CONSOLIDATED FINANCIAL STATEMENTS
Part B (by individual): Theory Questions
Q1. a) Discuss four prescriptions contained in AASB 10 Consolidated Financial Statements when applying to the consolidation process.
b) Discuss four issues that may challenge existing policies and procedures of the consolidation process when applying AAASB 10 Consolidated Financial Statements.
Q2. Why is it necessary to make adjustments for intragroup transactions? When does an intragroup transaction consolidation adjustment require us to perform a consolidation adjustment to tax expense?
CONSOLIDATED FINANCIAL STATEMENTS ESSAY.
Four Prescriptions contained in AASB 10 Consolidated Financial Statements when Applying to the Consolidation Process.
AASB 10 Consolidated Financial Statements is a guideline on how companies that have control over one or more other companies should prepare their financial statements.
Companies that have control (herein referred to as the ‘parent’) over one or more entities (herein referred to as ‘subsidiaries’) should prescribe to the following regulations set by the standard.
- A parent entity should prepare and present financial statements that consolidate both its activities and that of its subsidiaries.
- A parent entity must make it evident that the consolidation is as a result of control; whereby it must define the standard of control.
- Upon defining the standard of control, the parent entity must indicate how the standard of control is applied. This will help in identifying how an investor is treated; whether separate or consolidated.
- The parent entity must indicate the accounting procedures and requirements to indicate how the financial statements were consolidated.
Four Issues that May Challenge Existing Policies and Procedures
The main issues challenging the application on AASB 10 are based on the level of control and power. As such, there may be issues regarding the level of control that a parent company has, warranting the consolidation of financial statements. In addition, there may be the issue of whether an entity becomes a parent just because it controls any amount of activities in another entity. There may also be the issue of whether to consolidate activities that the subsidiary conducts outside the level of consolidation agreed upon. Lastly, it is important to understand the amount that holders of non-controlling interests are entitled to warrant the share of returns.
Adjustments for Intra-Group Transactions
Adjustments have to be made for intra-group transactions since they represent inter-company transaction between unrelated parties. In the case of consolidated financial statements, it is important to perform a consolidation adjustment to tax expense since it illustrates a transaction between related parties, which is not disclosed in the consolidated statement of financial position.
Consolidated Financial Statements. 2011. Australian Accounting Standards Board. Retrieved from http://www.aasb.gov.au/admin/file/content105/c9/AASB10_08-11.pdf