objective of this standard is to establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities.
Consolidated financial statements are 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.
The Standard requires an entity that is a parent to present Consolidated Financial Statements (CFS). A limited exemption is available to some entities. The Standard defines the principle of control and establishes control as the basis for determining which entities are consolidated in the consolidated financial statements.
An investor controls an investee when the investor is exposed, or 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.
Single control model
An investor controls an investee if and only if the investor has all the following:
(i) 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. (also see below)
(ii) Exposure, or rights, to variable returns from its involvement with the investee – 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 positive and negative. Returns are broadly defined and include not only direct returns but also indirect returns.
(iii) The ability to use power over the investee to affect the amount of the investor’s returns – An investor controls an investee if the investor not only has power over the investee and exposure or rights to variable returns from its involvement with the investee, but also has the ability to use its power to affect the investor’s returns from its involvement with the investee. Thus, an investor with decision-making rights shall determine whether it is a principal or an agent.
Power arises from rights. Sometimes assessing power is straightforward, such as when power over an investee is obtained directly and solely from the voting rights granted by equity instruments such as shares, and can be assessed by considering the voting rights from those shareholdings. In such cases, the investor considers potential voting rights that are substantive, rights arising from other contractual arrangements and factors that may indicate de facto power. In other cases i.e. where voting rights are not relevant for assessing power (for example when power results from one or more contractual arrangements), the assessment will be more complex and require more than one factor to be considered such as evidence of the practical ability to direct the relevant activities (the most important factor), indications of a special relationship with the investee, and the size of the investor’s exposure to variable returns from its involvement with the investee.
To have power over an investee, an investor must have existing rights that give it the current ability to direct the ‘relevant activities’ ie the activities that significantly affect the investee’s returns. For the purpose of assessing power, only substantive rights and rights that are not protective shall be considered.
Control is assessed on a continuous basis.
An ‘investment entity’ shall not consolidate its subsidiaries (or apply Ind AS 103) when it obtains control of another entity. Instead, an investment entity shall measure an investment in a subsidiary at fair value through profit or loss in accordance with Ind AS 109. A parent of an investment entity shall consolidate all entities that it controls, including those controlled through an investment entity subsidiary, unless the parent itself is an investment entity.
Consolidated financial statements:
(a) combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent with those of its subsidiaries.
(b) offset (eliminate) the carrying amount of the parent’s investment in each subsidiary and the parent’s portion of equity of each subsidiary (Ind AS 103 explains how to account for any related goodwill).
(c) eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between entities of the group (profits or losses resulting from intragroup transactions that are recognised in assets, such as inventory and fixed assets, are eliminated in full).
A parent shall prepare consolidated financial statements using uniform accounting policies for like transactions and other events in similar circumstances.
The difference between the reporting date of a parent and its subsidiary should not be more than three months. Adjustments are made for the effects of significant transactions and events between the two dates.
Consolidation of an investee shall begin from the date the investor obtains control of the investee and cease when the investor loses control of the investee.
Non-controlling interest (NCI)
Non-controlling interest is the equity in a subsidiary not attributable, directly or indirectly, to a parent.
To the extent NCI relates to present ownership interests that entitle their holders to a proportionate share of the entity’s net assets in liquidation, these are measured at fair value or at their proportionate interest in the net assets of the acquiree, at the date of acquisition. All other NCI are generally measured at fair value.
A parent shall present non-controlling interests in the consolidated balance sheet within equity, separately from the equity of the owners of the parent.
Changes in a parent’s ownership interest in a subsidiary that do not result in the parent losing control of the subsidiary are equity transactions (ie transactions with owners in their capacity as owners).
Loss of control
If a parent loses control of a subsidiary, the parent should:
(a) derecognise the assets and liabilities of the former subsidiary from the consolidated balance sheet.
(b) recognise any investment retained in the former subsidiary at its fair value when control is lost and subsequently account for it and for any amounts owed by or to the former subsidiary in accordance with relevant Ind ASs. That fair value shall be regarded as the fair value on initial recognition of a financial asset in accordance with Ind AS 109 or, when appropriate, the cost on initial recognition of an investment in an associate or joint venture.
(c) recognise the gain or loss associated with the loss of control attributable to the former controlling interest.