Accounting Standards

FRS 101
First-time Adoption of Financial Reporting Standards

Implementation Guidance

Consolidated Financial Statements and Accounting for Investments in Subsidiaries

The standards, which have been set in bold italic type, should be read in the context of the background material and implementation guidance in this Standard, and in the context of the Preface to Financial Reporting Standard. Financial Reporting Standards are not intended to apply to immaterial items.

Scope

1. This Standard should be applied in the preparation and presentation of consolidated financial statements for a group of enterprises under the control of a parent.

2. This Standard should also be applied in accounting for investments in subsidiaries in a parent's separate financial statements.

3. Consolidated financial statements are encompassed by the term "financial statements" included in the Preface to Financial Reporting Standards. Therefore, consolidated financial statements are prepared in accordance with Financial Reporting Standards.

4. This Standard does not deal with:

1. methods of accounting for business combinations and their effects on consolidation, including goodwill arising on a business combination (see FRS 22), Business Combinations);



2. accounting for investments in associates (see FRS 28, Accounting for Investments in Associates); and
   
   
3. accounting for investments in joint ventures (see FRS 31, Financial Reporting of Interests in Joint Ventures).
   
   

Definitions

5. The following terms are used in this Standard with the meanings specified:

Control (for the purpose of this Standard) is the power to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities.

A subsidiary is an enterprise that is controlled by another enterprise (known as the parent).

A parent is an enterprise that has one or more subsidiaries.

A group is a parent and all its subsidiaries.

Consolidated financial statements are the financial statements of a group presented as those of a single enterprise.

Minority interest is that part of the net results of operations and of net assets of a subsidiary attributable to interests which are not owned, directly or indirectly through subsidiaries, by the parent.

Presentation of Consolidated Financial Statements

6. A parent, other than a parent mentioned in paragraph 7, should present consolidated financial statements.

7. A parent that is a wholly owned subsidiary, or is virtually wholly owned, need not present consolidated financial statements provided, in the case of one that is virtually wholly owned, the parent obtains the approval of the owners of the minority interest. Such a parent should disclose the reasons why consolidated financial statements have not been presented together with the bases on which subsidiaries are accounted for in its separate financial statements. The name and registered office of its parent that publishes consolidated financial statements should also be disclosed.

8. Users of the financial statements of a parent are usually concerned with, and need to be informed about, the financial position, results of operations and changes in financial position of the group as a whole. This need is served by consolidated financial statements, which present financial information about the group as that of a single enterprise without regard for the legal boundaries of the separate legal entities.

9. A parent that is itself wholly owned by another enterprise may not always present consolidated financial statements since such statements may not be required by its parent and the needs of other users may be best served by the consolidated financial statements of its parent. In some countries, a parent is also exempted from presenting consolidated financial statements if it is virtually wholly owned by another enterprise and the parent obtains the approval of the owners of the minority interest. Virtually wholly owned is often taken to mean that the parent owns 90% or more of the voting power.

Scope of Consolidated Financial Statements

10. A parent which issues consolidated financial statements should consolidate all subsidiaries, foreign and domestic, other than those referred to in paragraph 12.

11. The consolidated financial statements include all enterprises that are controlled by the parent, other than those subsidiaries excluded for the reasons set out in paragraph 12. Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than one half of the voting power of an enterprise unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control. Control also exists even when the parent owns one half or less of the voting power of an enterprise when there is: ^1,2

1. power over more than one half of the voting rights by virtue of an agreement with other investors;
   
   
2. power to govern the financial and operating policies of the enterprise under a statute or an agreement;



3. power to appoint or remove the majority of the members of the board of directors or equivalent governing body; or
   
   
4. power to cast the majority of votes at meetings of the board of directors or equivalent governing body.

¹See also INT FRS-12, Consolidation - Special Purpose Entities
²See also INT FRS-33: Consolidation and Equity Method - Potential Voting Rights and Allocation of Ownership Interests

12. A subsidiary should be excluded from consolidation when:

1. control is intended to be temporary because the subsidiary is acquired and held exclusively with a view to its subsequent disposal in the near future; or



2. it operates under severe long-term restrictions which significantly impair its ability to transfer funds to the parent.

Such subsidiaries should be accounted for in accordance with FRS 39, Financial Instruments: Recognition and Measurement.

13. A subsidiary is not excluded from consolidation because its business activities are dissimilar from those of the other enterprises within the group. Better information is provided by consolidating such subsidiaries and disclosing additional information in the consolidated financial statements about the different business activities of subsidiaries. For example, the disclosures required by FRS 14, Segment Reporting, help to explain the significance of different business activities within the group.

Consolidation Procedures

14. In preparing consolidated financial statements, the financial statements of the parent and its subsidiaries are combined on a line-by-line basis by adding together like items of assets, liabilities, equity, income and expenses. In order that the consolidated financial statements present financial information about the group as that of a single enterprise, the following steps are then taken:³

1. the carrying amount of the parent's investment in each subsidiary and the parent's portion of equity of each subsidiary are eliminated (see FRS 22), Business Combinations, which also describes the treatment of any resultant goodwill);
   
   
2. minority interests in the net income of consolidated subsidiaries for the reporting period are identified and adjusted against the income of the group in order to arrive at the net income attributable to the owners of the parent; and



3. minority interests in the net assets of consolidated subsidiaries are identified and presented in the consolidated balance sheet separately from liabilities and the parent shareholders' equity. Minority interests in the net assets consist of:
   
   
   1. the amount at the date of the original combination calculated in accordance with FRS 22, Business Combinations; and
   
   
   
   2. the minority's share of movements in equity since the date of the combination.
   
