The consolidated and separate financial statements: theory and practice of application in the Republic of Kazakhstan

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Kokshetau Abai Myrzahmetov University, instructor

The consolidated and separate financial statements: theory and practice of application in the Republic of Kazakhstan

Ospanova B.T. - Undergraduate student

Mukanova A.B.

Baimbetov M.K. associate professor

Today in the Republic of Kazakhstan, as well as in the world, many enterprises work within group of companies. Each enterprise of group is obliged to make separate financial statements in accordance with IFRS. Also, the consolidated (summary) report that is uniform financial statements of all holding according to IFRS can be formed.

According to IFRS 27 the companies (the parent companies) which control activity of other firms (affiliated) have to make consolidated financial statements. As a rule, it is considered that one company controls another if it directly or indirectly (through other companies) owns more than a half of voting shares of this firm.

In general process of formation of the consolidated report represents line - by - line addition of the given financial report of the companies entering the group using a simultaneous exception of totals of intra group operations. However not everything is so simple. Procedure of drawing up the consolidated report includes some important aspects that are necessary to pay special attention on.

The consolidated financial statements reflect information about a financial position of the whole group. Therefore along with assets, liabilities, income and expenses of the parent company in it, also assets, liabilities, the income and expenses of its subsidiaries are shown.

It's worth noting that the reporting not of all firms which are under control of the parent company has to be consolidated. So, according to IFRS 27 it isn't necessary to include data about assets and liabilities of subsidiaries in the consolidated report:

- a share in which it is acquired for the purpose of resale in the near future and control over which in this regard is temporary;

- acting in the conditions of strict long - term restrictions which significantly complicate possibilities of subsidiaries to transfer funds of the parent company (for example if nationalization of property is carried out in the country with the subsidiary) [2].

Investments in such enterprises are reflected in the consolidated report of the parent company (if it is formed) as financial assets.

Sometimes data about subsidiary report is not included in the consolidated report because the specifics of its activity considerably differ from activity of other companies of group. However according to IFRS 27 it isn't acceptable: data about subsidiary has to be included in the consolidated report irrespective of the fact which kind of activity is engaged in as it helps users of the reporting to define scales of the activity within the group [2]. Thus, however, it is possible to be guided by the principle of importance which allows not to include insignificant information in the report. It can be a report of small subsidiaries which inclusion in the consolidated report do not influence on any decisions by users of the report of the holding. financial statement accounting consolidated

The principle of importance allows not to consolidate the report of those companies, operations and which assets are insignificant in comparison with operations and assets of the whole holding. The special category is made by the enterprises which activity is first insignificant (their assets and financial results are less than 5% in assets and results of group) and secondly, it strongly differs in character from primary activity of the organizations (group of companies)[2].

According to IFRS 27 the summary reporting has to be formed on the basis of uniform accounting policies. In other words, results of similar operations of all companies of group have to be reflected in the consolidated report with application of uniform methods and rules of their assessment and account. If a separate firm uses the accounting policies different from the group accounting policies, indicators of its financial statements for consolidation have to be corrected [3].

Sometimes it is inappropriate to completely unify the accounting policies: it is simpler to make adjustments before the consolidation, than to make changes to the accounting policies of the separate companies of the group. It is connected with that subsidiaries cannot have opportunities to apply those methods of the account which are chosen in the accounting policies for the consolidated report if they are more difficult (for example, due to the lack of the corresponding functions in the software used by the subsidiaries). The enterprises can keep account in any book of accounts, but at the level of the corporate center at transformation in IFRS all operations will be reflected by the same rules [1].

By drawing up the consolidated report by IFRS the Kazakhstan companies can choose one of the two options. The first option is that at first, the report by IFRS is prepared for each company of the group. Then data of this report is summarized and corrected for obtaining the consolidated report (an exception of intra group operations, reduction to uniform the accounting policies, etc.) [3].

According to the second option at first the indicators of the Kazakhstan reports of all companies are made. Then the aggregated national report of the group is transformed according to IFRS and corrected for the consolidation. The choice of this or that option depends on personnel and technical capabilities of the companies of holding.

