The Dabey Group is a UK group of companies, which owns and operates a social media site on which the public can post material relating to any particular topic. The cost of setting up the site was $3 million. The company generates revenue by selling advertising space on the site. The domain name is protected legally through registration with the national authority.

Dabey has developed good customer relationships with the advertisers and expects them to continue to trade with Dabey. There are no contracts with those advertising customers. Dabey also uses the site to sell transferable domain names which it has purchased from the national regulator. Dabey owns the names and allows purchasers of the names to use the name for a period of five years before it reverts back to Dabey. Dabey expects to achieve an 80% margin on the sale of the domain names.

The Dabey Group is diverse in nature and includes a subsidiary which has suffered significant losses during the year. The directors of Dabey have decided to exclude the subsidiary from consolidation on the grounds that it would have a significant effect upon the group’s reported earnings. In addition, they intend to show a material deferred tax asset in the group financial statements which was based upon the losses made by the subsidiary in the current year’s financial statements.

Required:
(ii) Advise the directors of Dabey as regards the regulations governing the exclusion of subsidiaries from consolidation under FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and the Companies Act 2006.