Introduction to Advanced Financial Accounting
Financial statements purpose at explaining the performance of company in terms of finance. The information included in financial reports helps stakeholders in identifying the financial position of company (Okamoto, 2011). In other words, it supports the decision making process of the company. In this regard, the organization registered under Companies Act are obliged to disclose their financial performance by the way of financial reports. The report herewith describes the role and importance of IAS 27 that comes under IFRS accounting standards. International Financial Reporting Standard addresses the scope of preparing financial statements and the discloser of information. IAS 27 was earlier aiming at disclosing the requirements on separate financial statements that have been revised as IAS 27 Consolidated and Separate Financial Statements. According to the new version of IAS 27, the corporate entities are required to assess control of their investees. The report also discloses the concept of control in determining whether group accounts have to be prepared or not. Lastly, the concept of control have been discussed.
Understanding to IAS 27
IAS 27 is the part of accounting standards that is designed to help-out the entities for disclosing financial information. The major aim of IAS 27 is to set standards that are to be applied in accounting for investments in subsidiaries, collectively ventures, individual and group financial statements (Teixeira, 2014). Further, an application of IAS is divided into two parts such as Consolidated financial statements and Separate financial statements. In regard to consolidated or group financial statements, the information of assets, liabilities, equity, income, expenses plus inflows and outflows of parent and its subsidiaries are presented in a single statement. On the other hand, in Separate financial statements the information related to a single parent company is to be provided (International Accounting Standard 27, 2015). To a further extent, IAS 27 -Consolidated and Separate financial statements include the road map for identifying the subsidiary undertakings that are to be presented in financial statements. Subsidiary entity is controlled by other entity which is known as the parent company (Okamoto, 2011) In respect to both entities, control is concerned to the power of governing the financial and operating policies in order to gain profits for entities. This power lies with the parent company. In case of this parent company, Group or consolidated financial statements are to be prepared The preparation of these financial statements is done under the guidelines of IAS 27 (Bamber and McMeeking, 2015)
Being a single entity, company has to prepare the separate financial statements that are disclosed under the guidelines of IFRS. On the other hand, when it has many subsidiaries, the financial statements get converted into group or consolidated financial statements for which the application of IAS 27 is mandatory. The treatment of financial information held with subsidiaries comes together with the financial accounting reports of the parent company (IAS 27 — Separate Financial Statements, 2011). At the time when the criteria of the parent company and its subsidiaries comes to a similar point, then the practices of IAS 27 are applicable. In this case, the consolidated financial statements are to be prepared in the place of separate financial statements. The controlling power presumed to exist in case if the parent company owns more than 50% of the voting power over its subsidiaries (Okamoto, 2011). The criteria are defined under the guidelines of IAS 27. The following points explain the further controlling power:
- In case if more than 50% of voting rights lies with the parent company and all the investors are agreed on the statement
- This power is governed in respect with the financial and operating policies of the entity
- The power of appointing or removing the members lies with the board of directors (International Accounting Standard 27, 2015.)
Adding to this, consideration is also needed for the potential voting rights that are effectual in two situations :
- In the situation where corporate entity owns 50% or less of the voting power to another entity instead of this it has ability to acquire additional voting rights.
- This is the situation in which entity capable of reducing the percentage of voting rights to less than 50%