Summary

Section 9 deals with the requirement to present consolidated financial statements, the consolidation procedures to be performed, accounting for acquisitions and disposals in a group and the presentation of non-controlling interests.

What is new?

When a parent entity increases/decreases its interest in a subsidiary with no change in control, this is accounted for as an equity transaction with no goodwill recognised or profit or loss on disposal recognised.

Under old GAAP, for increases, assets and liabilities were revalued to fair value and goodwill arising on the increase is calculated by reference to those values. For decreases the profit or loss was recognised in the profit and loss account. This is a significant change.

A subsidiary can be excluded from consolidation on the grounds that it is held as part of an investment portfolio with a view to sale and it has not been consolidated previously. If it is excluded it should be fair valued with movements recognised in profit and loss (Section 9.9B). Under old GAAP such exclusion was not permitted and therefore had to be consolidated.   This will result in the possibility of more entities being excluded from consolidation. However, if this is the case fair value movement will need to be posted to the profit and loss.

Section 9 does not mandate a provision to be made for the non–controlling interest where subsidiaries are in a net liability position and there is a legal obligation to provide non recoverable funding to rectify this. Under old GAAP (FRS 2) this was required.

Under old GAAP investment in subsidiaries, associates and joint ventures in the individual financial statements could only be carried at cost less impairment. However under FRS 102, these is a choice to either carry these at cost less impairment, fair value through profit and loss or fair value through OCI where fair value can be measured reliably. Where investments in subsidiaries are recognised at fair value in the individual financial statements on transition to FRS 102, deferred tax will need to be recognised on transition as well as an adjustment to reflect the investment at its fair value. The deferred tax rate to be used depends on the tax rate that will be payable on settlement

What is different?

Section 9 uses the term ‘non-controlling interest’ instead of the term ‘minority interest’ however they have the same meaning.

Section 9 specifies the non-controlling interest should be presented within equity whereas this was not a specific requirement under old GAAP. In addition FRS 102 requires that the profit and loss on items posted to other comprehensive income be separated and shown separately to that which is apportioned to the non-controlling interest and that apportioned to the parent. Under old GAAP there was no requirement for this.

Other standards affecting Section 9 where differences arise:

Section 35 – Transition to FRS 102 – Section 35.9 mandates that where an entity which has previously recognised goodwill (prior to the date of transition) on increases in ownership, which did not result in a change of control to continue carrying that asset until it is sold. The same is the case for a decrease in an interest where there was no change in control.

Section 35.10(r) provides a choice to subsidiaries, associates, joint ventures who adopt FRS 102 later than its group to measure its assets and liabilities at either:

• the carrying amounts that would be included in the parent’s consolidated financial statements based on the parent’s date of transition to FRS 102, if no adjustments were made for consolidation procedures and for the effects of business combination in which the parent acquired the subsidiary; or
• the carrying amounts required by the rest of FRS 102 based on the subsidiaries date of transition.

In effect the subsidiaries etc can choose to apply the choices taken by the parent in the consolidated financial statements and roll these forward to the date of transition for the subsidiary.

Consolidated financial statements on the other hand where the subsidiary has not been transitioned to FRS 102 before that date need to determine what the subsidiary results would be under FRS 102 when preparing its first set of FRS 102 financial statements, there are no exemptions.

Section 29 – Deferred tax should be recognised on any fair value adjustments recognised where an entity has chosen to fair value investments in either subsidiaries, associates and joint ventures in the individual financial statements.

What are the key points?

Consolidated financial statements are not required to be prepared:

• where the entity is part of a larger group and included in the consolidated financial statements of that parent of which the accounts were prepared in an equivalent GAAP (where ownership is less than 100% certain approval is required from shareholders); or
• where the group is considered a small group under the Companies Act.

A subsidiary is an entity controlled by the parent. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities (Section 9.4). Control is presumed to exist where the parent owns, directly or indirectly, more than 50% of an entity’s voting rights or where less than 50% is owned but they have legal rights to control the majority of voting power to include the ability to appoint or remove directors.

Exclusion of subsidiaries is allowed on the grounds of severe long term restrictions or it is held exclusively with a view to sale whether that be as part of an investment portfolio or not (if held as part of an investment portfolio, it is then measured at fair value with changes recognised in the profit and loss, other than this one exception, the choices are the same as the choices available in the individual set of financial statements i.e. at cost less impairment, FVTPL of fair value or fair value through other comprehensive income).

The consolidation process is set out as follows:

• The financial statements of the parent and its subsidiaries are combined line by line.

• The carrying amount of the parent’s investments in subsidiaries is eliminated against equity.

• Results and balances attributable to non-controlling interests are shown separately.

• Intragroup transactions and balances are eliminated; profits arising from such transactions and included within an asset’s carrying values are also eliminated.

Cumulative exchange gains/losses on disposal of a foreign operation are not recycled to the profit and loss.

On disposal of control, the carrying amount should be the value of net assets and goodwill of the retained investment.

Profit and loss on disposal is the difference at the date of disposal between the carrying amount just prior to the disposal and the net assets plus goodwill after the disposal, together with any proceeds received.

Choice of measurement for the individual financial statements of investment in subsidiaries, associates and jointly controlled entities at either; cost less impairment, fair value through the profit and loss or fair value through other comprehensive income.

When a parent acquires a subsidiary in stages, a fair value exercise (and goodwill calculation) is performed at the point when control is achieved, as set out in section 19.

In the individual financial statements investments in subsidiaries, associates and joint ventures can be carried at either:

• cost less impairment; or
• fair value through the profit and loss account (where it can be reliably measured); or
• fair value through other comprehensive income (where it can be reliably measured).

An entity should apply the accounting policy chosen consistently for all investments of the same type i.e. an entity may apply fair value to associates but not to joint ventures and subsidiaries etc.

What do accountants need to do?

Be aware of the differences between Section 9 and old GAAP.

Review their client portfolio to identify group companies and assess as a result of the new requirements whether any subsidiaries can fall out from consolidation and advise client accordingly.

For the group companies identified, assess if any of these group companies have made acquisitions or disposals of subsidiaries while still maintaining control in the year of transition to assess whether a transition adjustment is required to show the movements as an equity transaction.

Advise clients on the ability of entities to fair value investments in subsidiaries, associates or joint ventures where they can be reliably measured and the associated deferred tax impact of this.

What do companies need to do?

Be aware of the differences between Section 9 and old GAAP.

For group companies, assess the acquisitions or disposals in the year of transition to see if control changed and if control did not change, determine the transition adjustment to be made.

Be aware of the possibility of some subsidiaries which are held as part of an investment portfolio being excluded from consolidation.