Consolidated Financial Statements. 19/11/14 M P Vijay Kumar FCA, ACA, FCS 1

Transcription

1 Consolidated Financial Statements 19/11/14 M P Vijay Kumar FCA, ACA, FCS 1

2 Consolidated Financial Statements Society of Auditors Chennai Nov 14

3 170 minutes.. ( ) Why consolida7on slide minutes Introducing Consolida7on Slide minutes Consolida7on procedures/ issues Slide minutes Consolida7on Disclosure/Companies Act/IFRS Slide minutes Par7cipant queries received Slide minutes My learning 20 minutes 19/11/14 M P Vijay Kumar FCA, ACA, FCS 3

4 Why Consolida7on? 1. Enterprises operate as Groups ; not as single en7ty for all business 2. Group includes Subsidiary Associates Joint Ventures 3. Reasons Fiscal incen7ves Direct and Indirect Op7mal alloca7on of resources Core competence - Technology Difference in Management skills, Board personnel Differing degree of control need and dominance factor Succession planning Regulatory framework 19/11/14 M P Vijay Kumar FCA, ACA, FCS 4

5 Fundamentals Why Group FS? 1. Parent enterprise stakeholders funds routed to several enhhes 2. Parent operahons do not represent return on stakeholders funds 3. Investment income accounted only on right to receive AS Investments are to be treated at par with other tangible assets for leveraging 5. Undesirable cases parking of profits or losses and consequent siphoning 6. Group size relevant for compehng globally 19/11/14 M P Vijay Kumar FCA, ACA, FCS 5

6 An Illustra7on Holding company invests last day of year

7 Parent Balance Sheet as at 31st Mar without AS 21 S ubsidiary Balance S heet Share Capital 100 Sundry Net Assets 175 Reserves 150 Factory 1 Investment in Subsidiary 75 60% S hare Capital 50 Sundry Net Assets 100 (Factory 2) Res erves Consolidated Balance Sheet as at 31st Mar with AS 21 Share Capital 100 Goodwill 15 { 75-60% (50+50)} Reserves 150 Sundry Net Assets 275 Factory 1 &2 Minority Interest 40 Investment in subsidiary Nil (40% of 100) /11/14 M P Vijay Kumar FCA, ACA, FCS 7

8 ILLUSTRATION contd.., INVESTMENT 1 year later 19/11/14 M P Vijay Kumar FCA, ACA, FCS 8

9 Parent Balance Sheet as at 31st Mar without AS 21 Share Capital 100 Sundry Net Assets 200 Reserves 175 Factory 1 Investment in Subsidiary 75 60% Share Capital 50 Sundry Net Assets 150 (Factory 2) Reserves 100 (Current year Profit of 50) Subsidiary Balance Sheet Consolidated Balance Sheet as at 31st Mar with AS 21 Share Capital 100 Goodwill (same) 15 Reserves 205 Sundry Net Assets 350 ( ) Factory 1 &2 Investment Minority Interest 60 in subsidiary Nil (40% of 150) /11/14 M P Vijay Kumar FCA, ACA, FCS 9

10 Consolida7on procedure

11 Different concepts for consolida7on EnHty Concept The group is an economic unit. The view is to be of the resources controlled by the group Proprietary concept ownership through controlling interest and CFS principally for informahon of shareholders of parent Consolidate both domeshc and overseas subsidiaries 19/11/14 M P Vijay Kumar FCA, ACA, FCS 11

12 Consolidated Financial Statements Balance sheet Statement of P&L Cash flow statement Segment Report Explanatory statement/notes to accounts All AS will apply in full 19/11/14 M P Vijay Kumar FCA, ACA, FCS 12

13 Scenarios H Ltd in S Ltd. Vanilla relahonship Wholly owned subsidiary Partly owned subsidiary MulHple subsidiaries Independent Triangle holding Chain holding Cross holding New enhty ExisHng company acquire start or end of year acquire during year MulHple acquisihon Leading to control A`er control Change in shareholding Increase Decrease Both Foreign Subsidiary Integral Non- Integral Associate Joint venture Change in status From subsidiary to associate/jv to vice versa Exit from control Part Full 19/11/14 M P Vijay Kumar FCA, ACA, FCS 13

