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IAS-27 query

28 August 2008 1,971 views No Comment

Hi All

This is Muhammad Naveed

I have a query regarding the consolidation of subsidiaries. Does IAS-27 allow us to not consolidate subsidiaries which are immaterial for the group?

Is it specifically mentioned somewhere in IAS?

Regards

Muhammad

Well Naveed

Actually materiality is an underlying concept of the Financial Statements.So anything which is immaterial needs not to be disclosed or adjusted.

Thanks and regards

IAS 1 is the overall standard to refer to:

Materiality and Aggregation

29. Each material class of similar items shall be presented separately in the financial statements. Items of a dissimilar nature or function shall be presented separately unless they are immaterial.

30. Financial statements result from processing large numbers of transactions or other events that are aggregated into classes according to their nature or function. The final stage in the process of aggregation and classification is the presentation of condensed and classified data, which form line items on the face of the balance sheet, income statement, statement of changes in equity and cash flow statement, or in the notes. If a line item is not individually material, it is aggregated with other items either on the face of those statements or in the notes. An item that is not sufficiently material to warrant separate presentation on the face of those statements may nevertheless be sufficiently material for it to be presented separately in the notes.

But be careful, it really has to be insignificant for any outside user of these financial statements as a whole,

Henk

IAS 27 requires the consolidation of all subsidiaries refer paragraph 12 of IAS 27. Materiality is not an issue if the financial statements are to be IFRS compliant.

Furthermore, the only scoping out permissible for parent company consolidation is given in paragraph 10. Please refer paragraphs 38 to 40 for treatment in separate financial statements.

I suggest you refer to the revised IAS 27 issued in January 2008 as there are significant changes to the standard that you might need to refer to in determining whether consolidation is applicable.

I have already answered to you about materiality,

Here is a copy from the annual report from BMW, the German car maker, also applying IFRS

68 subsidiaries (2005: 72), either dormant or

generating a negligible volume of business, are not

included. Their influence on the Group’s earnings,

financial and net assets position is immaterial.

Henk

But how do you determine whether something is material or not?

I mean what is the spirit behind this? Is there an approach mentioned in IFRS?

Perhpas you take a percentage of profit, revenue, assets, equity?

Lado

IAS 1 revised in September 2007 also makes inferences to the requirements of other IFRS including IAS 27. Materiality would not be the criteria for not applying consolidation to the subsidiary but the provisions of IAS 27 which is based on the concept of control.

There have been percentages named in the past in Internal Auditing Manual of the big 4, but in the 90-ties these were removed from the manuals because of insurance issues, you have to base your choice on materiality on ‘professional judgment’, for example BMW specifically states that the non-consolidated subsidiaries account for 1.5% of turnover.

Both Henk and Shrikant have made valid observations on which I would like to add the comment that whether we are looking at materiality from the view point of IAS 1 or IAS 8 for the purposes of non-consolidation of immaterial subsidiaries, this would need to be reviewed on an annual reporting basis as a non-consolidation in one period may not be appropriate in another period based on the developments in the entity and particularly in the subsidiary.

While IAS 27 requires consolidation of all subsidiaries, perhaps in the case of BMW (interestingly I have a copy of the financial statements that Henk referred to and actually went back and read it cover to cover) management has chosen this method of not consolidating as it would perhaps give a better and true and fair view as required under IAS 1 or the cost of such consolidation would not be commensurate with the benefit ? Just thinking aloud.

However, sufficient disclosures have been made through out the financial statements in the notes to enable the user to ascertain the impact and the method of measurement both in the balance sheet and income statement. Also, it is clear that BMW in this case does review this policy on an annual basis.

I guess that is what would have satisfied KPMG, their auditors to give a clean audit opinion as well.

Hi dear,

I would like to comment on your query regarding exemption from consolidation (of those subsidiaries which are “Immaterial for the group”)

As for the terminology Immaterial is concerned, the standard provides no guidance. However, having said that, the standard quite narrows down the the scope for exemption from consolidation when it states:

Presentation of Consolidated Accounts

A parent is required to present consolidated financial statements in which it consolidates its investments in subsidiaries [IAS 27.9] – except in one circumstance: A parent is not required to (but may) present consolidated financial statements if and only if all of the following four conditions are met: [IAS 27.10]

1. the parent is itself a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements;
2. the parent’s debt or equity instruments are not traded in a public market;
3. 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; and
4. the ultimate or any intermediate parent of the parent produces consolidated financial statements available for public use that comply with International Financial Reporting Standards.

The consolidated accounts should include all of the parent’s subsidiaries, both domestic and foreign: [IAS 27.12]

There is no exemption for a subsidiary whose business is of a different nature from the parent’s.
There is no exemption for a subsidiary that operates under severe long-term restrictions impairing the subsidiary’s ability to transfer funds to the parent. Such an exemption was included in earlier versions of IAS 27, but in revising IAS 27 in December 2003 the IASB concluded that these restrictions, in themselves, do not preclude control.
There is no exemption for a subsidiary that had previously been consolidated and that is now being held for sale. The parent must continue to consolidate such a subsidiary until it is actually disposed of. However, as a result of an amendment of IAS 27 by IFRS 5 in March 2004, there is an exemption for a subsidiary for which control is intended to be temporary because the subsidiary was acquired and is held exclusively with a view to its subsequent disposal in the near future. For such a subsidiary, if it is highly probable that the sale will be completed within 12 months then the parent should account for its investment in the subsidiary under IFRS 5 as an asset held for sale, rather than consolidate it under IAS 27.

Hope the mater stands clear.