Afa2 - Chapter 1 Consolidation of financial statements

8/11/2019 Afa2 - Chapter 1 Consolidation of financial statements

1/27

Lecture 1:

Consolidated FinancialStatements

1


2/27

Introduction

What are consolidated financialstatements?

Who has to present consolidated financialstatements in Malaysia?

2


3/27

Introduction

Firstly:

What are consolidated financial statements?

3


4/27

Introduction

In a business combination:

Different business entities are brought under

common control Different entities have to prepare their own

set of financial statements

But there is also demand for the consolidatedfinancial statements

4


5/27

Introduction

Thus, consolidated financial statementsare the financial statements of a group of

business entities under common control

5


6/27

Introduction

Secondly:

Who has to prepare consolidated financialstatements in Malaysia?

6


7/27

Introduction

MFRS 10:A parent should present consolidated

financial statementsParent is an entity that controls

another

7


8/27

Introduction

Control:

Power,

Variable returns, andAbility to use power to affect the returns

8


9/27

Introduction

PowerAbility to direct the relevant activities (ie

activities that significantly affect returns) To consider Purpose and design of the investee

What the relevant activities are and how decisionabout those activities are made

Whether the rights of the investor give it thecurrent ability to direct the relevant activities

9


10/27

Introduction

Power Power arises from rights

Examples of rights that gives the powerVoting rights

Contractual rights

Decision making rights

10


11/27

Introduction

Power: Voting rights Majority vs De facto power

Potential voting rights

11


12/27

Introduction

Power: Voting rights - majority

In most cases, the investor that has more

than 50% of the voting rights is deemed tohave power over the investee

IE 1.2 (pp 9)

However, FRS 110 also requires an investor

to consider the de facto power wherehaving less than 50% of voting rights maygive it power

12


13/27

Introduction

Power: Voting rights - De facto power

Where investors rights are in fact sufficient

to give it practical ability to direct relevantactivities unilaterally

In LMN Ltd: A Ltd has 46%, the rest widelydispersed,


14/27

Introduction

Power: Voting rights - Potential votingrights

Must be substantive (ie holder has practicalability to exercise its rights)

Currently exercisable?

Financial ability to exercise?

Deeply out-of-the-money?

14


15/27

Introduction

Power: Contractual rights

A Ltd has 30% of B Ltd and has a contract tosupply raw material and to market finishedgoods. 75% vote required to cancel thecontract.

15


16/27

Introduction

Power: Decision making right

An investor that has decision making rights

will have power However, only if the decision maker who acts

as the principal has the ability to use powerto affect the returns (Agent does not have

the ability to use power to affect the returns)

16


17/27

Introduction

Returns

Investor is exposed, or has rights, to variable

returns (both positive and negative), as resultof investees performance

17


18/27

Introduction

Power and returns

Investor has the ability to use its power to

affect its returns from investee IE 1.9 (pp 14)

18


19/27

Introduction

Power and returnsdecision maker

Investor with decision making right (eg fund

manager) has the ability to use its power toaffect its returns from investee only if he actsas the principal

Agent does not have the ability to use its power to

affect its returns from investee

19


20/27

Introduction


Whether an investor with decision making

rights is a principal or agent: The scope of its decision making authority

The rights held by other parties

Its remuneration

Its exposure to returns through other interest

20


21/27

Introduction


The scope of its decision-making authority

Level of involvement in decision making

The rights held by other parties

The number of parties required to act together

against the decision maker

21


22/27

Introduction


Its remuneration

The variability of its remuneration relative toinvesteesreturns

Other interest

The magnitude of other interest

22


23/27

Introduction

For purposes of subsequent discussions, assumethat Entity A controls Entity B, if the formerholds more than 50% of the share capital of thelatter

23


24/27

Introduction

As mentioned earlier, the parent has to

prepare and present

However, not all parents have to presentconsolidated financial statements (exemption)

24


25/27

A B C

Question: Will B Ltd have to presentconsolidated accounts?

Yes, unless

25


26/27

MFRS 10 (para 4(a))

B is wholly owned by A, or NCI in B do

not objectB is not listed,

B is not in process of being listed; and

A produces consolidated accountsavailable for public use

26


27/27

End of Lecture 1

Thank you

27

Documents

Afa2 - Chapter 1 Consolidation of financial statements