14 Consolida7on procedure Line by Line Addi7on only 3 Adjustments Determina7on of Cost of Control Ascertainment of Minority Interest Elimina7on of Inter company transac7ons 19/11/14 M P Vijay Kumar FCA, ACA, FCS 14

15 Key Defini7on Equity residual interest in the assets of an enterprise aker deduc7ng all its liabili7es. Implies Assets less all outside liabili7es 19/11/14 M P Vijay Kumar FCA, ACA, FCS 15

16 Steps Iden7fy subsidiaries, associates and joint ventures to be consolidated Ascertain date of acquisi7on and shareholding palern Analyze reserves of subsidiaries with reference to date of acquisi7on Ascertain Goodwill/Capital Reserve Ascertain Minority Interest Ascertain and eliminate intragroup transac7ons Line- by- line addi7on to prepare consolidated financial statements 19/11/14 M P Vijay Kumar FCA, ACA, FCS 16

17 Iden7fy en77es to be consolidated COMPANIES ACT 2013 Subsidiary - EnHty in which Parent controls the composihon of Board of Directors or exercises or controls more than half of the total share capital either at its own or together with one or more subsidiaries Control defini7on quite wide- sec7on 2(27) Right to appoint majority of Directors, control of management/policy decisions ac9ng individually or in concert, directly or indirectly including vo9ng arrangement etc. 19/11/14 M P Vijay Kumar FCA, ACA, FCS 17

18 Iden7fy en77es to be consolidated AS 21 Subsidiary - EnHty in which parent exercises control Control Ownership directly on indirectly, more than half of vohng power Control of composihon of governing body, so as to obtain economic benefits from its achvihes Control over PF, Gratuity trust not covered, as it is not to obtain economic benefits to parent 19/11/14 M P Vijay Kumar FCA, ACA, FCS 18

19 Control exclusion from consolida7on (a) control is intended to be temporary because the subsidiary is acquired and held exclusively with a view to its subsequent disposal in the near future; or (b) it operates under severe long- term restrichons which significantly impair its ability to transfer funds to the parent. In CFS, Account these investments as per AS 13 and disclose the reasons for not consolidahng 19/11/14 M P Vijay Kumar FCA, ACA, FCS 19

20 Iden7fy en77es to be consolidated Subsidiary - EnHty in which Parent controls the composihon of Board of Directors or exercises or controls more than half of the total share capital either on its own or together with one or more subsidiaries Associate (includes a JV) - company in which there is SI Significant influence control of at least 20% of total share capital or of business decisions under an agreement 19/11/14 M P Vijay Kumar FCA, ACA, FCS 20

21 Ascertainment of CoC Determined with reference to date of investment as difference between: Carrying amount of investment in each subsidiary and the parent s porhon of equity in each subsidiary Difference recognized as Goodwill/Capital Reserve 19/11/14 M P Vijay Kumar FCA, ACA, FCS 21

22 CoC Key Points 1. MulHple investment made take date of each investment as base (step by step basis) 2. Small investments leading to control take date of last significant investment for control as base 19/11/14 M P Vijay Kumar FCA, ACA, FCS 22

23 CoC Key Points 3. If FS of subsidiary on date of investment not available/ imprachcable to prepare ( ex; 13 th May investment date), FS of subsidiary for the immediately preceding period are used as a basis for consolidahon and adjustments are made to these FS for effects of significant transachons or other events that occur between the date of preceding FS to date of investment 19/11/14 M P Vijay Kumar FCA, ACA, FCS 23

24 CoC Key Points 4. ComputaHon is based on Carrying Amount (even if different from cost, ex: fair valued in past) 5. Does not consider fair value of assets ; considerahon is paid based on fair value but equity (net assets) is measured on book value 19/11/14 M P Vijay Kumar FCA, ACA, FCS 24

