Professional Documents
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A group of companies is a set of companies which are either the controlling company itself, or
companies controlled by the same company. If you belong to a group of companies then, at
some stage of the financial reporting process, a group consolidation will be required in order
to establish the total group's financial position. A group consolidation is normally performed
by what is referred to as the parent company.
A parent company, commonly called a holding company, a holding company in relation to the
subsidiary is defined as a juristic person or undertaking that controls a subsidiary. Therefore,
controlling a company means having the power to appoint the majority of its directors. A
parent company controls their subsidiary if and only if the investor has all of the following
elements:
1) power over the investee, i.e. the investor has existing rights that give it the ability to
direct the relevant activities (the activities that significantly affect the investee's
returns)
2) exposure, or rights, to variable returns from its involvement with the investee
3) the ability to use its power over the investee to affect the amount of the investor's
returns.
The control of company A by company B may be direct (company B directly holds the
majority of voting rights on the management board of company A) or indirect (B controls
intermediate companies C, D or E, etc, which it can ask to vote the same way on the
management board of A, thereby obtaining a majority of rights). Control is generally
indicated by ownership by one company, directly or indirectly, or the power to govern the
financial and operating policies of an investee so as to obtain benefits from it activities,
although control may exist in other circumstances.
A key word is controlcontrol can be obtained either by:
1) buying the assets themselves (which automatically gives control to the buyer), or
2) buying control over the corporation that owns the assets (which makes the purchased
corporation a subsidiary).
In the new Act the parent/holding company does not have to own shares in the company as
ownership of voting rights is no longer required to constitute a subsidiary relationship. If the
holding company has the rights or control by virtue of a contract (e.g. a shareholders
agreement) then that will show a subsidiary relationship.
A. Amalgamation is defined as the combination of one or more companies into a new entity. It
includes two or more companies join to form a new company and absorption or blending of
one by the other. Generally, Amalgamation is done between two or more companies engaged
in the same line of activity or has some synergy in their operations. Again the companies may
also combine for diversification of activities or for expansion of services.
For example of amalgamation, existing companies A and B are wound up and a new company
C is formed to take over the businesses of A and B.
Accounting methods using in amalgamation are Pooling of Interests Method and Purchase
Method. Through pooling of interests method, the assets, liabilities and reserves of the
transferor company are recorded by the transferee company at their existing carrying amounts.
In purchase method, the transferee company accounts for the amalgamation either by
incorporating the assets and liabilities at their existing carrying amounts or by allocating the
consideration to individual assets and liabilities of the transferor company on the basis of their
fair values at the date of amalgamation.
B. Absorption is the process in which one company acquires the business of another company.
In this process, a smaller existing company is overpowered by an existing larger company. No
new company is established in absorption. There are two companies involved in this process.
In this process, the weaker company looses its identity by merging itself with stronger
company. The transferee company exercises control over the transferor company. The two
companies differ in their size, structure, financial condition and operations. The companies
either mutually take the decision of absorption, or it can be a hostile takeover.
C. Mergers And Acquisitions, based on Jrisy MOTIS, merger and acquisition refer to corporate
reorganizations that serve to transfer ownership control from one firm (the target) to the other
(the acquirer), strictly speaking, they are different.
.Accordingly, in a merger of equals, the entity deemed to be the acquirer should account for
the transaction using the acquisition method. Combinations of mutual enterprises are also
within the scope of IFRS3. The FASB also acknowledged some differences between mutual
enterprises and corporate business enterprises, but determined that such differences were not
substantial enough to warrant separate accounting. Accordingly, in a combination of mutual
enterprises, the entity deemed to be the acquirer should account for the transaction using the
acquisition method.
TYPES OF THE COMPANY OTHER FORMS OF INVESTMENT
A. Investment Funds
Investment funds pool the money of many investors and invest according to a specific
strategy. An investment fund is a supply of capital belonging to numerous investors used to
collectively purchase securities while each investor retains ownership and control of his own
shares. An investment fund provides a broader selection of investment opportunities, greater
management expertise and lower investment fees than investors might be able to obtain on
their own. Types of investment funds include mutual funds, exchange-traded funds, money
market funds and hedge funds.
B. Annuities
An annuity is a contract between you and an insurance company in which the company
promises to make periodic payments to you, starting immediately or at some future time. You
buy an annuity either with a single payment or a series of payments called premiums. Some
annuity contracts provide a way to save for retirement. Others can turn your savings into a
stream of retirement income. Still others do both. If you use an annuity as a savings vehicle
and the insurance company delays your pay-out to the future, you have a deferred annuity. If
you use the annuity to create a source of retirement income and your payments start right
away, you have an immediate annuity. Annuities are often products investors consider when
they plan for retirementso it pays to understand them. They also are often marketed as taxdeferred savings products. Annuities come with a variety of fees and expenses, such as
surrender charges, mortality and expense risk charges and administrative fees. Annuities also
can have high commissions, reaching seven percent or more. There are three types on
annuities :
I.
II.
III.
Fixed Annuities
Variable Annuities
Indexed Annuities
C. Debt Investment
The most major development for group company financial reporting is that IFRS 10 replaces
the portion of IAS 27 Consolidated and Separate Financial Statements that addresses the
accounting for consolidated financial statements. What remains in IAS 27 is limited to
accounting for subsidiaries, jointly controlled entities, and associates in separate financial
statements. IFRS 10 establishes a single control model that applies to all entities. The changes
introduced by IFRS 10 will require management to exercise significant judgement to
determine which entities are controlled, and therefore are required to be consolidated by a
parent, compared with the requirements that were in IAS 27. Therefore, IFRS 10 may change
which entities are within a group. These changes were made by the IASB, in part, in response
to the financial crisis, when there was heavy criticism of accounting rules that permitted
certain entities to remain off-balance sheet.
Consistent with the requirements that were previously included in IAS 27, a group presents
financial statements that consolidate the assets, liabilities, equity, income, expenses and cash
flows of the parent and its subsidiaries, as those of a single economic entity. A group will
continue to consist of a parent and its subsidiaries (i.e., entities that the parent controls),
however, IFRS 10 uses different terminology from IAS 27 in describing its control model. For
example, the new standard uses the term investor to refer to a reporting entity that
potentially controls one or more other entities, and investee to refer to an entity that is, or
may potentially be, the subsidiary of a reporting entity. IFRS 10 does not change
consolidation procedures i.e., how to consolidate an entity. Rather, IFRS 10 changes whether
an entity is consolidated, by revising the definition of control.
REFFERENCES