   
   

³See also INT FRS-33: Consolidation and Equity Method - Potential Voting Rights and Allocation of Ownership Interests

15. Taxes payable by either the parent or its subsidiaries on distribution to the parent of the profits retained in subsidiaries are accounted for in accordance with FRS 12, Income Taxes.

16. Intragroup balances and intragroup transactions and resulting unrealised profits should be eliminated in full. Unrealised losses resulting from intragroup transactions should also be eliminated unless cost cannot be recovered.

17. Intragroup balances and intragroup transactions, including sales, expenses and dividends, are eliminated in full. Unrealised profits resulting from intragroup transactions that are included in the carrying amount of assets, such as inventory and fixed assets, are eliminated in full. Unrealised losses resulting from intragroup transactions that are deducted in arriving at the carrying amount of assets are also eliminated unless cost cannot be recovered. Timing differences that arise from the elimination of unrealised profits and losses resulting from intragroup transactions are dealt with in accordance with FRS 12, Income Taxes.

18. When the financial statements used in the consolidation are drawn up to different reporting dates, adjustments should be made for the effects of significant transactions or other events that occur between those dates and the date of the parent's financial statements. In any case the difference between reporting dates should be no more than three months.

19. The financial statements of the parent and its subsidiaries used in the preparation of the consolidated financial statements are usually drawn up to the same date. When the reporting dates are different, the subsidiary often prepares, for consolidation purposes, statements as at the same date as the group. When it is impracticable to do this, financial statements drawn up to different reporting dates may be used provided the difference is no greater than three months. The consistency principle dictates that the length of the reporting periods and any difference in the reporting dates should be the same from period to period.

20. Consolidated financial statements should be prepared using uniform accounting policies for like transactions and other events in similar circumstances. If it is not practicable to use uniform accounting policies in preparing the consolidated financial statements, that fact should be disclosed together with the proportions of the items in the consolidated financial statements to which the different accounting policies have been applied.

21. In many cases, if a member of the group uses accounting policies other than those adopted in the consolidated financial statements for like transactions and events in similar circumstances, appropriate adjustments are made to its financial statements when they are used in preparing the consolidated financial statements.

22. The results of operations of a subsidiary are included in the consolidated financial statements as from the date of acquisition, which is the date on which control of the acquired subsidiary is effectively transferred to the buyer, in accordance with FRS 22, Business Combinations. The results of operations of a subsidiary disposed of are included in the consolidated income statement until the date of disposal which is the date on which the parent ceases to have control of the subsidiary. The difference between the proceeds from the disposal of the subsidiary and the carrying amount of its assets less liabilities as of the date of disposal is recognised in the consolidated income statement as the profit or loss on the disposal of the subsidiary. In order to ensure the comparability of the financial statements from one accounting period to the next, supplementary information is often provided about the effect of the acquisition and disposal of subsidiaries on the financial position at the reporting date and the results for the reporting period and on the corresponding amounts for the preceding period.

23. An investment in an enterprise should be accounted for in accordance with FRS 39, Financial Instruments: Recognition and Measurement, from the date that it ceases to fall within the definition of a subsidiary and does not become an associate as defined in FRS 28, Accounting for Investments in Associates.

24. The carrying amount of the investment at the date that it ceases to be a subsidiary is regarded as cost thereafter.

25. Minority interests should be presented in the consolidated balance sheet separately from liabilities and the parent shareholders' equity. Minority interests in the income of the group should also be separately presented.

26. The losses applicable to the minority in a consolidated subsidiary may exceed the minority interest in the equity of the subsidiary. The excess, and any further losses applicable to the minority, are charged against the majority interest except to the extent that the minority has a binding obligation to, and is able to, make good the losses. If the subsidiary subsequently reports profits, the majority interest is allocated all such profits until the minority's share of losses previously absorbed by the majority has been recovered.

27. If a subsidiary has outstanding cumulative preferred shares which are held outside the group, the parent computes its share of profits or losses after adjusting for the subsidiary's preferred dividends, whether or not dividends have been declared.

Accounting for Investments in Subsidiaries in a Parent's Separate Financial Statements

28. In a parent's separate financial statements, investments in subsidiaries that are included in the consolidated financial statements should be either:

1. carried at cost;



2. accounted for using the equity method as described in FRS 28, Accounting for Investments in Associates; or



3. accounted for as available-for-sale financial assets as described in FRS 39, Financial Instruments: Recognition and Measurement.

29. Investments in subsidiaries that are excluded from consolidated financial statements should be either:

1. carried at cost;



2. accounted for using the equity method as described in FRS 28, Accounting for Investments in Associates; or



3. accounted for as available-for-sale financial assets as described in FRS 39, Financial Instruments: Recognition and Measurement.

30. In many countries separate financial statements are presented by a parent in order to meet legal or other requirements.

Disclosure

31. In addition to those disclosures required by paragraphs 7 and 20, the following disclosures should be made:

1. in consolidated financial statements a listing of significant subsidiaries including the name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held;



2. in consolidated financial statements, where applicable:



1. the reasons for not consolidating a subsidiary;



2. the nature of the relationship between the parent and a subsidiary of which the parent does not own, directly or indirectly through subsidiaries, more than one half of the voting power;



3. the name of an enterprise in which more than one half of the voting power is owned, directly or indirectly through subsidiaries, but which, because of the absence of control, is not a subsidiary; and



4. the effect of the acquisition and disposal of subsidiaries on the financial position at the reporting date, the results for the reporting period and on the corresponding amounts for the preceding period; and



3. in the parent's separate financial statements, a description of the method used to account for subsidiaries.

Effective Date

32. FRS 27, Consolidated Financial Statements and Accounting for Investments in Subsidiaries, is operative for financial statements covering periods beginning on or after 1st January 1990.