Chapter 30 – Agriculture Page 400
government grants relating to biological assets measured at cost less accumulated depreciation and accumulated impairment losses.
7 Disclosure
IAS 1 Presentation of financial statements requires biological assets to be separately presented in the statement of financial position. [IAS 41.39]
Gains and losses arising on the initial recognition of biological assets and agricultural produce and from changes in fair value of biological assets should be separately disclosed. In addition
a description of each group of biological assets is required, with quantification encouraged. [IAS 41.40, 41.41]
IAS 41 encourages the entity to distinguish between consumable and bearer assets, or between mature and immature assets as appropriate. A consumable biological asset is one
that is harvested as agricultural produce or sold as biological assets. A bearer biological asset is self-regenerating rather than harvested for its agricultural produce. For example, livestock
intended for the production of meat are consumable biological assets whereas livestock held for dairy farming are bearer assets. Similarly, trees grown for lumber are consumable assets
whereas fruit trees are bearer assets.
A description of the nature of activities involving an entity’s biological assets by group should be included in the financial statements, as well as information on the physical quantity of
biological assets and their estimated outputs. [IAS 41.46]
A number of disclosures are required about the fair value of biological assets and agricultural produce. Such disclosures should include details about the methods used to fair value the
assets and the significant assumptions used as part of that process. Disclosure should also be made of the fair value of agricultural produce harvested. [IAS 41.47, 41.48]
An entity should disclose details of any biological assets where title is restricted in some way or where the assets have been pledged as security. Any commitment in relation to the
purchase or development of biological assets should also be explained. [IAS 41.49]
A full reconciliation should be included of changes in fair value during the period. [IAS 41.50]
Illustration 3
A herd of 5 four year old animals was held on 1 January 2007. On 1 July 2007 a 4½ year old animal was purchased. The fair values less estimated point of sale costs were as follows:
4 year old animal at 1 January 2007 CU200
4½ year old animal at 1 July 2007 CU212
5 year old animal at 31 December 2007 CU230
The movement in the fair value less estimated point of sale costs of the herd can be reconciled as follows:
At 1 January 2007 5 x CU200 CU1,000
Purchased CU212
Change in fair value the balancing figure CU168
At 31 December 2007 6 x CU230 CU1,380
Chapter 30 – Agriculture Page 401
The entity is encouraged to disclose separately the changes in fair value less estimated point of sale costs arising from physical changes and from price changes.
If it is not possible to measure the fair value of biological assets reliably and they are instead recognised at cost less depreciation and impairment, an explanation should be provided of
why it was not possible to establish fair value. A full reconciliation of movements in the net cost should be presented with an explanation of the depreciation rate and method used.
[IAS 41.54, 41.55, 41.56]
Additional disclosures are also required in relation to government grants. [IAS 41.57]
8 Chapter Review
This chapter has covered: the distinction between biological assets and agricultural produce;
the importance of market based measures for valuing biological assets and agricultural produce;
how to recognise assets and produce and the recognition of gains and losses arising; and
how to deal with government grants in the agricultural sector.
Chapter 30 – Agriculture Page 402
9 Self Test Questions
Chapter 30
1. The Anemone Company owns a number of herds of cattle. Where should
changes in the fair value of a herd of cattle be recognised in the financial statements, according to IAS41 Agriculture?
A In profit or loss only
B
In other comprehensive income only
C
In profit or loss or other comprehensive income
D In the statement of cash flows only
2. According to IAS41 Agriculture, which ONE of the following would be
classified as a product that is the result of processing after harvest?
A
Cotton
B Wool
C Bananas
D
Cheese
3. According to IAS41 Agriculture, which TWO of the following criteria must be
satisfied before a biological asset can be recognised in an entitys financial statements?
A
The entity controls the asset as a result of past events
B
It is probable that economic benefits relating to the asset will flow to the entity
C
An active market for the asset exists
D
The asset forms a homogenous biological group
4. According to IAS41 Agriculture, which TWO of the following expenses would
be classified as point-of-sale costs when valuing biological assets and agricultural produce?