25 CoC Key Points 6. AS 26 Not applicable; hence no amorhzahon 7. AS 28- Applicable ; to test for impairment and recognize when incidence arises 19/11/14 M P Vijay Kumar FCA, ACA, FCS 25

26 CoC Key Points 8. Ascertaining Goodwill/Capital Reserve is with respect to Date of AcquisiHon for all subsidiaries irrespechve of age of subsidiary 9. No transihonal provisions for determining such cost of control 10. InformaHon for older subsidiaries might be an issue 19/11/14 M P Vijay Kumar FCA, ACA, FCS 26

27 CoC- Key points 11. Company A acquires, Company B which has subsidiaries C,D & E. Whether CoC determina7on should be on CFS of B or individual financial statements of B,C,D,E? CoC should be computed based on CFS of B and not on individual financial statements 12. Mul7ple subsidiaries Goodwill and Capital reserve of different subsidiaries should not be set off; similarly should not be set off against/ clubbed with Goodwill or capital reserve already in books 19/11/14 M P Vijay Kumar FCA, ACA, FCS 27

28 Goodwill/Capital Reserve - Merger Treatment of Goodwill/Capital Reserve on acquisi7on when eventually the en77es are merged. AS 14 applies in that case and it requires re- measurement on date of merger to determine goodwill/capital reserve. 19/11/14 M P Vijay Kumar FCA, ACA, FCS 28

29 Minority Interest Minority interests in the net assets consists: (i) the amount of equity alributable to minori7es at the date on which investment in a subsidiary is made; and (ii) the minori7es share of movements in equity since the date the parent- subsidiary rela7onship came in existence. 19/11/14 M P Vijay Kumar FCA, ACA, FCS 29

30 Minority Interest Key points 1. Debit Balance To be shown as receivable only to extent of uncalled capital from Minority shareholders if any Excess of debit balance over uncalled capital should be shown as adjustment against Parent equity 2. To be shown separately in Equity; also in Income statement 3. Globally referred as Non- controlling interest ( NCI) 19/11/14 M P Vijay Kumar FCA, ACA, FCS 30

31 Subsidiary Preference Share capital Dividend Adjustment in determining profit to equity holders (same as EPS) If Non- cumula7ve - only if preference dividend is declared If cumula7ve consider preference dividend whether declared or not Capital Held by outsiders - include in MI Held by Parent cancel in determina7on of CoC 19/11/14 M P Vijay Kumar FCA, ACA, FCS 31

32 Intragroup items Eliminate in full Intragroup transac7ons, Intragroup balances, and unrealised gains in full 19/11/14 M P Vijay Kumar FCA, ACA, FCS 32

33 Intragroup Key points Intra group transac7ons in loss Eliminate /add back unless cost cannot be recovered in full Elimina7on Asset side 100% ; corresponding adj Downstream ( H to S) 100% from Parent P&L Upstream (S to H) - Both from Parent and Minority URP in Depreciable assets Eliminate from asset to extent of Un- amor7zed profit Eliminate deprecia7on in P&L alributable to profit element 19/11/14 M P Vijay Kumar FCA, ACA, FCS 33

34 Accoun7ng Policy Uniform for all en77es in group If different, subsidiary financials to be prepared in line with that of Parent If different and imprac7cable to change, then disclose same together with the propor7ons of the items in the CFS 19/11/14 M P Vijay Kumar FCA, ACA, FCS 34

35 Different Repor7ng date Future- situa7ons rare (only overseas subsidiaries) If situa7on arises Not exceeding 6 months difference Subsidiary to prepare FS for consolida7on, matching Parent repor7ng date If Subsidiary unable (imprac7cable), then consolidate using different date FS, but adjustments should be made for the effects of significant transac7ons or other events that occur between those dates and the date of the parent s financial statements Extract from TATA Steel Annual Report ( ) The financial statements of the subsidiaries, associates and joint ventures used in the consolida9on are drawn up to the same repor9ng date as that of the Company i.e. 31st March, 2013, except for certain associates (indicated as $ below) for which financial statements as on repor9ng date are not available. These have been consolidated based on latest available financial statements. 19/11/14 M P Vijay Kumar FCA, ACA, FCS 35

