Understanding Consolidated Financial Statements And IFRS 10 Essay.

Discussion

Consolidated financial statements refers to the financial statements that depict the revenues, expenses, liabilities, equity, and assets of the parent as well as subsidiary companies (Lopes and Lopes 2019).  The consolidated financial statements help the investors and other stakeholders to understand the actual financial health of the corporation. The entities are required to prepare the consolidated financial statements when the parent company holds more than 50% share of the subsidiary company. IFRS 10 contains the information about the rules and regulation involved in preparation and the presentation of consolidated financial statements (Buni and Yahaya 2021). It explains the principles for preparing and reporting the financial statements of parent and subsidiary company as single company (Bedford, Bugeja and Ma 2022).

The regulation under IFRS 10 requires the entities holding more than 50% shares of the subsidiary company to prepare and report the consolidated financial statement. This standard defines establishes and defines the principle of control that serves as the basis of consolidation. It also sets the accounting requirements for preparing the financial statement in a consolidated form. The IFRS 10 requires the entity to prepare the consolidated financial statement using the uniform accounting policies. However, the parent company may not disclose the consolidated financial statements if it meets the following criteria:

• If its equity and debt are not traded in public market such as stock market of OTC platform;
• If it does not file its financial statements with any regulatory organization.
• If its intermediate or ultimate parent produces the financial statements in compliance with the IFRSs.
• The entities that are engaged in investments are prohibited to present the reports in consolidation.

The consolidation requirement according to the IFRS 10 are as follows:

• Combine the items such as revenue, expenses, cash flow, asset and liabilities of the parent with those of the subsidiaries.
• Eliminate the carrying amount of parent’s investment in subsidiaries.
• Eliminating the profit or losses arising from any form of transaction between the subsidiaries and the parent company.
• The reporting date of parent and its subsidiaries should have the same reporting dates.
• It requires the reporting to present the non-controlling interests in the consolidated financial statements.
• The IFRS 10 requires the parent company to derecognize the assets and liabilities of the subsidiary if the parent losses the control.

The consolidated financial statements are of utmost importance for investors and stakeholders to understand the actual financial position of the company. It provides the perspective of the entire entity, in combination of parent and its subsidiaries company. The preparation and representation of the consolidated financial statements remains important for the group because of the following:

• Reducing the volume of paperwork: If the management or any stakeholders wanted to get an overview of the group would require go through of all the financial statements of parent and its subsidiaries. However, with the help of consolidated financial statements, one can have a complete understanding of the group’s financial position.
• Broad perspective: The information disclosed in the consolidated financial statement gives the insights of financial health of entity as a whole.
• Simplifying the process: The preparation of consolidated financial statements is simplified through the use of software. It helps in gathering information about the financial condition for decision making and analysis of actual performance of the company.

The concept of ‘fair value’ is used at the time of consolidating the financial statements of the parent company with that of its subsidiaries. At the time of acquisition, the assets and liabilities of the company are presented at fair market value to determine the actual worth of the company (Celli 2021). The consideration of the fair value of assets and liabilities are important for the business to determine the actual amount of goodwill arising from the company’s acquisition. The fair value measurement is essential for determining the worth of the business, especially when there exist no sales of businesses in recent period. The IFRS 13 deals with the fair value concept of recording assets and liabilities. The main objective of the fair value is to estimate the price of assets or liabilities at which the market participants would be ready to purchase an asset or assume a liability under the current market condition. It requires the entity to use fair value for recognizing any assets and liabilities during the consolidation.

IFRS 3 that deals with business combination provide two methods for calculating the goodwill. The goodwill represents the amount of fund that is above the fair value of net assets acquired by the parent company (Affes and Makni-Fourati 2019). Another method of calculating the goodwill is to compare the fair value of subsidiaries net assets with that of the whole subsidiary. In this method, the goodwill is attributable to both the parent company and the non-controlling interests (Tunyi, et al 2020).

Part A

An asset is impaired when the recoverable amount is than the carrying amount of that particular company. In the acquisition of Chui Ltd by Simba Ltd, the goodwill on acquisition is impaired, which means that the carrying amount of goodwill is more than the actual fair value of the goodwill. The impairment loss arising from the impairment of goodwill should be treated as non-cash expenses like depreciation. The IAS 36 deals with the recording and presentation of Impairment of assets. In case of the acquisition, the entities are subjected to annual impairment review to ascertain whether the group’s financial statements are overstated. It ensures that the goodwill in the financial statement reflect the true value of goodwill for the firm. It is one of the most peculiar assets in the balance sheet, and therefore, any impairment loss in which it is difficult to identify the impairment of asset, the impairment loss should be adjusted with the amount of goodwill. However, there exist no systematic requirement for adjusting the impairment loss using goodwill. In the case of Simba ltd, the impairment loss is consumed by the goodwill, as the amount is deducted from the retained earnings and the goodwill as impairment loss.

