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Why do IFRS and US GAAP require consolidation of financial statements?
Dalaloian A.
Для чего требуется консолидация финансовой отчетности при МСФО и ОПБУ?
Далалоян А. К.
Далалоян Анаит Корюновна /Dalaloian Anait - магистр в области экономики,
Финансовый университет при Правительстве Российской Федерации, г. Москва
Аннотация: данная статья посвящена анализу положений Международных Стандартов Финансовой Отчетности (МСФО) и Общепринятых Принципов Бухгалтерского Учёта (ОПБУ) в отношении консолидации финансовых отчетностей. Статья представлена в форме сравнительного анализа, что дает возможность определить важность консолидации в обоих стандартах.
Abstract: this article analyzes the provisions of International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) with regard to consolidated financial statements. It provides comparison of the standards and explains why consolidation offinancial statements is an important requirement of both standards.
Ключевые слова: МСФО, ОПБУ, РСБУ, консолидация финансовой отчетности, бухгалтерский учет. Keywords: IFRS, US GAAP, RAS, Consolidation of financial statements, accounting.
International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) require consolidated financial statements from parent companies that are involved in holdings structures and own subsidiaries or controlling interests, and subsidiaries purchased with the purpose of onward resale. Why do consolidation requirements change with different accounting standards? Why do the Russian Accounting Standards (RAS) consider consolidation less important? What is the importance of preparing consolidating financial statements?
The basics
Nowadays many large companies have complicated grained structures that may comprise numerous legal entities, autonomous subdivisions, and variety of business activities, namely a Holding company. From the Accounting or Taxation point of view a Holding Company refers to a group of companies, consisting of a parent company and its subsidiaries [1]. Though accounting itself had been widely used down the ages, the need to consolidate financial statements in accounting aroused along with establishment of holding companies only in the 20th century [2, p. 476]. Consolidated financial statements reflect the company’s total funds together with all of its subsidiaries. In other words, consolidation is the line-by-line summing up of all the subsidiaries revenues, expenses, assets and liabilities, in accordance with the parent company’s reporting period and its accounting policies, and eliminating intragroup transactions in order to avoid double counting [3]. Any change in controlling interest, excluding loss of controlling interest, shall be reported in financial statements as “Equity operation”, and no income or loss is generated.
IFRS & US GAAP
Control is an integral part of consolidation, as definition of a subsidiary and determination of the scope of consolidation is based on the concept of control. Both IFRS and US GAAP use the notion of “control” to determine whether the reporting company needs to consolidate another company, though the two standards have different approaches as to the definition of control.
IFRS US GAAP
Preparatio n of consolidat ed financial statements There is a limited exemption from preparing consolidated financial statements for a parent company that is itself a wholly owned or partially owned subsidiary, if certain conditions are met. Preparation of consolidated statements is mandatory, although industry-specific exemptions exist.
Definition of control IFRS 10 «Consolidated Financial Statements» defines control as an investor‘s ability to be exposed, or have rights, to variable returns from its involvement with the investee and to affect those returns through its power over the investee. Notion of «de facto control» is also considered [4, p. FAS 160 define control as an ownership of more than 50 percent of the outstanding voting shares of an entity. There is no explicit linkage between control and ownership benefits. There is no «de facto control» for non-variable
1691 interest entities [61.
Consolida tion model Consolidation is based on a control model. Consolidation is based on controlling financial interest model that is based on whether the entity under evaluation is a Variable interest entity (VIE) or a voting interest entity.
Accountin g policies and accountin g period Uniform accounting policies are used throughout the group. Uniform accounting policies within the group are not required.