36 Consolidated P&L Period From To date of control date of cessa7on of control Exit- Profit/Loss on disposal Difference between: proceeds from the disposal of investment in a subsidiary and the carrying amount of its assets less liabili7es as of the date 19/11/14 M P Vijay Kumar FCA, ACA, FCS 36

37 Cessa7on of control Investment - accounted as per AS 13 The carrying amount of the investment at the date that it ceases to be a subsidiary is regarded as cost thereaker. 19/11/14 M P Vijay Kumar FCA, ACA, FCS 37

38 Chain holding (A B C) B s share of Pre- acquisi7on profits from C Consider in determining CoC of B Ltd in C Ltd B s share of Post- acquisi7on profits from C Appor7on to B Ltd. Shareholders viz. A Ltd and Minority shareholders in B 19/11/14 M P Vijay Kumar FCA, ACA, FCS 38

39 Income Taxes Current tax and Deferred tax of individual en77es should be added up DTA of one en7ty should not be set off against DTL of another en7ty in the group ( no legal right of set off). 19/11/14 M P Vijay Kumar FCA, ACA, FCS 39

40 Addi7onal acquisi7on in a partly owned subsidiary Further acquisi7ons would result in Goodwill/Capital Reserve 19/11/14 M P Vijay Kumar FCA, ACA, FCS 40

41 Selling subsidiary to another subsidiary A parent sells 100% subsidiary to another subsidiary in which it holds 80%. The considera7on is in excess of carrying amount of net assets of 100% subsidiary. Whether the gain should be elimina7on in consolida7on? Intragroup en7ty concept, eliminated in full 19/11/14 M P Vijay Kumar FCA, ACA, FCS 41

42 Disclosure in Consolidated Financial Statements List of all subsidiaries including the name, country of incorpora7on or residence, propor7on of ownership interest and, if different, propor7on of vo7ng power held; the nature of the rela7onship between the parent and a subsidiary, if the parent does not own, directly or indirectly through subsidiaries, more than one- half of the vo7ng power of the subsidiary; 19/11/14 M P Vijay Kumar FCA, ACA, FCS 42

43 Disclosure in Consolidated Financial Statements Contd the effect of the acquisi7on and disposal of subsidiaries on the financial posi7on at the repor7ng date, the results for the repor7ng period and on the corresponding amounts for the preceding period; and the names of the subsidiary(ies) of which repor7ng date(s) is/are different from that of the parent and the difference in repor7ng dates. 19/11/14 M P Vijay Kumar FCA, ACA, FCS 43

44 CFS- reference doc hlp:// report Audit Report Consolidated Balance Sheet, Consolidated P&L, Consolidated Cash flow statement, Notes to CFS 19/11/14 M P Vijay Kumar FCA, ACA, FCS 44

45 Disclosure in Consolidated Financial Statements Contd the effect of the acquisi7on and disposal of subsidiaries on the financial posi7on at the repor7ng date, the results for the repor7ng period and on the corresponding amounts for the preceding period; and the names of the subsidiary(ies) of which repor7ng date(s) is/are different from that of the parent and the difference in repor7ng dates. 19/11/14 M P Vijay Kumar FCA, ACA, FCS 45

46 Transi7onal provisions First 7me- Previous year figures need not be presented URP of past transac7ons on first 7me consolida7on ICAI recommendahon- adjust against opening reserves First 7me- impact of uniform accoun7ng policies- past period Adjust against opening reserves 19/11/14 M P Vijay Kumar FCA, ACA, FCS 46

47 Other aspects Foreign subsidiaries Refer AS 11- for translahon Integral or Non- integral and then consolidate Dividend & Managerial RemuneraHon Parent separate has profit but consolidated is loss Notes to CFS ( formerly ASI 15) Give to extent necessary to reflect true and fair view of CFS Cover only material items materiality assessed wrt to CFS as a whole Of course Schedule III needs to be adhered to 19/11/14 M P Vijay Kumar FCA, ACA, FCS 47

