Group Accounts – Further Points

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1 Introduction

In this – the final chapter on group accounts – we will state the full definition of what is meant by a subsidiary, and explain the meaning of associated companies and how we deal with them.

2 The definition of a subsidiary

A subsidiary is an entity controlled by another entity.

Control is the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities.

Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than one half of the voting power of an entity unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control.

Control also exists when the parent owns half or less of the voting power of an entity when there is:

• power over more than half the voting rights by virtue of an agreement with other investors

• power to govern the financial and operating policies of the entity under statute or agreement

• power to appoint or remove the majority of the directors or equivalent governing body

• power to cast the majority of votes at meetings of the directors or equivalent governing body

3 Associate companies

An associate is an entity in which the investor has significant influence, but which is not a subsidiary.

Significant influence is the power to participate in the financial and operating policy decisions of the entity, but not to control these policies.

Although the full definition of an associate is more involved, as far as we are concerned for this examination it is where the investing company holds more than 20% of the shares (but not more than 50% - this would make it a subsidiary).

IAS 28 requires the use of what is called the equity method of accounting for investments in associates.

This means the following:

(i)   Consolidated Statement of Profit or Loss

The investing company should add to the consolidated profit the group’s share of the associated company’s profit after tax.

(Note that the associate’s revenue and costs are not added to those of the group as with a subsidiary – we simply add the group’s share of the associate’s profit.

(ii)   Consolidated Statement of Financial Position

A figure for “investment in associates” is shown as an asset in the Consolidated Statement of Financial Position. This figure is the original cost of the investment plus the group’s share of post-acquisition retained earnings of the associate.

Note: the above requirements only apply if consolidated accounts are being prepared because the parent company has subsidiaries. If there are no subsidiaries (and therefore no consolidated accounts) then the associate is treated simply as a trade investment and shown as a non-current asset.