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IAS 27’s Concept of ‘Control’
This essay will go into depths of the International Accounting Standard 27 Consolidated and Separate Financial Statements the one concept of ‘Control’ between a Parent company and it Entity/Entities and what control means for each of the companies no matter their relationship. Control can affect how these Financial Statements are prepared and produced depend in how much control and whether the parent company that has the control to use it to change the current financial statements preparation into consolidated financial statements. The essay will start off with a brief description of the IAS 27 Consolidated and Separate Financial Statements, then it will go into the Control aspect of the IAS giving a description and what this could mean for a Parent or an Entity, giving advantages and disadvantages of the control and finally giving some examples of the control that is gained through investment of a company then finishing up with a conclusion to summarise the discussion.
Summary of International Accounting Standard 27 Consolidated and Separate Financial Statements has two main objectives: A parent company assumes control in the preparation and presentation of consolidated statements of financial matters as a whole group including any controlled entities, associated companies and any subsidiaries that have been invested in. And the accounting of the investment in the subsidiaries, entities and associated companies mentioned in the first objective.
Control in terms of IAS 27 is the allotment of control due how much investment has been made into a company making it a subsidiary of the parent company (investor). With such an investment the parent company can use any benefits that come with such an investment (Benefits will be discussed later on).
The term ‘control’ usually means covering operating activities such as manufacturing, investments, marketing, sales, human resources, operating policies, acquisitions and disposals. When a parent directly or indirectly owns over half of the voting rights (ordinary shares) of an entity through subsidiaries it is presumed that the parent has control of that entity. Although there are in certain circumstances where even though evidence that over half of ownership of the entity doesn’t exactly allow the parent company control of the entity.
When a parent company has enough voting rights to have control over an entity they have the power to: Assign or remove some or all the current board members that run the entity, alternatively they can appoint a governing body to run in the director’s place, change the current financial and operating policies to under a certain agreement or statute, casing the majority of voting when it comes to meetings.
‘The definition and guidance on control is intended to identify whether an entity has sole control over one or more other entities. Where two entities have joint control under a contractual agreement (i.e. they are able to exercise control by cooperating, but neither can unilaterally exercise control without the agreement of the other), then the arrangement will not fall within the scope of either IAS 27 or IFRS 3, but will fall within the scope of IAS 31.’ (DELOITTE 2009)
There are advantages of a Parent company investing in a Subsidiary for instance when a company if it changes the financial and operating policies to that of a proven and effective method by a set statute or under an agreement. Another advantage of having consolidated financials if a metalwork’s company is always looking for a supplier to supplier metal that are required for the production, the metalwork company can invest in a supplier and it will become a subsidiary thus giving the metalwork’s a supplier that they can constantly go to also giving the supplier a regular source of business.
With advantages come disadvantages of a Parent company investing in a subsidiary one of which is the Parent investing and controlling too much to the point where the newly implemented operating and financial policies run the subsidiary into them making a loss rather than the profit they were turning over previous to the investment. Another disadvantage of such an investment is that the subsidiary (company C) could currently be selling to competing companies A and B before the investment, but company B doesn’t want company C selling to their competitors so company B invests in company C so that company A has to either buy off of company C thus giving company B a percentage of the sale gains or company A will have to find another supplier at a more likely expensive rate. Despite the advantages and disadvantages although the parent company has control over the voting rights they may have a look at the current operating and financial policies and just let these policies continue as they seem to be the most efficient way forward.
When a company as a group, parent and all its subsidiaries, will have to prepare and present all their financial statements together on the same dates. If for some reason one of the subsidiaries cannot make the group presentation date they will have to produce these statements within 3 months of the group’s date.
In some cases attaining control in an entity can be made through 2 transactions. There are a few ways this can happen, the investment in an asset under the IAS 39: Recognition and Measurement where a parent company owns an asset giving them around 15% (hypothetical figure) for a separate entity then the parent to-be company then decides to invest in the company at a later date or vice versa, in the end giving them over 75% of control of the entity, through an associate under the IAS 28: Investments in Associates where the parent company has invested in an associate of the entity giving them significant fraction of influence but not enough for full control of the entity than again at a later date the investment comes giving them majority of control of the entity. Finally there is gaining control through more than one transaction under IAS 31: Investments in Associates where the parent company has already invested in company B for around 30%, company B is currently in association with company A and with the parent company having already invested 30% into one of the companies of the association they will have either a passive or significant stake in the association as a whole, if the parent company then invests in company for 50% of control they would increase their stake in the association to a full control stake.
To conclude the critical discussion of International Accounting Standard 27: Consolidated and Separate Financial Statements. We started to look into IAS 27 and got a brief description and summary of the Standard itself to gt a frim grounding of the aspect as a whole before going into depth about one fraction of the Standard. Then we looked into what control is before we looked into the concept of control within IAS 27. I then gave an example of gaining control through investment of a parent to a subsidiary. Then briefly moving on to advantages and disadvantages of a parent company using their control through voting rights to adjust the current financial and operating policies that were currently in place in the subsidiary. Then we go into presentation times of the financial statements that are required on an annual basis. Then finally we go into the different methods of how a parent company can attain control through voting right through 2 transactions. Using all this information we can confirm that the concept of control through IAS 27 is key to both a parent and an entities future as a business whether the business as whole will continually run for years to come or the abuse of such control can put the subsidiary and even in some cases the parent into debt. As mentioned there are many reasons to why a parent company may want to invest in a company. Through the information given my opinion has to be that the investing company will have to evaluate thoroughly their plan and the subsidiaries plan before making such an investment making sure both companies will prosper from working with each other and remain to function post-investment.
References and Bibliography
Deloitte IFRS Global Office published Business Combinations and Changes in Ownership Interests: A Guide to the Revised IFRS 3 and IAS 27. 2009
MARY E. BARTH, WAYNE R. LANDSMAN and MARK H. LANG (June 2008) International Accounting Standards and Accounting Quality
ICAEW (2014) Knowledge guide to International Accounting Standards [Online] http://www.icaew.com/en/library/subject-gateways/accounting-standards/knowledge-guide-to-international-accounting-standards [Accessed July 2014]
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