A
Commissions to brokers
B Transport costs
C
Transfer taxes and duties
D
Advertising costs
5. Which ONE of the following items would be classified as agricultural produce,
according to IAS41 Agriculture?
A Tree
B
Bush
C
Butter
D Apple
Chapter 30 – Agriculture Page 403
6. According to IAS41 Agriculture, which TWO of the following items would be
classified as biological assets?
A
Oranges
B
Chickens
C Eggs
D
Trees
7. Are the following statements about classification according to IAS41
Agriculture true or false? 1
Sugar should be classified as agricultural produce. 2
Wool should be classified as agricultural produce. Statement 1
Statement 2
A False
False
B
False True
C True
False
D True
True
Chapter 31 – Consolidation Page 405
Chapter 31 CONSOLIDATION
1 Business Context
Financial statements normally set out the financial position and performance of a single entity. If that entity is controlled by another entity its parent and there are intra-group transactions,
then its financial statements may not reveal a true picture of its activities. Consolidated financial statements are prepared on the basis that the group is a single economic entity, by
aggregating the transactions and balances of the parent and all its subsidiaries. A group is simply a collection of entities, where one, the parent, controls the activities of the others, its
subsidiaries.
The preparation of single entity financial statements would not reflect the economic reality of the financial performance and position under the control of the parent entity.
2 Chapter Objectives
This chapter deals with how an investor entity should report the results of other entities over whose financial and operating policies it has control so that it can obtain benefits from their
activities.
A group of entities presents financial information about their activities as if it was a single economic entity; such financial statements are known as the consolidated financial
statements. IAS 27 Consolidated and separate financial statements governs their preparation and is discussed in this chapter. The treatment in the consolidated financial statements for
investments giving rise to joint control under IAS 31 Interests in joint ventures and for those giving rise to significant influence under IAS 28 Investments in associates are dealt with in
separate chapters.
On completion of this chapter you should be able to: understand the scope of IAS 27;
interpret the important terminology and definitions which relate to the preparation of the financial statements of a group of entities;
understand the key principles relating to recognition and measurement in consolidated financial statements; and
demonstrate knowledge of the principal disclosure requirements of IAS 27.
Chapter 31 – Consolidation Page 406
3 Objectives, Scope and Definitions of IAS 27
The scope of IAS 27 is wide and should be applied “in the preparation and presentation of consolidated financial statements for a group of entities under the control of a parent”.
[IAS 27.1]
IAS 27 also addresses the accounting requirements for investments in subsidiaries, jointly- controlled entities and associates in separate financial statements. Separate financial
statements are those of an individual investing entity rather than those of the combined group. [IAS 27.3]
IAS 27 does not cover the treatment of a business combination, for example the acquisition of a subsidiary, in the group financial statements. This is set out in IFRS 3 Business
combinations.
A parent entity can control another entity in a number of ways. The easiest control relationship to identify is where one entity owns more than half of the voting rights in another
entity. It is not, however, a requirement that at least half of the voting rights are held for control to exist. IAS 27 includes a number of examples where control may exist even though
the parent does not hold a majority of the voting rights. Such situations include:
where the parent has the power to control more than 50 of the voting rights, for example by exercising share conversion rights which are currently exercisable, or
where it has the power to govern the financial and operating policies of the other entity through agreement with other shareholders or by statute; or
where the entity is controlled by its board of directors and the parent has the ability to appoint or remove the majority of the members of that board, or has the power to cast
the majority of the votes at such a board meeting. A revised version of IAS 27 was published in January 2008. This revision was made as a
result of the changes made to IFRS 3 as part of the second phase of the IASB’s business combinations project. The rest of this chapter is based on the newly published version of
IAS 27.