According to IFRS 22 purchase of the enterprise means a merger of companies at which one of the companies (buyer) receives control over net assets and operations of other company in exchange for transfer of assets, acceptance on itself obligations or issue of shares. It means that purchase is also forming of subsidiary. By drawing up the consolidated reporting by purchase method the following adjustments are made:

Exception of investments of the parent company. Investments of one companies of holding into other companies of holding shouldn't be reflected in the consolidated report. Along with intra group investments from the consolidated report the share of the parent company in the capital of all subsidiaries is also excluded. The remained share in the capital of the subsidiaries is reflected as a minority interest. Thus in the section “Equity” of the consolidated balance sheet the indicator of retained earnings of the group includes the general net profit of group 5, created in the consolidated profit and loss report[4].

As the parent company controls activity of subsidiaries, all assets and liabilities of such firms are reflected in the consolidated report by an overall cost (but not in the share belonging to the parent company). However if the parent company doesn't own 100 percent capital of subsidiary, it is also necessary to reflect in the consolidated report minority interest - part of the capital and net profit of the subsidiary belonging to minority shareholders. For example, if the company owns 60% of stocks of the subsidiary, 40% of net assets and net profit of this firm belong to the minority interest. In the consolidated balance in the section “Capital and Reserves” in the separate line the minority interest in net assets of subsidiary is shown. In the separate line it is necessary to reflect about profit and loss a minority interest in the net profit of the subsidiary in the consolidated report [2].

Definition and depreciation of business reputation (goodwill). The business reputation (goodwill) arises in the report in case if the sum of the actual expenses of the parent company of a share purchase in the subsidiary doesn't coincide with a fair value of the acquired share in net assets of this firm (the so - called acquired interest). The size of the goodwill is defined when control over the subsidiary is acquired[2].

For example, if the parent company for 100 million KZT acquired 80% of shares of subsidiary which fair value of net assets for the date of acquisition is 120 million KZT, the size of business reputation will be equal to 4 million KZT (100 million KZT - 80% x 120 million KZT).

The business reputation can be positive (if the sum of expenses more than a cost of the acquired interest) or negative. In first case, the non - material asset in the account is admitted, which needs to be amortized. Usually it is considered that the term of depreciation of the goodwill can't exceed 20 years. The negative goodwill reduces assets in the consolidated report, and its depreciation is included in the consolidated report in structure of the income (rules of recognition of this income are in detail described in IFRS 22).

Exception of the intra group operations. In the process of forming the consolidated report it is also necessary to exclude results of the intra group operations.

In particular, sales can be carried out between parent and affiliated structures. In that case receivables in group, account payable in group, realization in group and cost of sales in group must be excluded from the consolidated report [3].

Other examples of intra group operations are charge and payment of dividends and crediting between the companies of holding of each other.

The company “Alfa” acquired 60% of shares of “Beta” firm for 45 000 000 KZT. The balance cost of assets and liabilities of “Beta” firm corresponds to their fair value. Articles of separate (unconsolidated) balances of “Alfa” and “Beta” companies for the date of acquisition are presented in Table 1. The fair value of net assets (that is assets minus liabilities) of “Beta” firm for the date of its acquisition by the “Alfa” company is 50 000 000 KZT (85 000 000 KZT - 35000000 KZT) [3].

Therefore the acquired interest is equal to 30 000 000 KZT (50 000 000 KZT x 60%). The minority interest for the date of acquisition is equal to the difference between total amount of net assets of “Beta” (50000000 KZT) and a share in it, which belongs to “Alpha” (30000 000 KZT), also makes 20000000 KZT. As the fair value of the acquired interest (30 000000 KZT) is less than a sum of money that is paid for actions of “Beta” firm (45 000000 KZT), there is a positive business reputation (goodwill) of 15 000 000 KZT (45000000 KZT - 30000000 KZT).

