The Consolidated Statement of Financial Position

The consolidated statement of financial position is a statement of financial position that reflects the financial position of a parent and all its subsidiaries, as if they were one single entity. That is, it reflects the performance of the entire group.

In consolidating the results of a parent company and its subsidiaries, full consolidation method is used. Full consolidation entails aggregating the net assets of all the group entities on a line-by-line basis. In consolidating the results of the group, it is often necessary to deal with goodwill. Goodwill, specifically goodwill on acquisition arises when the cost of investment does not equal the net assets at the date of acquisition. And, this goodwill on acquisition is carried as an asset in the consolidated statement of financial position.

Pre-acquisition retained earnings, and any other reserves existing at the acquisition date are just some of the other items that have to be dealt with. These are part of the net assets at acquisition, and will help in the calculation of goodwill. Post-acquisition profits, on the other hand, are earned by the group and are included in the consolidated reserves.

Please note that a parent can control a subsidiary without owning all of its equity shares. The interests of other shareholders in the subsidiary entities are referred to as non-controlling interests. The basic aggregation is not affected where subsidiaries are not wholly owned. The net assets of the parent and 100% of the net assets of the subsidiary are added together. Where the subsidiary is not wholly owned, then the goodwill calculation is calculated as the cost of the investment plus the non-controlling interest in the investment (either held at fair value or at its proportionate share of the fair value of the net assets acquired) less the net assets of the subsidiary at the date of acquisition.

Where a group exists, it is inevitable that there would be intra-group transactions. Intra-group balances need to be eliminated in preparing the consolidated statement of financial position. This is because the consolidated statement of financial position is of the group as a combined entity, and balances that are wholly internal will not be receivables or payables of the whole entity. From a group perspective, this profit cannot be recognised until the goods are sold outside the group.

Furthermore, a parent entity is free to hold debt of its subsidiary, but is not required to do so. Investing in loan stock, debentures, etc. of the subsidiary does not give any control as it is an investment in debt and not equity. Investment in the debt of a subsidiary is eliminated on consolidation as it is an internal balance of the group.

And, lastly, where the parent entity invests in the non-equity of an existing subsidiary, goodwill on acquisition will be calculated in a similar way to the goodwill on acquisition of the equity shares.

Accounting for Investments

A group is a cohesive economic unit. And, a cohesive economic unit is one that is subject to control from a common source. We can look at a group of companies as being made up of a number of separate legal entities that are subject to common control and therefore can be said to be a single economic entity for financial reporting purposes.

Within a group there is a parent company. It is the parent company, which usually exercises common control. The exercise of common control means that the parent entity controls the operating and financial policies of the other entities of the group, which are known as the subsidiary entities.

A subsidiary is an entity that is controlled by another entity. In financial management, control is known as the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. And, the  most common way for one entity to control another is by obtaining a sufficient number of equity shares to control more than 50% of the votes at shareholders' meetings.

The obligations of a parent company are that it should prepare consolidated statements, in addition to its own separate accounts (according to IAS 27, Consolidated and Separate Financial Statements). The following are the consolidated statements a parent company is expected to prepare: A consolidated statement of financial position dealing with the state of affairs of the parent and all of its subsidiary entities; A consolidated income statement dealing with the profit or loss of the parent and all of its subsidiary entities; A consolidated statement of cash flows dealing with the cash flows of the parent and all of its subsidiary entities.

In addition, there are further guidelines on when a parent company could prepare consolidate financial statements, such as the following: The parent entity's debt or equity instruments are traded on a public market; The parent is engaged in filing statements in preparation for trading in a public market.

However, a parent entity is not required to prepare and present consolidated financial statements if: It is specifically exempted by the IAS from doing so. The parent entity has itself an ultimate or immediate parent that prepares and presents consolidated financial statements for public use; Where a subsidiary has been acquired and is held exclusively with a view to its subsequent disposal (within 12 months of the year end), it does not require consolidation. It is treated as an asset 'held for sale' (as per IFRS 5).