48 Companies Act 2013 Who has to prepare? All en77es having either subsidiary or Associate or JV Exemp7on Intermediate 100% wholly owned subsidiaries Temporary relief for a year Companies having associate or JV and NO subsidiary 19/11/14 M P Vijay Kumar FCA, ACA, FCS 48

49 Requirements in Companies Act 2013 Sec7on 129 (3) requires consolidated financial statement (CFS) in addi7on to separate financial statement Informa7on in form AOC- I is required to be provided The word subsidiary shall include associate company and joint venture for the purpose of this provision CFS to be prepared in accordance with AS 21 and Schedule III of the Act 19/11/14 M P Vijay Kumar FCA, ACA, FCS 49

50 Schedule III of Companies Act 2013 General Instruc7ons for the prepara7on of consolidated financial statements Profit or loss alributable to minority interest and to owners of the parent in the statement of profit and loss shall be presented as alloca7on for the period. Minority interests in the balance sheet within equity shall be presented separately from the equity of the owners of the parent. 19/11/14 M P Vijay Kumar FCA, ACA, FCS 50

51 Schedule III of Companies Act 2013 All subsidiaries, associates, joint ventures (Indian and foreign) covered List of subsidiaries, associates, joint ventures which have not been consolidated along with the reasons 19/11/14 M P Vijay Kumar FCA, ACA, FCS 51

52 Addi7onal informa7on Schedule III Name of the en7ty Net Assets Share in profit or loss As a % of consolidated net assets Amount As a % of consolidated profit or loss Amount Parent Subsidiaries Indian Foreign Minority in all Associates Indian Foreign Joint ventures Indian Foreign 19/11/14 M P Vijay Kumar FCA, ACA, FCS 52

53 IFRS IFRS 3 IFRS 10, 11, 12, 27 and 28 IFRS 13 Defini7on of Control Business Combina7on similar Substance over form Amalagama7on and Subsidiary are 19/11/14 M P Vijay Kumar FCA, ACA, FCS 53

54 Queries Q1: Different Companies in a Group of Companies are following different deprecia7on policies. One company is following WDV; another is following SLM. AS 21 requires consistency in accoun7ng policies while consolida7ng the holding company with its subsidiaries. In above case, can we say the accoun7ng policies in deprecia7on are consistent? Q2: Company A and Company B are part of same Group (viz. Consol FS). A buys total RM and puts in effort (all cos7ng Rs. 100) and sells to B at Rs B adds value to cost of Rs. 10 and sells at Rs How this is to be treated in CFS? 19/11/14 M P Vijay Kumar FCA, ACA, FCS 54

55 Queries Q3: Company A and Company B are part of same Group (viz. Consol FS). Company A is in business of Car Dealership. It sells a car to Company B and Company B capitalises the same in it books. How should this be dealt with in CFS prepara7on? Q4: Company A amor7ses Intangibles (say, acquired accoun7ng sokware) over a period of 5 years (cap is 10 years with rebulable presump7on as per AS 26) and Company B amor7ses same type of Intangibles over a period of 8 years (again within ambit of AS 26). When these two companies are being consolidated, can we say that Uniform Accoun7ng Policies are being followed (only the es7mates of useful life are different?). 19/11/14 M P Vijay Kumar FCA, ACA, FCS 55

56 Queries Q5: Company A is Indian Company. Company B is a foreign company (completely unrelated). Both these companies, enter into JV in India. Company A has 40% and Company B has 60%. Should Company A use Associate (AS 23) or JV (AS 27) while Consolida7ng Company C in its CFS? Q6: What Notes to Accounts should necessarily be given while giving CFS? What need not be given. Can a prac7cal list of definitely to give and need not give be compiled? [e.g. As 15 disclosures; segment repor7ng; EPS; Con7ngent Liability etc.] 19/11/14 M P Vijay Kumar FCA, ACA, FCS 56

57 19/11/14 M P Vijay Kumar FCA, ACA, FCS 57