When is a group required to prepare consolidated financial statements

Notes

IAS 27 outlines the circumstances in which a group is required to prepare consolidated FS

Consolidated financial statements should be prepared when the parent company has control over the subsidiary.  Control is usually based on ownership of more than 50% of voting power.

However, IAS 27 lists the following situations where control exists, even when the parent owns only 50% or less of the voting power of an enterprise

  • The parent has power over more than 50% of the voting rights by virtue of agreement with other investments

  • The parent has power to  govern the financial and operating policies of the enterprise by statute or under an agreement

  • The parent has the power to appoint or remove a majority of members of the board of directors (or equivalent governing body)

  • The parent has power to cast a  majority of votes at meetings of the board of directors

As per IFRS 10, “an investor controls an investee if and only if the investor has all of the following elements:

  • power over the investee i.e. the investor has existing rights that give it the ability to direct the relevant activities (the activities that significantly affect the investee’s returns)

  • 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.”

Notes