Table 1 Balances of “Alfa” and “Beta” companies (in thousand KZT)

From the balances of both companies it is seen that assets of “Alfa” company contain receivables of “Beta” firm in the sum of 10000000 KZT (respectively, in the balance of “Beta” firm this debt is payable and it is reflected in liabilities). We will make the consolidated balance sheet of “Alfa” group for the date of acquisition. For this purpose it is necessary to prepare the working table in which adjustments are brought (see tab. 2).

Table 2 The working table for drawing up the consolidated balance (in thousand KZT)

Let's review adjustments in Table 2 more detailed. The first correcting record (1) excludes a share of the parent company in the capital of “Beta”: in the share capital of 18 000 000KZT (30 000 000 x 60%) and in retained earnings in the amount of 12 000 000 KZT (20 000 000 x 60%). At the same time for the amount of 30 000 000 KZT investments of “Alpha” in subsidiary are excluded. The difference between the sum of investments of the parent company and its shares in the capital of subsidiary firms forms goodwill (2) in the amount of 15 000 000 KZT. This amount is also excluded from investments of the parent company into the subsidiary then these investments are nullified. The third adjustment reflects the part of the capital of “Beta” firm which isn't belonging to the “Alfa” company in the amount of 20 000 000 KZT (30 000 000 KZT x 40% + 20 000 000 KZT x 40%) as minority interest (3). It should be noted that the minority interest will subsequently change on the corresponding share in net profit of the subsidiary earned after its acquisition. At last, the fourth adjusting journal entry excludes debts between the companies of group (4). The consolidated balance sheet of “Alfa” company is presented in Table 3.

Table 3 The consolidated balance sheet of “Alfa” company for the date of acquisition

The method of combination of interests (merge) is used by drawing up the consolidated report of group of companies, in which shareholders of the united companies perform general control over their uniform net assets and operations. The purpose of the combined control is continuous division of all risks and benefits between the companies. Any of the companies can't be defined as a buyer.

According to the method of combination of interests the summary reporting of the united companies is formed in such way that they were always integrated. In other words, it turns out by addition of all articles of assets, liabilities and the capital of the companies. Thus assets and liabilities aren't overestimated and no business reputation arises. Only adjustments are made that are connected with derogations of the separate companies from uniform accounting policies and with an exception of intra group operations [1].

By applying this method goodwill doesn't arise, and the difference between the cost of investments (the let - out share capital) and the sum of the acquired share capital will be included in the structure of retained earnings of the group. Determination of the fair value of assets and liabilities is also not necessary applying this method. The main stages of drawing up the consolidated reporting are:

1. Collecting and analysis of information from subsidiaries. Aggregation (addition) of the reporting of subsidiaries.

2. Exception of intra group turns and remains (investment of the parent company, intra group debit / accounts payable, revenue, etc.).

3. Calculation of the main amendments for the reporting by IFRS (on fixed assets, stocks, etc.).

4. Calculation of inflationary amendments.

5. Collecting and analysis of all amendments and preliminary version of the reporting by IFRS.

6. Preparation of information for disclosure according to requirements of IFRS.

7. Release of the reporting with explanations [2].

It was the most main aspects of drawing up the consolidated report. However, there are more other difficult questions connected with formation of the consolidated reporting. For example, how to choose currency for the consolidated report or how investments in dependent societies are reflected in the consolidated report [1].

References

1. Kazhmukhametova A. (2013). Opyt formirovanija konsolidirovannoj finansovoj otchetnosti v zarubezhnyh stranah. Retrieved from The Global website: //http://group - global. Org/kk/node/5070.

2. Nurseitov D.E. &Nurseitov E.O. (2007). Mezhdunarodnye standarty finansovoj otchetnosti: teorija I praktika, Almaty: Lem, p.235.

3. Nurseitov E.O.(2007). Buhgalterskij uchet v organizacijah. Almaty, Economics, p.476.

4. Nurseitov E.O. (2006). MSFO v Kazahstane: principy perehoda I primenenija. Almaty: Lem, p.240.

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