Equity method investmen ts An investment of 20% or more of the equity of an investee (including potential rights) leads to a presumption that an investor has the ability to exercise significant influence over an investee, unless this presumption can be overcome based on facts and circumstances. When determining significant influence, potential voting rights are considered if currently exercisable. When an investor has an investment in a limited partnership, LLC, trust or similar entity, the determination of significant influence is made using the same general principle of significant influence that is used for all other investments. Accounting at fair value is not available to investors (other than venture capital organizations, mutual funds, unit trusts and similar entities) to account for their investments in associates. IAS 28 generally requires investors (other than venture capital organizations, mutual funds, unit trusts and similar entities) to use the equity method of accounting for their investments in associates in consolidated financial statements [ 5]. An investment of 20% or more of the voting common stock of an investee leads to a presumption that an investor has the ability to exercise significant influence over an investee, unless this presumption can be overcome based on facts and circumstances. When determining significant influence, potential voting rights are generally not considered. When an investor in a limited partnership or an LLC with specific ownership accounts has an interest greater than 3% to 5% in an investee, there is generally the presumption that the investor has the ability to exercise significant influence over that investment. ASC 825-10, Financial Instruments, gives entities the option to account for certain equity method investments at fair value. If management does not elect to use the fair value option, the equity method of accounting is required.
RAS
The fundamental distinction of the Russian Accounting Standards from IFRS and GAAP is that Russian accounting is mainly aimed for Tax Authorities, and IFRS and GAAP are aimed for those parties, who have financial interest in the wealth of the company - shareholders, investors, counterparties. RAS do not give a strict definition of control, but it distinguishes conditions which can be considered as a definition of a parent company: (a) parent company holds more than 50% of the share capital of the subsidiary or more than half of the its voting shares; (b) parent company can influence the decisions made by its subsidiary. So why do the Russian Accounting Standards (RAS) consider consolidation less important? In Russia preparation of consolidated financial statement is specified by the instructions of the Ministry of Finance of the Russian Federation, and on the legislative level corresponding rule reaches only banking institutions [7]. As a practical matter, not all the companies, meeting the requirements of the instructions, prepare consolidated financial statements.
The fact that RAS do not make provision for compulsive consolidation of financial statements for holding companies makes it complex to analyze Russian companies, as the financial statements reflect operations of the parent company solely aside from its subsidiaries.
Importance
Focusing on separate figures of each subsidiary to judge a company, therefore, may prove rather disastrous sometimes, given that a company may have numerous subsidiaries, whether profitable or not, and all they add to shareholder's wealth. But poor performance of a subsidiary will affect the earnings of the parent. Companies can even suffer a loss on a consolidated basis while making profits independently and vice versa. Take the case of LG Electronics Inc. An interim separate income of LG Electronics Inc. for three-month periods ended March 31, 2014 slipped into loss of 72,313 million of Korean won. On a consolidated level the group profit amounted to 92,566 million of Korean won. Therefore, where a company declares consolidated figures, especially on a quarterly basis, you need to look through it. Comparing separate numbers to the consolidated figures helps to judge whether the company has benefited from the subsidiary activities and which subsidiary adds to or detracts from the company. It may influence the investment decisions; that is how consolidated financial statement proves its importance.
References
1. IFRS 10. Consolidated financial statements. [Electronic resource]. IAS plus. Access mode: http://www.iasplus.com/en/standards/ifrs/ifrsl0 (date of treatment 25.02.2015).
2. Averchev I. IFRS. 1000 examples of implementation: Reed Group, 2011. - p. 476.
3. The importance of consolidated statements [Electronic resource]: Business Line. Access mode: http://www.thehindubusinessline.com/features/investment-world/young-investor/the-importance-of-consolidated-statements/article2482407.ece (date of treatment 25.02.2015).
4. Audit Committee Institute. Insights into IFRS, KPMG’s practical guide to International Financial Reporting Standards: 8th edition, Alpina Publisher, 2011/2012. - p. 169.
5. Professor Tan Liong Tong. Consolidated Financial Statements, International Edition: CCH Asia Pte Ltd. - 2013.
6. Crovitz, Gordon L. Closing the Information GAAP // The Wall Street Journal. Retrieved 2008-09-24.
7. Federal law on account № 402-ФЗ signed 06 December 2011. Effective from 1 January 2013.
