Group Company Structures

Introduction to Groups

• Companies can expand by building up their business through trading.
• Companies can expand by merging, when two distinct companies combine to form a larger, single company.
• Companies can expand through acquisitions (takeovers), when a company is absorbed by another
• The purchasing company takes control by purchasing shares or acquiring assets.
• Expansion can result in a single entity or a group where the acquired business is a subsidiary.

Main Terms in Group Accounts: Definitions

• A parent is an entity that controls other entities.
• A subsidiary is an entity controlled by another entity (parent/investor).
• An associate is an entity over which the investor has significant influence of 20% or more of voting rights.
• Associates are neither a subsidiary nor an interest in a joint venture.
• A group consists of a parent company, one or more subsidiary companies, and associates.

Control and Power

• Control is the power to govern the financial and operating policies of an entity to obtain benefits from its activities.
• An investor controls an investee if and only if the investor has all of the following:
  • Power over the investee
  • Exposure or rights to variable returns
  • Ability to use its power to affect the amount of return

How is Control Acknowledged?

• Control is presumed to exist when the parent has a majority of voting rights of an entity.
• Control is presumed to exist when the parent has the right to exercise a dominant influence over an entity.
• Control is presumed to exist when the parent has the right to appoint or remove the majority of the board.

Significant Influence

• Significant influence is usually evidenced by one or more of the following ways:
  • Representation on the board of directors
  • Participation in policy-making processes
  • Material transactions between the investor and the investee
  • Interchange of managerial personnel
  • Provision of essential technical information

The Concept of Group Accounts: Acquisition

• Acquisition take place through acquisition of shares and acquiring control (subsidiary) or significance influence (associate) of other companies.
• The parent company prepares the financial statements for the group as a single entity, being Consolidated Financial Statements.

Types of Acquisitions

• Acquisitions can occur in two forms: investment in subsidiaries and investment in associates

Investment in Subsidiary

• Parent acquires 50% or more of ownership
• This makes them the majority shareholder
• The parent has control to govern financial and operating policies via statute or an agreement.
• The parent controls the management of the company and regulated through IAS 27.

Investment in Associate

• Parent acquires between 20%-50% of ownership.
• The parent becomes the minority shareholder
• The parent has the right to influence financial, operational, and other decisions (significant influence).
• The parent and associate may have a certain number of common partners or directors and are regulated through IAS 28.

Accounting of Acquisitions: The Financial Statements

• When a parent entity acquires shares in a subsidiary, these are still considered separate legal entities.
• There is a requirement to prepare separate financial statements at the end of the accounting period.
• The financial statements of the parent entity must present a set of financial statements for all the group to show full financial information.
• Consolidated / Group Financial Statements, need to be prepared by the Parent Entity.

Accounting for Subsidiaries

• Consolidated Method is applied when there is an accounting for subsidiaries.
• The parent’s and subsidiary’s financial statements are presented in one set of financial statements via:
  • Adding line by line items like assets, liabilities, equity, income, and expenses
  • Eliminating and removing any overlapping transfers, payments, and loans

Accounting for Associates

• The equity method is applied when there is accounting for associates.
• In Parent books, an acquisition will be shown as an Investment - Non-Current Asset.
• In Associate’s books, an acquisition will be showed as Equity – Share Capital.

Consolidated Accounts in Malta

• Parent companies in Malta must prepare consolidated accounts under IFRS or GAPSME.
• Groups must use IFRS if the group figures exceed any two of the three criteria at balance sheet date.
  • Balance sheet total should be < €20,000,000 net / < €24,000,000 gross
  • Turnover should be < €40,000,000 net / < €48,000,000 gross
  • Average number of employees should be < 250
• If any two of the criteria are not exceeded, groups prepare consolidated financial statements under GAPSME.

Consolidation Exemptions in Malta

• Unlike IFRS, GAPSME provides exemption from consolidation where the parent and its subsidiaries do not exceed at least two out of three of the criteria figures
  • Balance sheet total should be < €4,000,000 net / < €4,800,000 gross
  • Turnover should be < €8,000,000 net / < €9,600,000 gross
  • Average number of employees should be < 50

Related Parties in Groups: Definition

• A related party is a person or entity related to the entity that is preparing its financial statements.
• A person or a close member of that person's family is related to a reporting entity if that person:
  • Has control or joint control over the reporting entity
  • Has significant influence over the reporting entity
  • Is a member of the key management personnel of the reporting entity or of a parent of the reporting entity

Related Parties in Groups: Definition continued

• An entity is related to a reporting entity if any of the following conditions applies:
  • The entity and the reporting entity are members of the same group – subsidiary or parent
  • One entity is an associate or joint venture of the other entity
  • Both entities are associates or joint ventures of the same third party
  • The entity is a post-employment benefit plan for the employees
  • The entity is controlled/jointly controlled by a person
  • The entity has significant influence over the entity or is a member of the key management personnel of the entity.

Not Related Parties

• Two entities simply have a director in common.
• Two ventures simply share joint control over a joint venture.
• Parties by virtue of their normal dealings e.g. providers of finance, trade unions
• Customers, suppliers, franchisors, distributors or general agents with whom an entity transacts a significant volume of business.

What is a Related Party Transaction?

• A related party transaction is a transfer of resources, services, or obligations between related parties. This is regardless of whether a price is charged or not.
• Financial statements should contain the necessary disclosures to draw attention to the possibility that its financial position and profit or loss may have been affected by the existence of related parties.

Disclosures Based on Type of Relation

• Relationships between parents and subsidiaries - disclose the name and registered office of its immediate parent
• Management compensation will disclose the following in relation to members of the entity’s board of directors and other members of its administrative, managerial and supervisory bodies.
  • Disclose the amount of advances and credits granted with indications of the interest rates and any amounts repaid or written off or waived.
  • Any commitments entered into on their behalf by way of guarantees of any kind.

Disclosures on related parties:

• The amount of the transactions in aggregate.
• The amount of outstanding balances in aggregate.
• Terms and conditions, including whether they are secured.
• The nature of the consideration to be provided in settlement
• Details of any guarantees given or received;
• Provisions for doubtful debts related to the amount of outstanding balances
• The expense recognised during the period relating to bad or doubtful debts due from related parties.