Accounting: Subsidiaries and Parent Companies

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Questions and Answers

What is the term for an entity that has one or more subsidiaries?

Subsidiary

Parent (correct)

Controlled entity

Associated entity

How is control presumed in a subsidiary?

When the parent has a majority of seats on the board

When the parent acquires less than half of the voting rights

When the parent has a significant influence on the subsidiary's operations

When the parent acquires more than half of the voting rights (correct)

What is an indicator of control in a Special Purpose Entity (SPE)?

The substance of the relationship indicates that the SPE is controlled by the reporting entity (correct)

The majority of voting or equity are held by the reporting entity

The SPE is a separate legal entity

The SPE is not a subsidiary of the reporting entity

When can control be evidenced by power over more than one half of the voting rights?

When the parent has an agreement with other investors to govern the subsidiary Signup and view all the answers

What is the purpose of SIC-12 in relation to Special Purpose Entities (SPEs)?

To provide indicators of control for SPEs Signup and view all the answers

What is a parent required to present in its financial statements?

Consolidated financial statements Signup and view all the answers

What is a characteristic of a subsidiary?

It is an entity that is controlled by another entity Signup and view all the answers

Under which condition is a parent not required to present consolidated financial statements?

If its other owners, including those not otherwise entitled to vote, have been informed and do not object Signup and view all the answers

What is the condition for a parent to not file consolidated financial statements with a securities commission?

Its debt or equity instruments are not traded in a public market Signup and view all the answers

Which of the following is true about a subsidiary's business nature?

The business nature of a subsidiary is not a factor in consolidation Signup and view all the answers

Who produces consolidated financial statements available for public use?

The ultimate or any intermediate parent of the parent Signup and view all the answers

Why may a parent not present consolidated financial statements?

Because it meets specific conditions set out in IAS 27.10 Signup and view all the answers

What is the condition for a subsidiary to be exempt from consolidation?

There is no such exemption Signup and view all the answers

What should be done with intragroup balances, transactions, income, and expenses?

They should be eliminated in full Signup and view all the answers

What should be recognized if intragroup losses indicate an impairment?

An impairment loss on the related asset Signup and view all the answers

How should a Special Purpose Entity (SPE) be accounted for?

It should be consolidated where the substance of the relationship indicates control Signup and view all the answers

What happens when an investment ceases to be a subsidiary?

It is accounted for under IAS 39, or as an associate under IAS 28, or as a joint venture under IAS 31 Signup and view all the answers

What should be eliminated in consolidation?

Intragroup balances, transactions, income, and expenses Signup and view all the answers

What is the main requirement for the financial statements of the parent and its subsidiaries when preparing consolidated financial statements?

They must be prepared as of the same reporting date and using the same accounting policies. Signup and view all the answers

What adjustments must be made if a subsidiary's financial statements are not prepared as of the same date as its parent's?

Adjustments for the effects of significant transactions or events that occur between the dates of the subsidiary's and the parent's financial statements. Signup and view all the answers

What is the maximum difference in reporting dates allowed between a subsidiary's and its parent's financial statements?

Three months Signup and view all the answers

How should minority interests be presented in the consolidated balance sheet?

Separate from the parent's shareholders' equity, within equity Signup and view all the answers

What happens if losses applicable to the minority exceed the minority interest in the equity of the relevant subsidiary?

The excess is charged to the group, unless the minority has a binding obligation to, and is able to, make good the losses. Signup and view all the answers

What is the purpose of using uniform accounting policies for like transactions and other events in similar circumstances?

To ensure consistency in the financial statements of the parent and its subsidiaries Signup and view all the answers

What is disclosed in consolidated financial statements according to IAS 27?

The nature of the relationship between the parent and a subsidiary when the parent does not own more than half of the voting power Signup and view all the answers

Why does the ownership of more than half of the voting or potential voting power not constitute control?

Because the reasons for this are disclosed in the consolidated financial statements Signup and view all the answers

When are the financial statements of a subsidiary used to prepare consolidated financial statements?

When the financial statements are as of a reporting date or for a period that is different from that of the parent Signup and view all the answers

What is the reason for using a different reporting date or period for a subsidiary's financial statements?

Because the reasons for this are disclosed in the consolidated financial statements Signup and view all the answers

What is disclosed in consolidated financial statements regarding the transfer of funds from a subsidiary to the parent?

The nature and extent of any significant restrictions on the ability of subsidiaries to transfer funds to the parent Signup and view all the answers

Study Notes

Subsidiary, Parent, and Control

A subsidiary is an entity controlled by another entity (the parent).
A parent is an entity that has one or more subsidiaries.
Control is the power to govern the financial and operating policies of an entity to obtain benefits from its activities.

Identification of Subsidiaries

Control is presumed when the parent acquires more than half of the voting rights of the entity.
Control may also be evidenced by:
- Power over more than half of the voting rights through an agreement with other investors.
- Power to govern the financial and operating policies of the entity under a statute or agreement.
- Ability to appoint or remove the majority of the board of directors.
- Ability to cast the majority of votes at a meeting of the board of directors.

Special Purpose Entities (SPEs)

SPEs should be consolidated where the substance of the relationship indicates that the SPE is controlled by the reporting entity.
This may arise even where the activities of the SPE are predetermined or where the majority of voting or equity are not held by the reporting entity.

Consolidation Procedures

Intragroup balances, transactions, income, and expenses should be eliminated in full.
Intragroup losses may indicate that an impairment loss on the related asset should be recognized.
Financial statements of the parent and its subsidiaries used in preparing the consolidated financial statements should be prepared as of the same reporting date.
If impractical, adjustments must be made for the effects of significant transactions or events that occur between the dates of the subsidiary's and the parent's financial statements.
The difference in reporting dates should not be more than three months.

Consolidated Financial Statements

Consolidated financial statements must be prepared using uniform accounting policies for like transactions and other events in similar circumstances.
Minority interests should be presented in the consolidated balance sheet within equity, but separate from the parent's shareholders' equity.
Minority interests in the profit or loss of the group should also be separately disclosed.
Where losses applicable to the minority exceed the minority interest in the equity of the relevant subsidiary, the excess and any further losses attributable to the minority are charged to the group.

Disclosure

Disclosures required in consolidated financial statements include:
- The nature of the relationship between the parent and a subsidiary when the parent does not own, directly or indirectly, more than half of the voting power.
- The reasons why the ownership, directly or indirectly, of more than half of the voting or potential voting power of an investee does not constitute control.
- The reporting date of the financial statements of a subsidiary when such financial statements are used to prepare consolidated financial statements and are as of a different reporting date or period.
- The nature and extent of any significant restrictions on the ability of subsidiaries to transfer funds to the parent in the form of cash dividends or to repay loans or advances.

Presentation of Consolidated Financial Statements

A parent is required to present consolidated financial statements in which it consolidates its investments in subsidiaries.
Exceptions to this requirement include:
- The parent is itself a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners have been informed about and do not object to the parent not presenting consolidated financial statements.
- The parent's debt or equity instruments are not traded in a public market.
- The parent did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market.
- The ultimate or any intermediate parent of the parent produces consolidated financial statements available for public use that comply with International Financial Reporting Standards.

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Description

Test your understanding of subsidiaries, parent companies, and control in accounting. Learn how to identify subsidiaries and the role of voting rights in determining control.