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Financial Statement Consolidation

22 August 2010 2,598 views 5 Comments

If the subsidiary was established prior to the parent company, what are the possible complications? I.e. because the Holdings require higher initial capital the management decided that once the subsidiary generates revenue. the revenue can be use to fund the share capital of the parent.
On the establishment of the subsidiary the shareholders put more money over the share capital. can i transfer the excess of shareholders capital in the subsidiary to the parent company? what would be my entry?Please help.

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5 Comments »

  • Mladek said:

    I don’t see how a subsidiary can be established prior to a parent being established.

    What could happen, I suppose, is that “a parent reorganises the structure of its group by establishing a new entity as its parent”, in which case the entity would apply IAS 27.38B “the new parent shall measure cost at the carrying amount of its share of the equity items shown in the separate financial statements of the original parent at the date of the reorganisation.”.

    While I may be wrong, it also seems to me that you are trying to mix and match IFRS and “National GAAP”.

    In general, IFRS applies to the consolidated economic whole: the parent (the ultimate controlling entity) and its subsidiaries (entities, including unincorporated entities such as a partnerships, controlled by the parent) regardless of the formal, legal structure.

    Also, (in practically all jurisdictions), IFRS applies only because the consolidated entity has issued shares (equity instruments) and/or bonds (debt instruments) to non-accredited investors, or on “regulated, public markets”.

    In contrast, “national GAAP” (usually for tax / regulatory / statistical or similar, national-interest reasons) applies to the “legal entity” (the entity required, by law, to produce financial statements as per national, usually legalistic, accounting standards).

    “National GAAP” is usually applicable because the entity (a parent, a subsidiary, a permanent establishment, etc.) has a physical presence in a particular country (though it may also arise for formal, legal reasons, such as an entity established to take advantage the favorable national legislation of an “off-shore” jurisdiction).

    So, correct me if I’m wrong, but the issues you are dealing seem to be driven by the latter (legal considerations) rather than the former (IFRS). Or, more properly, by the owners’ / management’s attempt to get creative in apply national legislation.

    In any event, if an entity (as understood by IFRS) issues capital (sells shares), the accounting entry is (for example):

    Dr. cash — 1,000,000
    Cr. paid-in capital (share capital) — 1,000,000

    or, if the issued shares had a par value, it could be:

    Dr. cash — 1,000,000
    Cr. share capital at par — 100,000
    Cr. additional paid in capital (share premium) — 900,000

    The only situation where it would make a difference whether it was the parent or a subsidiary, would be if a minority interest were involved / separate financial statements were published.

    Revenue, on the other hand, is not a capital investment. “Revenue arises in the course of the ordinary activities of an entity…”

    Thus, during the period, entries associated with revenue would look something like this:

    Dr. Inventory — 5,000
    Cr. Cash — 5,000

    Dr. Cash — 10,000
    Cr. Revenue — 10,000
    Dr. Cost of sales — 5,000
    Cr. Inventory — 5,000

    Dr. Selling expenses – 1,000
    Cr. Cash – 1,000

    Dr. Administrative expense — 2,000
    Cr. Cash – 2,000

    At the end of the period, the nominal accounts would be closed:

    Dr. Revenue — 10,000
    CR. Suspense account — 10,000
    DR. Suspense account — 8,000
    Cr. Cost of sales — 5,000
    Cr. Selling expenses – 1,000
    Cr. Administrative expense — 2,000

    And net income (revenue less expenses) taken to equity:

    DR. Suspense account — 2,000
    Cr. Retained earnings — 2,000

    where it would be accumulated in retained earnings.

    As to possible complications?

    Hard to say, depending on the ultimate impact on investors, national revenue services, regulators, statistical offices, etc., they could range anywhere from none (if all the i’s were dotted, t’s crossed and disclosures made) to significant jail time (for those attempting to defraud investors and/or the nation state).

    BTW, in some countries, unless a violation / intentional misapplication of IFRS leads to significant damages, it is not, in and of itself, a punishable crime.

    Nevertheless, since IFRS is mandatory (in the EU) under Regulation (1606/2002) not Directive, I would strongly suggest consulting questionable practices with an advocate qualified to express an opinion not only on one’s particular national law, but also EU wide legislation.

    # 22 August 2010 at 9:40 am
  • Mladek said:

    BTW, you sure do seem to have a lot of questions.

    Maybe it’s time to hire some professional advice.

    # 22 August 2010 at 9:42 am
  • dina (author) said:

    Do I still have to account a 1% minority interest?
    I do have lots of questions, i appreciate your great responses. :)

    # 22 August 2010 at 10:44 am
  • Mladek said:

    I’m sure you do.

    IFRS 3.10: As of the acquisition date, the acquirer shall recognise, separately from goodwill, the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree.

    IAS 8.8: IFRSs set out accounting policies that the IASB has concluded result in financial statements containing relevant and reliable information about the transactions, other events and conditions to which they apply. Those policies need not be applied when the effect of applying them is immaterial. However, it is inappropriate to make, or leave uncorrected, immaterial departures from IFRSs to achieve a particular presentation of an entity’s financial position, financial performance or cash flows.

    Sorry, but you have to decide for yourself if 1% is material or not.

    # 22 August 2010 at 5:22 pm
  • ifrslist
    ifrslist said:

    Financial Statement Consolidation – http://www.ifrslist.com/2010/08/fs-conso...
    via Twitoaster

    # 23 August 2010 at 3:37 pm

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