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It is obvious from the name that group accounts will be demonstrating financial status of more than one entity. Group accounts are the financial statements of different entities operating in a group. Group of companies is established in order to obtain benefits of synergy, better management of resources, and to avoid competitive business environment. Formation of a group of companies takes place when one company establishes its control over another company. This creates a relationship of parent and subsidiary. The company that enjoys control is named as parent company and the company that is controlled is known as subsidiary company. In a group there will be one parent company with its one ore more than one subsidiary companies. Therefore, Group means a parent and all its subsidiaries.

Control:

According to IFRS 3 and IAS 27, Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Normally control is assumed to exist when the parent company acquires majority number of ordinary share capital. But according to the above referred accounting standards control exists when any of the following situation crops up.

When the parent company:

1. Has owned more than 50% of the voting rights of subsidiary company (Each ordinary share capital has one voting right)
2. Has power over more than 50% of the voting rights of subsidiary company by virtue of agreement with other share-holders of it.
3. Has power to govern the financial and operating policies of subsidiary company by statute or under an agreement.
4. Has power to appoint or remove a majority of the directors of subsidiary company.
5. Has power to cast the majority of votes at meetings of the board of directors of subsidiary company.

Consolidated Financial Statements:

A single set of financial statements that combine the assets, liabilities, incomes and expenses of a parent company and its subsidiaries. In our syllabus we shall learn how to prepare:

1. Consolidated Balance Sheet
2. Consolidated Income Statement

Group Accounts

Example – [ Case i ] Simple Consolidation

Balance Sheet as on 31st December 2008

P S

Rs Rs Fixed Assets 1,000 400 Investment in S. 500 Current Assets 400 200

1,900 600

Share Capital 1,200 300 Reserves 500 200 Current Liabilities 200 100

1,900 600

The Parent Co. (P) acquired 100% shares of the Subsidiary Co. (S) on 31st December 2008.

Required: Prepare the Consolidated Balance Sheet as on the same date.

Solution – [ Case i ]

Consolidated Balance Sheet

As at 31 December 2008

Rs Fixed Assets 1,400 Current Assets 600

2,000

Share Capital 1,200 Reserves 500 Current Liabilities 300

2,000

The above example covers simple consolidation of balance sheet that explains how the assets and liabilities of subsidiary company are consolidated with the assets and liabilities of the parent company. This also explains that the cost of investment appearing in the parent company gets cancelled with the amount of the owner equity of the subsidiary company. This cost of investments is asset of the parent company made up from its own sources therefore in the consolidated balance sheet we have to replace the cost of investment in subsidiary company with net assets of it. The only care is to be taken is to consolidate all assets and liabilities individually and remember do not confuse why we are not consolidating the owner equity of the subsidiary company in the parent company’s owners’ equity.

Example – [ Case ii ] Goodwill

Balance Sheet as on 31st December 2008

P S

Rs Rs Fixed Assets 1,000 400 Investment in S. 500 Current Assets 400 200

1,900 600

Share Capital 1,200 300 Reserves 500 150 Current Liabilities 200 150

1,900 600

The Parent Co. (P) acquired 100% shares of the Subsidiary Co. (S) on 31st December 2008.

Prepare the Consolidated Balance Sheet as on the Required: same date.

Solution – [ Case ii ]

Working for Calculation of Good will: Cost of investment 500 Net assets of S Co acquired 450 Good will 50

Consolidated Balance Sheet

As at 31 December 2008

Rs Fixed Assets 1,400 Goodwill 50 Current Assets 600

2,050

Share Capital 1,200 Reserves 500 Current Liabilities 350

2,050

Good Will: Good will is the excess of the cost of investment made in the subsidiary company over the fair value of the net assets of the subsidiary company acquired.