Understanding Group Accounts

Introduction to Groups

• Companies can expand through building up their business, mergers, or acquisitions.
• Merging is when two distinct companies combine to form a new, larger entity.
• Acquisitions (takeovers) occur when one company absorbs another, gaining control by purchasing shares or acquiring assets.
• Two possible outcomes of expansion are the creation of a single entity or a larger organization that legally recognizes the acquired business as a subsidiary.

Main Terms in Group Accounts

• A parent is an entity that controls other entities.
• A subsidiary is an entity controlled by another entity (the parent/investor).
• An associate is an entity over which the investor has significant influence (20% or more of voting rights) but isn't a subsidiary or a joint venture interest.
• A group consists of a parent company, one or more subsidiary companies, and associates controlled or significantly influenced by the parent.
• Control is the authority to govern an entity's financial and operational policies to gain benefits from its activities.
• Significant influence is the power to participate in the financial and operating policy decisions of the associate but is not control or joint control over those policies.
• Power refers to existing rights that grant the current ability to direct relevant activities.
• An investor controls an investee only if the investor has power over the investee, exposure or rights to variable returns, and the ability to use its power to affect the return amount.
• Control is presumed to exist when the parent has a majority of the shareholders' voting rights, the right to exercise dominant influence, the right to appoint/remove the majority of the board of directors, and the ability to affect the amount of return.
• Significant influence is evidenced by representation on the board of directors, participation in policymaking, material transactions, interchange of managerial personnel, or provision of technical information.

The Concept of Group Accounts

• Acquisitions involve acquiring shares and gaining control (subsidiary) or significant influence (associate) in other companies.
• The parent company prepares financial statements for the group as a single entity, known as Consolidated Financial Statements.

Types of Acquisitions

• The types of acquisitions include investments in subsidiaries and investments in associates.
• Investment in a subsidiary involves the parent acquiring 50% or more of ownership, holding a majority stake.
• In a subsidiary investment, the parent has control to govern the financial and operating policies under statutes or agreements and controls the company's management and is regulated through IAS 27.
• With investment in an associate, the parent acquires between 20% and 50% ownership, having a minority stake.
• When investing in an associate, the parent can influence the associate's financial, operational, and other decisions through significant influence, and may share common partners or directors, and is regulated through IAS 28.

Accounting of Acquisitions

• When a parent acquires shares in a subsidiary or associate, these remain separate legal entities.
• Separate financial statements are required at the end of the accounting period for the parent, subsidiaries and associates.
• The parent entity's financial statements must present a set of financial statements for the entire group, which requires preparing Consolidated/Group Financial Statements by the Parent Entity.
• The Consolidated Method is used for accounting subsidiaries.
• With the consolidated method, the parent's and subsidiary's financial statements will be presented in a single, consolidated set by adding all line items such as assets, liabilities, equity, income, and expenses. Overlapping transfers, payments, and loans between parent and subsidiaries will be eliminated.
• Investments in S Ltd (€40,000) cancels out directly against Share capital (€30,000) and Retained Earnings (€10,000), showing a single economic activity post-consolidation.
• The equity method is applied for accounting associates.
• Acquisition is shown as an Investment - Non-Current Asset on the parent's books.
• On the associate's books, the Acquisition is shown as Equity - Share Capital.
• The investment may only appear under debit non-current assets, while the other credit assets are reduced due to a decrease in bank balance.

Identification of Group Structures

• Subsidiaries include companies in which Alpha has 52% votes without a board seat, or Alpha holds 100% of votes and all board seats.
• What qualifies a company to be regarded as a parent of another is if it controls and owns the majority of the votes in the other company.
• If A plc owns 80% of the ordinary shares in C Ltd and has the right to appoint three out of the four directors of D Ltd, then C Ltd and D Ltd are subsidiaries of A plc.
• In consolidation, a subsidiary and an associate are not treated identically and consolidation only includes addition of balances of two financial statements but eliminates intra-group transactions.
• If Earl Ltd can affect the returns of Amber Ltd through its power, Amber Ltd is a subsidiary of Earl Ltd.
• The statement that Moat Ltd, owning 6,000 'A' €1 ordinary shares in Grange Ltd, which has 10,000 Ordinary voting shares, makes Grange Ltd a subsidiary of Moat Ltd is a true statement.

Consolidated Accounts in Malta

• All parent companies in Malta need to prepare consolidated accounts under IFRS or GAPSME.
• To prepare consolidated financial statements, IFRS must be used if the group figures exceed any two of the three criteria at the balance sheet date.
• Under GAPSME, for groups under a theshold criteria, the balance sheet total must be under €20,000,000 net or €24,000,000 gross, turnover must be less than €40,000,000 net or €48,000,000 gross, and the average number of employees must be less than 250.
• If any two of the GAPSME thresholds are not exceeded, the group can prepare consolidated financial statements under GAPSME.

Consolidation Exemptions in Malta

• Unlike IFRS, GAPSME provides a consolidation exemption where the parent and its subsidiaries do not exceed at least two out of the three criteria figures.
• Under GAPSME, consolidation is exempt if the balance sheet total is less than €4,000,000 net or €4,800,000 gross, turnover is less than €8,000,000 net or €9,600,000 gross, and the average number of employees is less than 50.

Related Parties in Groups

• Related parties in groups include key management personnel, family members, and companies within the groups.
• A related party is defined as a person or entity related to the entity preparing its financial statements.
• A person or a close member of that person's family is related if they have control or joint control over the reporting entity, significant influence, or are key management personnel.
• An entity is related to a reporting entity if they belong to the same group (subsidiary/parent), one is an associate/joint venture of the other, both are associates/joint ventures of the same third party, the entity is a post-employment benefit plan, the entity is controlled by a person under definition (a), or the entity has significant influence or is a member of key management personnel of the entity.
• Not considered related parties are two entities that simply have a director in common; two venturers sharing joint control; providers of finance, trade unions, public utilities, or government agencies by virtue of their normal dealings; and customers, suppliers, franchisors or distributors.
• A related party transaction is a transfer of resources, services, or obligations between related parties, irrespective of pricing, that requires financial statement disclosures.
• Disclosure is required of relationships between parents and subsidiaries, which requires disclosure of the name and registered office of its immediate parent.
• Disclosure is required for management compensation, including the amount of advances and credits granted, including interest rates, terms, and any amounts repaid or waived. It must also disclose any commitments entered into via guarantees.
• For transactions between related parties, the amount of transactions and outstanding balances in aggregate must be disclosed, along with terms, conditions, the nature of consideration, details of guarantees, provisions for doubtful debts, and expenses during the period for bad or doubtful debts from them.