Simba Ltd has been able to identify the opportunity for expanding its business in the international market. The company is planning to sell the ecofriendly household appliance Ec0-X. After the acquisition of Chui Ltd, it would be able to take advantage of online retail business which would further help in attracting and informing new customers about the products offered by the company.

There are several factors that may serve as the motivation for international expansion. The opportunity is to enter into the Kilimahari market, a country outside of the Europe. It would help the business to grow outside the boundaries of UK. The main motivational factor is to expand the customer base, utilize the online retail facility after the acquisition of Chui Ltd, improve the entity’s cost effectiveness, changes in trends to sustainability and eco-friendly product in Europe and to build the global brand image. Other non-financial factors that should be considered by the directors of Simba Ltd include the size of the market, macroeconomic stability, openness of trade, country performance, foreign exchange rates and the domestic savings (Testa, Slaton and Karpova 2022). In addition, the business must focus on cultural differences, regulatory and legal barriers, foreign government consideration and the business case, which include market study and consideration for trademark protection and intellectual property.

The investment opportunity for expansion in Kilimahari is evaluated through the Net Present Value method. It represents the sum of the present value of future cash flows. The decision rule for this method of capital budgeting states that the project should be accepted only if it has a positive NPV (Marchioni and Magni 2018). The NPV of the project is calculated as K$8,219,042, which is approximately £4.1 million. The main reason behind the positive NPV for this project is due to the sale of project for K$16 million at the end of the fourth year. Therefore, according to the estimation of the board of director and NPV calculation, the project shall be accepted by the firm as it shows positive NPV (See Appendix).

The NPV method of capital budgeting is considered to be the most widely used and efficient technique for decision making purpose. It is due to the fact that this method considers the time value of money concept, which says that the value of same amount of money today will be less in future (Kashyap 2020). The future cash flows are discounted using the WACC, also referred to as the hurdle rate. Other appraisal techniques such as payback period and internal rate of return does not consider the present value for arriving at a decision. Therefore, the NPV provides insights on the actual profitability of the business arising from a particular investment.

Conclusion/ Recommendation

From the above discussion and analysis, it is revealed that IFRS 10 mandates the public entities to prepare and present the consolidated financial statements in which the revenues, expenses, liabilities, assets and equity of parent and subsidiary companies are combined together to represent a single economic entity. The IFRS 10 also requires the disclosure of non-controlling interest in the equity section of the consolidated balance sheet. The project evaluation for international expansion opportunities shows that the company would have positive NPV at the end of the fourth year. Therefore, it is recommended that the business should accept the project as it would lead to profit for the business at the end of the fourth year. It is also to be noted that the positive NPV is mainly because of directors assumption of selling the project for K$16 million to the local business.

References

Affes, H. and Makni-Fourati, Y., 2019, January. Compliance with IFRS 3, IAS 36 and IAS 38 by Canadian companies: Economic incentives or opportunistic choices?. IAS.

Bedford, A., Bugeja, M. and Ma, N., 2022. The impact of IFRS 10 on consolidated financial reporting. Accounting & Finance, 62(1), pp.101-141.

Buni, M.B. and Yahaya, H.D., 2021. The impact of Compliance with IFRS 10 (Consolidated Financial Statement) on Financial Reporting Quality of listed Deposit Money Banks in Nigeria. Fane-Fane International Multi-Disciplinary Journal, 5(II), pp.20-20.

Celli, M., 2021. The Accounting of Consolidation Differences in the European Accounting Practice. International Journal of Business and Management, 14(12), pp.102-102.

Kashyap, R., 2020. The economics of enlightenment: time value of knowledge and the net present value (NPV) of knowledge machines, a proposed approach adapted from finance. The BE Journal of Economic Analysis & Policy, 20(2).

Lopes, A.I. and Lopes, M., 2019. Effects of adopting IFRS 10 and IFRS 11 on consolidated financial statements: an exploratory research. Meditari Accountancy Research.

Marchioni, A. and Magni, C.A., 2018. Investment decisions and sensitivity analysis: NPV-consistency of rates of return. European Journal of Operational Research, 268(1), pp.361-372.

Testa, D.S., Slaton, K. and Karpova, E., 2022. A Mixed Methods Exploration of Economic Factors Role in Fashion Specialty Retailers' International Expansion and Performance. Journal of Marketing Development & Competitiveness, 16(1).

Tunyi, A.A., Ehalaiye, D., Gyapong, E. and Ntim, C.G., 2020. The value of discretion in Africa: Evidence from acquired intangible assets under IFRS 3. The International Journal of Accounting, 55(02), p.2050008.