When a client must prepare consolidated statements
How IFRS 10's control principle decides whether a client holding shares in another company must consolidate, and how to plan the work.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
A family business sets up a second company to hold its delivery vehicles. A manufacturer buys most of the shares in a supplier. A trust-owned property company lends money to a related operating company and appoints two of its directors. When the year-end file opens, someone has to ask whether the client is now a parent, and whether its statements must show the group as one.
Shareholding percentages are where the conversation usually starts, but they are not where IFRS 10 ends. The question the standard asks is about control, and the answer can surprise a client who assumed a minority stake kept things simple, or a majority stake made consolidation automatic.
Control is the deciding question
IFRS 10 requires an entity that controls one or more other entities to present consolidated financial statements. The controlling entity is the parent; the controlled entities are its subsidiaries. The standard defines the principle of control, makes control the basis for consolidation, and sets out how to apply that principle to decide whether an investor controls an investee and must therefore consolidate it.
The IFRS Foundation's IFRS 10 page summarises the standard and links to its full text, which is where the detailed tests and application guidance sit. Work from that text when the answer is not obvious.
Some history explains why older files may use different language. The IASB issued IFRS 10 in May 2011 to supersede IAS 27's consolidation requirements, and IFRS 12, issued at the same time, took over IAS 27's disclosure requirements. A client whose group structure was last analysed many years ago may have a memo written under the old standard; it is worth re-reading against IFRS 10.
Gathering the facts before deciding
Control is a judgement, and judgements need evidence. Before reaching a view, collect the facts the analysis will turn on:
- Shareholdings and voting rights, including different share classes and any rights that are not in proportion to shares held.
- Board appointments: who can appoint or remove directors, and how decisions are actually taken.
- Agreements: shareholders' agreements, management contracts, franchise or licence terms, and any rights that let one party direct how the other operates.
- Options and convertible instruments that could change who holds votes.
- Economic ties: loans, sureties given on the investee's behalf, supply arrangements and who benefits when the investee does well or badly.
- How things work in practice: who sets budgets, hires management and signs off major decisions.
Record the conclusion, the facts it rests on and who reviewed it. If the structure changes during the year, a new subsidiary or a sale of shares, record the date control began or ended.
What consolidation presents
IFRS 10 describes consolidated financial statements as presenting the assets, liabilities, equity, income, expenses and cash flows of a parent and its subsidiaries as those of a single economic entity.
That phrase, single economic entity, is the practical guide to the work. Balances and transactions between group companies are, from the group's point of view, the entity dealing with itself. The firm needs:
- the trial balance of each group company at the group's reporting date;
- a schedule of balances between group companies that agree on both sides;
- intra-group sales, management fees, interest and dividends for the year;
- any stock or assets transferred within the group that still carry an internal profit;
- the acquisition records for each subsidiary, so the investment can be replaced by the subsidiary's net assets.
Gaps here are the usual cause of delays. A loan that one company records and the other does not, or a management fee charged at year end by one side only, has to be resolved before the group figures make sense.
The investment entity exception
IFRS 10 also defines an investment entity and sets out an exception to consolidating particular subsidiaries of one. The October 2012 Investment Entities amendments require an investment entity to measure those subsidiaries at fair value through profit or loss in accordance with IFRS 9, in both its consolidated and separate financial statements.
Few owner-managed groups qualify, but some investment holding structures may. Where a client claims the exception, the reasoning against the definition in IFRS 10 needs to be documented as carefully as any control assessment, and the fair value evidence for each subsidiary has to be on file.
Recording the group in Achekam
Achekam lets staff see clients grouped under their parent group, with each group's entities and engagement counts, and create a group and add entities to it. That gives the firm one place to see which clients belong together, and which engagements are open for each entity.
For each group company, the Studio can build a draft set of annual financial statements from that entity's mapped trial balance, with every figure calculated in code. That covers the individual statements each company prepares.
The consolidation itself is a limit to state plainly: Achekam has no engine that consolidates the accounts of a group of businesses. The combining of trial balances, the eliminations and the group statements are done outside Achekam.
Planning the consolidation work outside Achekam
Because the group figures are prepared separately, plan the work so the inputs and the outputs can be traced:
- Confirm the reporting date for every group company, and what adjustments are needed if any company's year end differs.
- Finalise each entity's trial balance and individual statements first, so the consolidation starts from agreed figures.
- Prepare the intra-group schedule and clear differences with both sides before year-end adjustments are made.
- Keep the consolidation workbook, the eliminations and the reviewer's sign-off with the parent's engagement file.
- Agree the group statements back to the entity figures plus documented adjustments.
Preparing consolidated statements without a consolidation engine covers the workbook approach in more detail. Where a client has just bought shares or a business, business or asset acquisition deals with the question that comes before this one.
At the next planning meeting for any client that holds shares in another company, ask for the shareholders' agreements and board minutes as well as the share register. The control answer usually sits in those documents.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