Associate companies are dealt with through IAS28. This standard defines an associate as an entity, including an unincorporated entity such as a partnership, over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture. According to IAS 28, significant influence is the power to participate in the financial and operating policy decisions of the entity but is not control over those policies.

The existence of significant influence by an investor is usually evidenced in one or more of the following ways: Representation on the board of directors; Participation in policy-making processes; Material transactions between the investor and the entity; Interchange of managerial personnel; Provision of essential technical information; A holding of at least 20% creates a presumption that the investor exercises significant influence, unless it can be demonstrated that this is not the case.

Structure of the International Accounting Standard Setting

The International Accounting Standard Committee (IASC) foundation was established in 1973 as a way of bringing about convergence in accounting policies and practices around the world. It has evolved since its foundation but, currently, the duties of its trustees are as follows:

The IASC foundation serves, through its trustees, the purpose of appointing members of the International Accounting Standard Board (IASB); the International Financial Reporting Interpretation Committee (IFRIC) and the Standards Advisory Council (SAC). It also evaluates and reviews the effectiveness of the IASB, on an annual basis. And, also to finance the activities of the IASB. It makes an assessment on the financial budget submitted by the IASB and stipulate the basis for funding. It also reviews broad strategic issues affecting accounting standards and to promote the work of the IASB, as well as promoting the objective of rigorous application of the IASB's standards.

On the other hand, the SAC gives advice to the IASB on agenda decisions and priorities in the IASB's work. It also informs the IASB board of the views of its member organisations and individuals about standard-setting projects, as well as giving other advice to the board or trustee.

The IASB's objectives, however, can be summarised as being:

To develop, in the public interest, a single set of high-quality, understandable and enforceable global accounting standards that require high-quality, transparent and comparable information in financial statements and other financial reporting to help participants in the world's capital markets and other users make economic decisions. It also promotes the use and rigorous application of those standards; bring about convergence of national accounting standards and international accounting standards to high-quality solutions

The IFRIC's mainl duties can be described as being to consider, on a timely basis, accounting issues that are likely to receive divergent or unacceptable treatment in the absence of authoritative guidance. And, to publish draft interpretations for public comment; to report to the IASB and obtain approval for final interpretations.

The IASC framework is built upon the fundamental understanding that harmonisation can best be pursued by focusing on financial statements that are prepared for the purpose of providing information that is useful in making economic decisions. Its principal purposes are to assist the board of the IASC in the development of international accounting standard; in promoting harmonisation of regulations, accounting standards and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative treatments permitted by international standards

The IASC framework contains the following principal sections: Objective of financial statements; Underlying assumptions; Qualitative characteristics of financial statements; Elements of financial statements; Recognition of the elements of financial statements; Measurement of the elements of financial statements; Concepts of capital and capital maintenance

The IASC framework notes that financial statements principally convey the financial effects of past events with regard to performance, position and changes in financial position so that the information is useful to a wide range of users in making economic decisions.

The IASC framework also defines the 4 principal qualitative characteristics of financial statements as understandability, relevance, reliability and comparability. It also notes that the most commonly adopted basis of measurement in financial statements is historical cost, but it does not prohibit the adoption of other bases of measurement. The framework highlights that the elements of financial statements related to the measurement of financial position are income and expenses.

Recognition in the statement of financial position or income statement of the elements depends upon the criteria that: It is probable that any future economic benefit associated with the item will flow to or from the entity; the item has a cost or value that can be measured reliably.

The fundamental requirement for the presentation of financial statements is that the financial statements should present fairly the financial position, performance and cash flows of an entity. IAS 1 Presentation of Financial Statements prescribes that a complete set of financial statements should include the following:  A statement of financial position ; A statement of comprehensive income or an income statement; A statement of changes in equity; A statement of cash flows; Accounting policies and explanatory notes

IAS 1 prescribes minimum disclosure requirements for the content of the statement of financial position, income statement, statement of changes in equity and provides details of what should be disclosed in the supporting notes to the accounts. That is, notes should present information about the bases of preparation of the financial statements, the accounting policies selected and applied, information required by international standards which is not presented elsewhere and any other information required for a fair presentation.