Chapter

1
Chapter 4Holding Company Accounting

• Chapter outcomes
• Introduction Company Groups
• Rationale for group financial statement
• Current practices
• Acquisition Accounting
• Associated Companies
• Joint venture
• Practical exercises

Dr. BALAMURUGAN MUTHURAMAN
2
Group Financial Statements

• Group Financial Statements are the financial
  statements of a set of two or more enterprises
  organised as an economic entity
• Group is defined according to concept of
  control
• Control is the power to govern the financial and
  operating policies of an entity so as to obtain
  benefits from its activities.

3
Group Companies

• Company group characteristics
• Vertical group
• Horizontal group
• Conglomerate
• Group expansion
• Development of new subsidiaries
• Acquisition by takeover of other companies
• Meger between companies

4

• Membership rights
• Influence on management, voting power
• Equity rights
• Right to participate in distribution of profits
  equivalent part of liquidation balance
• In principle rights are proportional to capital
  share
• Exceptions preference shares, limitations to
  voting power, multiple votes per share,...
• .

5
Rational for group financial statements

• Interdependent relationships within a group
  (patrimonial, contractual, personal ties)
• Loss of part of their independence of individual
  entities
• Common or unified management
• Economic interest of the group gt individual
  interests of legal entities involved
• It is economically more relevant to present the
  financial statement of the economic whole as an
  aggregate of all assets and liabilities under
  unified control

6
Current Practices

• IAS 27 Consolidated and Separate Financial
  Statements
• IFRS 3 Business Combinations
• IAS 28 Investments in Associates
• IAS 31 Investments in Joint Ventures
• Seventh EC Company law Directive

7

• Purchase Accounting
• Purchase method of accounting
• Fair value adjustments of acquired assets and
  liabilities
• Subsequent measurement of goodwill
• Minority interests
• Merger accounting
• Group income statement

8
Acquisition Accounting

• Purchase method of accounting
• Fair Value Adjustments of acquired assets and
  liabilities
• Subsequent measurement of goodwill
• Minority interests
• Merger accounting
• Group income statement

9

• Purchase method of accounting
• Purchse method Accounting
• Fair value ajustements of acquired assets and
  liabilities
• Subsequent measurement of goodwill
• Minority interests
• Merger accounting
• Group income statement

10
Minority Interests

• Minority Interests (or non-controlling interests)
  appear if the group does not own 100 of the
  shares in a subsidiary
• They represent the part of the net assets and
  profit or loss of the subsidiary attributable to
  the equity interest that are not owned.

11
Merger Accounting

• Two companies can combine by merging their
  activities and managements without one of them
  acquiring the other
• Two types of mers Fusion and Pooling of
  interests
• IFRS 3 business combinations banned merger
  accounting methods.

12
Group income statement

• In the group income statement, the effect of
  intra-group transactions has to be eliminated
• Only income and expenses recognized with regard
  to parties outside the group will be retained
• Follow-up effects of fair value adjustments over
  time have to be integrated
• Amortization of goodwill or impairment losses on
  goodwill may also significantly impact the group
  income statement.

13
Associated Companies

• Associated Companies are companies in which the
  investor company has significant influence
• Different types of relationships between investor
  company and investee company mainly according to
  voting rights under control
• Accounting rules differ according to the type of
  relationship

14
Joint Ventures

• A joint venture is a contractual arrangement
  whereby two or more parties undertake an economic
  activity that is subject to joint control
• IFRS recognises three kinds of arrangement
• Jointly controlled operations
• Jointly controlled assets
• Jointly controlled entities
• IFRS recommends use of proportionate considation
  for jointly controlled entities.