Preparing financial statements

Published:

INTRODUCTION

According to section 292 of Corporations Act 2001, public company listed on the stock exchange is required to prepare its financial report. The consolidated financial statement isprepared to present the operational and financial performance of the parent company along with one or more subsidiaries of the company. Consolidated financial statement is prepared as if the parent company is the single company. Company requires following the same accounting principle to prepare a consolidated financial statement as to prepare the separate financial statement.(IFRS 10 Consolidated Financial Statements, 2014)

Under the current standards followed by the companies, consolidated financial statements are prepared when one entity owns majority of common share outstanding of other entity. In other words where an entity holds or acquired more than 50% of the common share outstanding of other company, then the company owning the common shares (parent company)is required to prepare the consolidated financial statement. However there are certain circumstances which require the company to prepare the consolidated financial statement even though the company does not hold majority of shares in other company. Where a company without holding majority common shares are able to direct and control the operating and financial activities of the other company, then also the company exercising such control and influence over the other company is required to prepare CFS.

Lady using a tablet
Lady using a tablet

Professional

Essay Writers

Lady Using Tablet

Get your grade
or your money back

using our Essay Writing Service!

Essay Writing Service

There are two types of controls which the company has over the other company. A) direct control, b) indirect control. Under direct control, company owns majority of shares of another company and under indirect control occurs when one or more companies owns the common stock of the investee company and that those companies are under the same common control .

However there is also regulation which prohibits the company holding majority of shares of the subsidiary company to exercise control over the subsidiary company under the following circumstances-

  • The subsidiary company is bankrupt or is in legal reorganisation
  • The domestic company is restricted to transfer the profits of the subsidiary company by the foreign control
  • Parent company does not control any significant operations of the subsidiary company.(Baker, 2005)

The AASB 10 and AASB 127 govern the provisions for the preparation and presentation of consolidated financial statement. AASB 10 is applicable on entities (parent company) that controls one or more entities. This standard defines as what is meant by control and provides that control forms the basis of consolidation of financial statements prepared by the entities.

According to AASB 127, consolidated financial statements are those financial statements which are prepared by the parent company taking into account the assets, liabilities, cash flow as well as the expenses and income of the parent company together with the subsidiary. These statements are prepared as if the parent and the subsidiary company is a single economic entity. (AASB-127 Separate Financial Statements , 2011)

CONTROL

As per AASB 10, the investor company is required to prepare a CFS not depending on the nature of its involvement it has with Investee Company, but on the basis of control it exercises over the investee company.Under the provisions of AASB 10, it is said that the investor company has control over the investee company when the investor company has the right to get variable returns from the company because of its involvement with the company and also the investor company also has the power to affect such returns on the basis of its control over the investee company. It is said that under the following circumstances the investor company has a control over the investee company

  • Where the investor company has power over the investee company
  • Investor company has the right to get variable returns from the company because of its involvement with the company
  • InvestorCompany has the power to affect such returns on the basis of its control over the investee company. (AASB 10 - Consolidated Financial Statements, 2011)

POWER

According to AASB the investor company has the power on the investee company under the following situations-

  • The investor company has power over the investee company when the investor company has the ability to currently affect the operating activities of the investee company. These operating activities are those activities which has a significant impact on the returns of the investee company. Thus in other words, power in the hands of Investor Company exists when it is able to have impact on activities which affect the returns of the investee company.
  • There are certain powers that arise from the rights the investor company has over the investee company. Where the investor company acquires shares of the investee company which give them the right to vote in the meetings of the company, then such powers are said to be straight forward powers in the hands of the investor company. However there are powers that arise to the investor company because of the contractual obligations that the investee company enters into with the investor company. These powers depend on the facts and circumstances of the contractual agreement. Thus the power is acquired by the investor company either through the acquisition of shares which give them the power to vote or the powers acquired through the contractual agreements with the investee company.
  • An investor company has the power over the investee company if it has the ability to give directions for the relevant activities of the investee company even if such right to directions has not been exercised by the investor company. If there exists evidences that the investor company has the ability to direct the important activities of the company even though such rights have not yet being exercised by the company, then also it is deemed that the investor company has power over the investee company.
Lady using a tablet
Lady using a tablet

Comprehensive

Writing Services

Lady Using Tablet

Plagiarism-free
Always on Time

Marked to Standard

Order Now

The following activities are considered as relevant activities or significant activities while determining the control or power of the investor company over the investee company.

  1. Investor company controls the goods or services produced or sold by the investee company
  2. The investor company manages the financial assets of the investee company
  3. The investor company buys, sells, selects and disposes off assets of the investee company
  4. The investor company researches and develops new products and processes for the investee company
  5. The investor company determines the capital structure and also the decisions regarding the raising of funds of the investee company.