The revised version of IAS 27 should be applied for annual reporting periods beginning on or after 1 July 2009. However, an entity is permitted to adopt the standard earlier if it also
applies the revised version of IFRS 3. [IAS 27.45]
4 Consolidated Financial Statements
4.1 Presentation
Subject to limited exceptions, IAS 27 requires every parent to prepare a set of consolidated financial statements. [IAS 27.9]
An exception to this requirement arises in circumstances where the shareholders of the parent will gain limited benefit from the preparation of consolidated financial statements at this
level, for example where the parent entity is itself a wholly-owned subsidiary. In this scenario the only shareholder is the superior parent entity, which will be required to prepare its own
consolidated financial statements. The exception also applies where a partially-owned subsidiary has informed the other shareholders i.e. the shareholders of the subsidiary other
than the parent entity of the proposal not to prepare consolidated financial statements and there were no objections. The ultimate parent i.e. the top entity in the group, or the
intermediate parent if one exists, is required to prepare consolidated financial statements that are publicly available and in accordance with IFRS for this exception to be available.
[IAS 27.10]
Chapter 31 – Consolidation Page 407
This exception cannot be utilised where the parent has debt or equity instruments traded on any public market or is in the process of issuing debt or equity in a public market. In such
circumstances its consolidated financial statements are likely to have a wider circulation and therefore should be prepared. [IAS 27.10]
4.2 Scope of consolidated financial statements
Consolidated financial statements are designed to present the group’s activities as if they had been undertaken by a single entity. Such financial statements should therefore combine on a
line-by-line basis the income, expenses, assets and liabilities of all subsidiaries. One exception to this general requirement is where on acquisition an entity meets the criteria to be
classified as held for sale under IFRS 5 Non-current assets held for sale and discontinued operations. While such an entity should still be included in the consolidated financial
statements, it is recognised under IFRS 5 rather than on a line-by-line basis in accordance with IAS 27. The results will instead be presented as a single amount in the statement of
comprehensive income, with the assets and liabilities presented as separate amounts in the statement of financial position. [IAS 27.12]
A subsidiary should not be excluded from the consolidated financial statements because its activities are dissimilar to those of the other entities in the group. This information should
instead be presented as additional information in the consolidated financial statements, for example as a separate reporting segment in accordance with IFRS 8 Operating segments.
The preparation of consolidated financial statements is still generally required where a parent entity is a venture capitalist, mutual fund or unit trust.
4.3 Special purpose entities
IAS 27 requires that an entity is included in the consolidated financial statements where it is controlled by another entity. As explained above, control is usually obtained where the
majority of the voting rights in the other entity are held, although it is possible to have control in other circumstances. The identification of control should be established by looking at the
substance of the relationship rather than its legal form, for example by identifying which party is gaining the benefits generated by an entity’s activities.
It is possible to set up an operating relationship between entities solely for a defined and narrow purpose, for example to effect a lease. Entities used for such purposes are commonly
referred to as special purpose entities SPE and may be in the form of a trust or partnership rather than an incorporated entity.
What is unique about such entities is that, although they may have a governing body, they have restricted decision-making powers which instead lie with the creator of the entity. As a
consequence the SPE acts as if it were on ‘autopilot’.
Where such entities exist, management may have to exercise a significant amount of judgement to identify whether there is effective control over the SPE. Control may exist
through the predetermination of the activities of the SPE. Other indicators of control may include where the activities of the SPE are essentially being operated on behalf of another
entity or where another entity enjoys the majority of the benefits generated by the SPE.
SIC 12 Special purpose entities requires that, where the substance of the relationship is that the SPE is controlled by another entity, that entity should consolidate it in accordance with the
requirements of IAS 27.
Chapter 31 – Consolidation Page 408
5 Consolidation Procedures
5.1 Basic approach
The preparation of consolidated financial statements involves the combination of the financial statements of the parent and its subsidiaries on a line-by-line basis. Individual line items are
added together for all entities within the group to produce the consolidated figures for the single economic entity. This approach is adopted for all items in the financial statements, for
example income, expenditure, assets and liabilities.
A number of further steps are then required to ensure that information is not double counted and that the consolidated financial statements of the group fairly present the results and
position of the group as a whole.
The parent entity will have an asset line item in its own financial statements which represents the cost of acquiring an investment in a subsidiary. The cost of the investment is replaced by
the results and financial position of the subsidiary on consolidation.
The aggregation of each line item in the statement of financial position will lead to equity which represents that of the total of all entities in the group. This will include retained earnings
that were generated both before and after a subsidiary was acquired. Retained earning generated before a subsidiary was acquired by its current parent should not be reported as
part of the group results. The parent’s share of a subsidiary’s equity at the time of acquisition should therefore be eliminated.
