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%
Control under IAS 27 Consolidated and Separate Financial Statements
The major point of discussion is that the corporate possess controlling power through acquiring 50% or more than 50% of voting power. However, the IAS 27 considers that there are some condition wherein corporate entities can control over the business of other entity without having half of the voting power. At the time of measuring the controlling power, it was confirmed that an entity holding a minority interest can eligible for controlling another entity, however, in the absence of formal arrangements in regard with voting rights (IAS 27 — Separate Financial Statements, 2011). The situation is examined with the case in which the scale of holdings is distributed and the shareholders were not in the situation to organize their interests. In this situation, they cannot exercise more votes as compared to minority shareholder. Side by the side the situation can be called as ‘de facto control’. From this aspect, it can be said that IAS 27 also includes de facto control that may be arose in some cases. However, the control under IAS 27 acknowledges the professional skill and judgement to apply such control concept including de facto control. According to the recent study the circumstances allows entities to have legal control over a majority of the voting rights to control another entity. The guidelines of IAS 27 are helpful in assisting financial information for groups. Although the specifications provided by the IAS 27 are helpful in preparing financial accounts but it also implies greater risk in controlling mechanism (Teixeira, 2014). Further, the applications of IAS 27 are influenced by adoption of IFRS. The IASB has stated that an appropriate accounting approach is to be used in case of increased voting rights of another entities. Adding to that, IAS 27 do not include hierarchy of guidance that is required for specific accounting application and its monitoring (International Accounting Standard 27, 2015). IAS 27 describes the role of group statement for parent companies in order to assess the benefits from its subsidies. However, US auditing standards includes the hierarchy of five official levels that are mandate for accounting procedure. In lack of any specific guidance that covers IAS 27 negative consequences of financial information and its discloser can be identified. Further, in case of unwanted application of IAS 27, the parent companies seeks for applying new version for jurisdiction (IAS 27 — Separate Financial Statements, 2011).
Beside this, the inconsistency in approach might become an issue to the corporate entity in presenting financial information to the public. The corporate entities approached towards accounting policy that serves the guidelines of IAS 27 so that the consistently in relation to de -facto control can be disclosed through financial reports.
A new definition of control
The guidelines of IAS 27 have been revised that have promoted as consolidated or group financial statements. It is mandatory for parent company to disclose the information of parent company so that the financial information of subsidiaries can be disclosed. In case when the decision making is are controlled by voting rights the entity which holds a majority of rights is eligible to take decisions. The preparation of consolidated financial statements are applicable in case of parent company that shows the information of parent company along with its subsidiaries. However, the guidelines of IFRS 10 are contradicted to the IAS 27. The companies who obliged to disclose their finical information to public prepared consolidated statements. In this regard, the significance of IAS 27 is crucial for jointly controlled entities, associates, balance of ownership interest proportion of voting rights (International Accounting Standard 27, 2015). Further, it can be said that the guidelines are used to account for the foregoing investments. In is mandatory for the parent company to prepare the financial statements in accordance with IFRS10 or IAS 27 (as amended in 2011). However, they are committed to disclose the information in separate financial statements. In this regard they have to provide the clarification why the statements are prepared if not required by law. Further it is mandatory to include the Non-controlling interests at the time of presenting the consolidated statement of financial Position (Teixeira, 2014). Total three major consolidated statements are to be prepared such as income statement, balance sheet and cash flow statement for providing better understanding of financial information to key financial users.
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The reports above disclosed the role and importance of IAS 27 and guidelines included in it. The application of International Financial Reporting Standard is to be addressed at the time of preparing financial statements. The revision made in IAS 27 has enabled corporate entities to disclose their financial information including with the information of their subsidiaries. After the revision it is mandatory to prepare consolidated or group financial statements. The report concluded the control mechanism arises when the single entity owns more than50% voting power to another entity.
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