Exclusion of subsidiary from consolidation

DDerrick9y ago

Hi Mike, BPP revision kit question 24 (1): On what basis may a subsidiary be excluded from consolidation? A. The activities of the subsidiary are dissimilar to the activities of the rest of the group B. The subsidiary was acquired with the intention of reselling it after a short period of time C. The subsidiary is based in a country with strict exchange controls which make it difficult for it to transfer funds to the parent D. There is no basis on which a subsidiary may be excluded from consolidation The answer given is Option D, but I'm absolutely sure that the only basis on which a subsidiary may be excluded is where the parent has completely lost its control over it. In this case option C sounds more reasonable. Do you think if the solution given is wrong? Hope you could help me on this, thank you :)

MikeLittleTutor9y ago#1

Here's an extract from IASPLUS on IAS 27 "The consolidated accounts should include all of the parent's subsidiaries, both domestic and foreign: [IAS 27.12] There is no exemption for a subsidiary whose business is of a different nature from the parent's. There is no exemption for a subsidiary that operates under severe long-term restrictions impairing the subsidiary's ability to transfer funds to the parent. Such an exemption was included in earlier versions of IAS 27, but in revising IAS 27 in December 2003 the IASB concluded that these restrictions, in themselves, do not preclude control. There is no exemption for a subsidiary that had previously been consolidated and that is now being held for sale. However, a subsidiary that meets the IFRS 5 criteria as an asset held for sale shall be accounted for under that Standard." Applying this extract to the question you have posted: Option A is clearly incorrect Option B, the same Option C also not correct So that leaves option D HOWEVER!!!! If a subsidiary is immaterial in the context of the group, then it may be excluded from the consolidation because accounting standards apply only to material matters So option D is also technically incorrect

DDerrick9y ago#2

Thanks for the help :) "If a subsidiary is immaterial...." = in what situation does a subsidiary become immaterial to the parent company? A total loss of control?

MikeLittleTutor9y ago#3

No - a total loss of control means that it's no longer a subsidiary A subsidiary is immaterial where the values involved in that subsidiary are so negligible that to include them within a consolidation would have an immeasurable effect If you look at a set of published financial statements - it could take you a while to find this - you should be able to see a list of the parent's subsidiaries and, particularly, a list of those subsidiaries that have not been consolidated on the basis of their immateriality

DDerrick9y ago#4

Ok I will look them up if I get bored from studying :) many thanks again- it's finally clear to me now

MikeLittleTutor9y ago#5

You're welcome

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