Any difference between the cost of investment and the parent’s share of a subsidiary’s equity at the time of acquisition is goodwill, which is recognised in the consolidated financial
statements as an asset, in accordance with IFRS 3.
Illustration 1
ABC acquired the entire share capital of XYZ i.e. there is no non-controlling interest for CU20,000. At that date the equity of XYZ comprised share capital of CU5,000 and retained
earnings of CU6,000.
The share capital and pre-acquisition retained earnings are eliminated against the cost of investment in the consolidated financial statements. The difference is goodwill.
CU Consideration transferred
20,000 Less:
XYZ’s net assets Share capital
5,000 Retained earnings
6,000 11,000
Goodwill 9,000
The ownership of the profits and net assets of subsidiaries included in the aggregation process should be analysed between the parent entity shareholders and the non-controlling
interest. The non-controlling interest is the portion of the results and financial position of subsidiaries that does not belong to the parent. For example, where a parent owns 80 of a
subsidiary, the non-controlling interest is the remaining 20.
The portion of profit or loss and net assets of the group which belongs to the non-controlling interest should be presented separately in the consolidated financial statements. Total
comprehensive income is split between the owners of the parent and the non-controlling
Chapter 31 – Consolidation Page 409
interest even if this results in the non-controlling interest having a deficit balance. The non- controlling interest’s share of net assets is presented within equity. [IAS 27.27]
The non-controlling interest is calculated by applying the proportion of shares in the subsidiary that belong to the non-controlling interest to the results and net assets of the
subsidiary.
Illustration 2
ABC acquired 60 of the share capital of XYZ on 1 January 2007 for CU18,000 a 40 non-controlling interest in XYZ therefore exists. At that date the equity of XYZ comprised
share capital of CU5,000 and retained earnings of CU15,000.
The profit after tax of XYZ for the year ended 31 December 2007 was CU10,000 and the retained earnings at that date were CU25,000.
The share capital and pre-acquisition retained earnings are eliminated against the cost of investment in the consolidated financial statements. The difference is goodwill.
CU CU
Consideration transferred 18,000
Non-controlling interest 40 × 5,000+15,000 – note 1
8,000 26,000
XYZ’s net assets Share capital
5,000 Retained earnings
15,000 20,000
Goodwill 6,000
The non-controlling interest in the net assets at year-end is CU12,000 40 x CU5,000 + CU25,000.
The non-controlling interest in the profit for the year is CU4,000 40 x CU10,000. The consolidated retained earnings will include ABC’s share of the retained earnings since
acquisition of CU6,000 CU25,000 - CU15,000 x 60. The pre-acquisition retained earnings were eliminated against the cost of investment.
Note 1 – The non-controlling interest at acquisition has been measured at the non- controlling interest’s proportionate share of the acquiree’s identifiable net assets in
accordance with IFRS 3, as discussed in Chapter 33.
Chapter 31 – Consolidation Page 410
5.2 Adjustments
As the consolidated financial statements present the information for the group as a single entity, any transactions or balances arising between different entities in the group should be
eliminated. This treatment is required because the single entity cannot transact business with itself or owe itself money. [IAS 27.20]
Where sales have been made between group entities, these should be eliminated in the revenue and costs of sales lines of the aggregated results of the group. Similarly where
balances exist at the year end, the asset and corresponding liability should be eliminated.
A more complex adjustment is necessary where goods are sold between group entities and they are still held by one of the entities at the year-end. Any element of profit created by these
internal transactions is considered to be unearned as far as the single economic entity is concerned and should therefore be eliminated. The inventories themselves should be
reduced to their original cost to the group.
Because the parent controls the activities of subsidiaries, the full amounts of such transactions and balances arising within a group should be eliminated even if the seller is a
subsidiary in which there is a non-controlling interest.
