CIA3001: CORPORATE ACCOUNTING

• BASIC CONCEPTS OF CORPORATE

GROUP

• Semester 2, 2017/2018
• Week 1
CIA3001: CORPORATE ACCOUNTING
By the end of this lecture, you should be
able to:
 explain the concept of control;
 discuss the existence of control;
 explain whether a company is required to
prepare consolidated accounts.
 CIA3001: CORPORATE ACCOUNTING
• Reasons for preparing consolidated
accounts:
Prevent manipulation
 Inflating sales by selling within the group.
Consolidation prevents the publication of misleading
accounts by such means as inflating the sales through
selling to another member of a group.
 More meaningful EPS figure
 Better measurement of management performance
using ROCE. Consolidation provides a better
measurement of the performance of a parent
company’s directors as the total earnings of a group
can be compared with its total assets in arriving at the
group’s return on capital employed (ROCE).
CIA3001: CORPORATE ACCOUNTING

• Definition of a group
MFRS 10 does not define group explicitly. However,
the standard describes that, one enterprise may have
control another enterprise either:
– Directly
– Indirectly
This also, relates to the concept of “control”
CIA3001: CORPORATE ACCOUNTING

• Definition of a control under MFRS 10:

– through power over the investee
– rights to variable returns
– ability to affect those returns

MFRS 10, para 4

CIA3001: CORPORATE ACCOUNTING
• Power
- current ability to direct the relevant activities.
- power arises from rights, voting rights and other
contractual arrangements may be considered.
- Ability to direct indicates power even though the
right is yet to be exercised.
- Investor that has the ability to direct activities that
most significantly affects the return of the investor
has the power over investee.
- Having only protective rights does not constitute
power and therefore there is no control.

MFRS 10, para 10-14

CIA3001: CORPORATE ACCOUNTING
• Return
- investors’ involvement in the investee and therefore
their return is affected by the investee’s
performance.
- Although only one company has the control over an
investee, many parties can share the profits of an
investee.

MFRS 10, para 15-16

CIA3001: CORPORATE ACCOUNTING
• Link between power and returns
- Investor that has control over investee must also
possess the ability to to affect the investor’s returns
from its involvement with the investee.
- It is therefore necessary to decide if an investor is a
principal or agent. An agent does not control an
investee.

MFRS 10, para 17-18

CIA3001: CORPORATE ACCOUNTING
• Control considerations
 Control assumed if >50% of voting rights
 Control may exist where <50%
 CIA3001: CORPORATE ACCOUNTING
• Control may exist where <50% voting rights
 Agreement with other investors gives power over >50%.
 Power over financial and operating policies
by an agreement.
 Power to appoint or remove majority of board members.
 Power to cast the majority of votes at a board meeting.

Also, the MFRS 10 provides that if the options or potential

rights give the entity control, then this could result in the
entity being consolidated.
CIA3001: CORPORATE ACCOUNTING
• Other consideration;
• Another instance is when an investor is powerful
relative to other shareholders. An example, is when
an investor holds a 40% ownership, whilst other
60% ownership consists of shareholders with a
widely dispersed ownership.
 CIA3001: CORPORATE ACCOUNTING
When may a parent company may not be
required to prepare consolidated accounts?
a) If the parent company itself is a wholly owned subsidiary
and the ultimate parent produces consolidated financial
statements for public use that complies with MFRS.
b) If the parent company is a partly owned subsidiary of
another entity, and if other owners do not object to the
parent not preparing the consolidated financial
statements
c) If the parents’ debt or equity instruments are not traded
in foreign or domestic market.
d) If the parent did not file its financial statements with the
securities commission for the purpose of issuing any
class of instruments in the public market.

MFRS 10, para 4

CIA3001: CORPORATE ACCOUNTING

• Which brings us to the question;

“What is consolidated
financial statements?”
CIA3001: CORPORATE ACCOUNTING
In a business combination:
 Different business entities are brought under
common control
 Different entities have to prepare their own set of
financial statements
 But there is also demand for the consolidated
financial statements
Thus, consolidated financial statements are the
financial statements of a group of business entities
under common control
CIA3001: CORPORATE ACCOUNTING

• End of Lecture