The following are the rights which give power to the investor company to exercise power and control over the investee company. However these are not limited to the following rights.

  • Where the investor company has the right to vote or the potential right to vote of the investee company. In other words, the investor company votes on behalf of the members of the investee company.
  • Where the investor company has the right to appoint, remove or reassign the key management personnel of the investee company. The key management personnel is the one who has significant control over the activities of the investee company. In other words Investor Company has power over the investee company where it has the right to remove, reassign or appoint the key managerial personnel who exercises significant control over the activities of the investee company.
  • Where the investor company has the right to appoint, remove or reassign other entities that exercises control over the investee company.
  • Where the investor company has the right to enter or veto any transaction entered by the investee company for the benefit of the investor company itself.
  • Where the investor company has the right to take decisions on behalf of the investee company.

All the above rights given by the investee company to the investor company reflects that the investor company has significant power and control over the investee company. (Consolidated Financial Statements, 2011)

Preparing of CFS has some disadvantages also. There are huge cost involved in preparing the CFS as data from all the entities have to brought together. Also preparing CFS call for more time than preparing the separate financial statements for the companies.

However there are circumstances under which the company is relieved from preparing the consolidated financial statement. Where the reporting does not provide any useful information to the investor in that circumstances the company may opt not to prepare the CFS. (Amendments to Australian Accounting Standards - Investment Entities, 2014)

In the given case study, Polaris Ltd is a public company and is listed on the Australian Stock Exchange. The company holds 35% of the shares of Beta Ltd while the remaining 65% of the shares of Beta Ltd is held by small shareholders. All these shareholders own less than 4% of the share of the company. The constitution of Beta Ltd provides that each shareholder has the right to vote on the basis of one share held by it. In other word, shareholder holding one share has one voting right attached to it. However in the general meeting conducted by Beta Ltd only the resolution passed by Polaris Ltd ispassed and also the candidate selected by Polaris Ltd for the post of director is invariably elected as the director by Beta Ltd. also the small shareholders do not attend the general meeting and thus they do not exercise their rights.

On the basis of the above case study Polaris Ltd is required to prepare Consolidated Financial Statement on the basis of the following considerations.

As per AASB 10, the investor company has the right to vote or the potential right to vote of the investee company.

As in the given case study the resolution passed by Polaris Ltd is passed and also the candidate selected by Polaris Ltd for the post of director is invariably elected as the director by Beta Ltd, it shows that Polaris Ltd has power and control over Beta Ltd. and as per AASB 10, where the investor company (Polaris Ltd.) has power or control over the investee company (Beta Ltd.) then the investor company is required to prepare the consolidated financial statement. While preparing the consolidated financial statement Polaris Ltd. should apply the provisions contained in AASB 127 which lays down the principles that have to be followed while preparing the consolidated financial statements of the company.

Lady using a tablet
Lady using a tablet

This Essay is

a Student's Work

Lady Using Tablet

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Examples of our work

CONCLUSION

In the given case study Polaris Ltd is required to prepare the consolidated financial statement as the provisions of AASB 10 is applicable on the company. In the given case study as resolution passed by Polaris Ltd is passed and also the candidate selected by Polaris Ltd for the post of director is invariably elected as the director by Beta Ltd, it shows that Polaris has strong influence on the activities of the company and hence the provisions of AASB 10 is applicable and the company is required to prepare the consolidated financial statement.

Bibliography

AASB 10 - Consolidated Financial Statements. (2011, August). Retrieved May Tuesday, 2014, from AASB 10 - Consolidated Financial Statements: http://www.comlaw.gov.au/Details/F2011L01941

(2011). AASB-127 Separate Financial Statements . In AASB-127 Separate Financial Statements (p. 8). Melbourne Victoria: Australian Accounting Standards Board.

Amendments to Australian Accounting Standards - Investment Entities. (2014, May Tuesday). Retrieved May Tuesday, 2014, from Amendments to Australian Accounting Standards - Investment Entities: http://www.nexia.com.au/news/accounting-update-consolidation-relief-for-investment-entities

Baker, R. E. (2005). The Reporting Entity and Consolidated Financial Statement. In R. E. Baker, The Reporting Entity and Consolidated Financial Statement. The McGraw-Hill Companies, Inc.

(2011). Consolidated Financial Statements. In Consolidated Financial Statements. Common Wealth of Australia.

IFRS 10 Consolidated Financial Statements. (2014, May Tuesday). Retrieved May Tuesday, 2014, from IFRS 10 Consolidated Financial Statements: http://www.iasplus.com/en/news/2011/May/news6910