Illustration 3
PQR owns 60 of STU. The following figures are extracted from their separate financial statements:
PQR Trade receivables CU280,000, including CU50,000 due from STU
Trade payables CU220,000, including CU10,000 due to STU
STU Trade receivables CU125,000, including CU10,000 due from PQR
Trade payables CU95,000, including CU50,000 due to PQR The following figures should be included in the consolidated statement of financial position of
the group. Trade receivables:
CU280,000 – 50,000 + 125,000 – 10,000 = CU345,000 Trade payables:
CU220,000 – 10,000 + 95,000 – 50,000 = CU255,000 The intra-group balances should be eliminated in full. Trade receivables and trade payables
should only include balances with third parties.
Illustration 4
ABC holds a 75 interest in DEF. At the end of the reporting period, inventory is held within the group which was purchased from another group entity for CU50,000 at cost plus 25.
The group’s consolidated statement of financial position has been drafted without any adjustment in relation to this holding of inventory.
The adjustment required to be made to the draft consolidated statement of financial position for inventories, the non-controlling interest and retained earnings attributable to the owners
of ABC are set out below based on the following assumptions:
Assumption 1: ABC holds the inventory which was bought from DEF
Assumption 2: DEF holds the inventory which was purchased from ABC
Chapter 31 – Consolidation Page 411
Under both assumptions, the CU10,000 of profit should be taken out of the carrying amount of the inventory 25125 x CU50,000 = CU10,000. This amount should be removed from the
seller’s retained earnings.
Assumption 1 The subsidiary is the seller, so part of the reduction goes to reduce the non-controlling
interest. Therefore, the non-controlling interest is reduced by 25 of CU10,000 = CU2,500 and retained earnings by 75 = CU7,500.
Assumption 2 The parent is the seller therefore the whole of the CU10,000 goes to reduce retained
earnings.
If non-current assets, such as property, have been sold by one group entity to another, adjustment is necessary to eliminate the unrealised profit or loss on the sale. In addition, the
depreciation i.e. charging an asset’s cost over the period in which it will be used by the entity should be adjusted to the value it would have been had no sale taken place.
5.3 Other requirements
5.3.1 Reporting dates and consistent accounting policies
Since the consolidated financial statements are prepared on the basis that the group is a single economic entity, the financial statements of the parent and its subsidiaries should be
made up to the same reporting date. If a subsidiary has a year-end different to that of its parent, then it is required to prepare additional financial information for consolidation
purposes. Adjustments should be made for significant transactions and events between the subsidiary’s reporting date and that of its parent. [IAS 27.22, 27.23]
Where different accounting dates exist for the parent and one of its subsidiaries, the difference in reporting dates should not exceed three months.
It is also essential that uniform accounting policies are applied by all entities in the group. If group accounting policies are not adopted in the subsidiaries’ own financial statements, then
adjustments should be made to reflect the effect of the group policies for inclusion in the consolidation financial statements. [IAS 27.24]
5.3.2 Ceasing to be a subsidiary
When a parent loses control of a subsidiary, the subsidiary should be excluded from consolidation from that date. But the results of the subsidiary should be included in the
consolidated financial statements up to that date, since this reflects the reality that up until that point the subsidiary was still a group entity.
Where a change in a parent’s ownership interest in a subsidiary does not lead to the loss of control, it is recognised as an equity transaction. The carrying amounts of the controlling and
non-controlling interests should be adjusted to reflect the change in levels of ownership. Any difference between the consideration received and the adjustment to the non-controlling
interest is recognised directly in equity. [IAS 27.30]
If a parent loses control of a subsidiary, the subsidiary should be removed from the consolidated financial statements and replaced by any consideration received, along with any
investment that is retained, on the date on which control is lost. This will lead to the assets and liabilities and any non-controlling interest in the subsidiary being removed from the
consolidated statement of financial position at their carrying amounts, any consideration received, or shares of the subsidiary distributed to its owners, as a result of the loss of control
Chapter 31 – Consolidation Page 412
being recognised and any investment that has been retained being recognised at its fair value. [IAS 27.34]
If any amounts have been recognised in other comprehensive income of the consolidated financial statements in relation to the subsidiary in which the parent has lost control, these
amounts should be reclassified to profit or loss or transferred directly to retained earnings in accordance with the relevant accounting standard.
If any gain or loss arises from the above transactions as a result of losing control of a subsidiary, it should be recognised directly in profit or loss.
