Consolidation Accounting

What is Consolidation Accounting?

Consolidation Accounting is used to present and analyze the financial statements of several entities under common control combined with those of the controlling entity so that the consolidated financial statements of the group appear as that of a single entity.

This is governed under several accounting standards: MFRS 3 Business Combination, MFRS 10 Consolidated Financial Statements, MFRS128 Investment in Associates and MFRS 131 Investment in Joint Ventures.

When is Group Consolidation Accounts needed?

Companies only require group consolidation accounts if they have several companies and businesses, and/or in different countries or regions. Hence, the preparation of group consolidation accounts will enhance the financial and management reporting as well as act as a robust analysis to compare financial performance by region, country and/or segment.

Businesses or even other entities for the purpose of diversification, expansion and acquisition with other entities will require group consolidation accounts relevant for the purposes of the users of the financial statements. For example, they will need to know the goodwill upon acquisition.

Why is Group Consolidation Accounts Important?

In all, group consolidation accounts assist investors, financial analysts, business owners and other interested parties to get a complete overview of the parent company.

At one glance, they can view the overall health of the business and how each subsidiary impacts the parent company.

The preparation of group consolidation accounts is also in compliance with relevant accounting standards and statutory audit.

Summary of Accounting Standards on Group Consolidation Accounts

The accountant has to identify whether the group has several subsidiaries with associates and/or with joint venture and/or equity interest before applying the relevant accounting standards.

  1. MFRS 3 outlines the main accounting treatments for the following: –
    • Determining whether a transaction is a business combination
    • Identifying the acquirer
    • Determining the date of acquisition date (which is also the date of control of the acquirer party)
    • Recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquirer
    • Recognising and measuring goodwill or a gain from a bargain purchase
    • The business combination is achieved in stages (step acquisitions)
    • Subsequent measurements
    • Disclosures in the financial statements
  2. MFRS 10 outlines the situations when the investor obtains control over its investment
  3. MFRS 128 outlines the main accounting treatments for the following: –
    • Definition of significant influence
    • Subsequent measurements
    • Equity method of accounting and applications
    • Disclosures in the financial statements
  4. MFRS 139 outlines the main accounting treatment for equity interest (less than 20%)
  5. MFRS 131outlines the main accounting treatment for the following: –
    • Joint arrangements
    • Disclosures in the financial statements
    • Join controls
    • Financial statements of parties to a joint arrangement

Common Mistakes Made by Accountants When Performing Group Consolidation Accounts

  1. Wrong date of acquisition resulting in wrong date of control in the acquirer’s books.
  2. Missed out elimination of pre-acquisition profits when calculating goodwill.
  3. Recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree was not at fair value at the date of acquisition.
  4. Do not understand the nature of intragroup transactions eliminations
  5. Intragroup balances cannot be eliminated in full.
  6. Not clear on the definition of control. For example, not necessary 49% shareholding in a company means it is an associate, it can also be a subsidiary.

Important Tips for Ease of Preparing Group Consolidation Accounts

  1. Maintain a proper list of permanent adjustments and documents relating to the adjustments. For example, the accountant may need to track back the date of acquisition of a subsidiary.
  2. Keep a list of current adjustments separately from permanent adjustments maintained on a yearly basis.
  3. Maintain an updated detailed group structure record which consists detailed shareholding and common directors for ease of reference. At one glance, the accountant should be able to understand which related party is subsidiary, associate, joint venture, immediate/penultimate holding company, ultimate holding company and so forth.
  4. Have a proper control in place on a monthly basis to check and review intragroup transactions eliminations as well as intergroup balances. An intragroup reconciliation needs to be prepared when figures do not tie and this needs to be monitored till resolved.
  5. As this area is rather technical, the accountant has to be equipped with sufficient technical knowledge and must keep up with relevant standards as well as importantly to understand the business and industry.