Once an entity is no longer a subsidiary, it should be accounted for as an investment in accordance with other appropriate accounting standards, for example, IAS 39 Financial
instruments: Recognition and measurement, IAS 28 or IAS 31. [IAS 27.36]
6 Investors Separate Financial Statements
For the preparation of the separate financial statements of an entity, i.e. the parent only financial statements rather than the consolidated financial statements, investments in
subsidiaries and associates and joint ventures should be recognised either at cost or in accordance with IAS 39, at the choice of the entity. If such an investment is classified as ‘held
for sale’ under IFRS 5, then it should be treated in accordance with that standard. [IAS 27.38]
Where investments in jointly controlled entities and associates are recognised and measured in accordance with IAS 39 in the consolidated financial statements, this accounting treatment
should also be adopted in the separate financial statements of the entity. [IAS 27.40]
Chapter 31 – Consolidation Page 413
7 Disclosures
A number of disclosure requirements are included in IAS 27, which provide additional information about the nature of the control relationship between the parent and its
subsidiaries. These disclosures include: an explanation of the parent subsidiary relationship where the parent does not hold the majority of the voting rights, an explanation of why, even
though the majority of the voting rights are held, the investor does not have control, and an explanation of any significant restrictions on the ability of the subsidiary to transfer funds to its
parent, for example by the payment of dividends. [IAS 27.41]
Where a subsidiary does not have the same reporting date as its parent, this fact should be explained along with details of the subsidiary’s reporting date. [IAS 27.41]
Where there has been a change in the ownership interest in a subsidiary during the period, this fact should be explained. If control was not lost, a schedule of the effect of the reduced
ownership interest should be presented. If control was lost, then any resulting gain or loss should be identified, together with the line item within which the gain or loss was recognised.
[IAS 27.41]
Where a parent entity does not prepare consolidated financial statements because it is permitted to use the exception, as explained at the beginning of this chapter this fact should
be disclosed. In addition the parent entity should include the name and country of incorporation or residence of the entity in which its results have been consolidated and
where the publicly available financial statements can be obtained. A list of significant investments such as subsidiaries, associates and joint ventures, should be provided in the
entity-only financial statements with details on the shareholdings held, the country of incorporation and how the investments have been accounted for. [IAS 27.42]
Where separate financial statements have been prepared, disclosures are required about investments that are classed as being in associates and joint ventures where separate
financial statements are prepared. These disclosures detail similar information to that set out above, along with an explanation of why the separate financial statements have been
prepared, if they are not required by law. [IAS 27.43]
8 Chapter Review
This chapter covered the routine processes by which the consolidated financial statements for a parent and its subsidiaries are prepared, as if the various separate legal entities are a single
economic entity.
This chapter has covered: the scope of IAS 27;
its requirements as to which entities should produce consolidated financial statements;
consolidation procedures; the requirements in respect of common reporting dates and uniform accounting
policies; and the disclosure requirements set out in IAS 27.
Chapter 31 – Consolidation Page 414
9 Self Test Questions
Chapter 31
1. Which ONE of the following terms best describes the financial statements of a
parent in which the investments are accounted for on the basis of the direct equity interest?
A Single financial statements
B
Combined financial statements
C
Separate financial statements
D Consolidated financial statements
2. Are the following statements true or false, according to IAS27 Consolidated
and separate financial statements? 1
Consolidated financial statements must be prepared using uniform accounting policies.
2 The non-controlling interest in the net assets of subsidiaries may be
shown by way of note to the consolidated statement of financial position.
Statement 1 Statement 2
A
False False
B False
True
C
True False
D True
True
3. The Cavy Company owns 75 of The Haldenby Company. The following
figures are from their separate financial statements: Cavy:
Trade receivables CU1,040,000, including CU30,000 due from Haldenby.
Haldenby: Trade receivables CU215,000, including CU40,000 due from
Cavy. According to IAS27 Consolidated and separate financial statements, what
figure should appear for trade receivables in Cavys consolidated statement of financial position?
A CU1,215,000
B CU1,225,000
C CU1,255,000
D CU1,185,000
