We prepare consolidated financial statements as if…
…a group of companies is one company. This implies that we eliminate all internal transactions, to show the performance of the group in relation to external parties. It is an adjusted summary of the financial statements of the group companies.
How to we handle holding shares in another company?
It represents a claim on equity, so we exchange the shares to the corresponding assets and liabilities of the other company
According to ÅRL, a legal entity is a parent company and another legal entity is a subsidiary, if the parent company:
- owns > 50 % of the votes (not shares)
- owns rights and due to agreements with other owners controls > 50% of the votes
- owns rights and has the right to appoint and remove > 50% of the board members or corresponding management bodies
- owns rights and has the sole right to exercise control
What is a parent company according to the IFRS?
An entity that has control over one or more other entities (subsidiaries)
What is control according to K3?
Control is a right to develop and decide an entity’s financial and operating strategies with the purpose of obtaining economic benefits
What is control according to IFRS?
An investor controls the investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.
What are the different degrees of control?
- Significant control (associated companies)
- Common control (joint ventures)
- Control (subsidiaries)
Which companies must prepare consolidated financial statements?
All parent companies, if not:
- The parent company also is a subsidiary
- the group is small (definition is ÅRL)
- all subsidiaries are insignificant
Which subsidiaries should be included in the consolidated financial statements?
All subsidiaries, unless:
- they are insignificant
- there are significant and sustainable obstacles
- there are considerable costs/unreasonable time
- it is a temporary control situation with the purpose of reselling the subsidiary
What are untaxed reserves?
Future profits that have not been taxed yet
Why do we need to “undo” untaxed reserves in consolidated financial statements?
Because groups are not tax subjects
What does the purchase/acquisition method imply?
As if the parent company acquires the subsidiary’s assets and liabilities.
The subsidiary’s assets and liabilities are valued at an estimated consolidated acquisition cost. Often estimated using the fair value (market value) at the acquisition date.
What are the stages of the Purchase Price Allocation?
- Consideration transferred (amount paid)
- What has been acquired (gained control over?)
+ Separately identifiable assets
- Separately identifiable liabilities
= Separately identifiable net assets
Consideration transferred - Separately identifiable net assets = Goodwill (residual)
What is goodwill?
The difference that emerges if the consideration transferred for the acquired entity is higher than the value of the acquired entity’s net assets
What adjustments do we make at the acquisition date?
- Split appropriations and untaxed reserves into net profit/equity and deferred taxes
- Adjustments for consolidated acquisition cost (fair value adjustments) including deferred tax effects
- Adjustments for goodwill
- Eliminate internal holdings by removing equity in subsidiary at the acquisition date
What adjustments do we make after the acquisition date?
- Depreciation/amortization of fair value adjustments
(a) Current depreciation/amortizations
(b) Accumulated past depreciations/amortizations - Impairments of fair value adjustments
(a) Current
(b) Accumulated past - Adjustments for internal transactions
How do we handle depreciation/amortization of fair value adjustments?
- Make depreciations/amortizations over the remaining useful life for the asset
- Perform impairment tests to determine if impairments beyond ordinary depreciation/amortizations are necessary
- For goodwill, amortizations are made under K3, but not according to IFRS.
What is particular goodwill amortizations/impairments?
- Since there is no deferred tax on goodwill, there is no tax effect on the income statement neither for goodwill amortizations or impairments?
What are examples of internal transactions?
- Sales of goods/services
- Sale of non-current assets
- Lending
- Dividends
- Group contributions
What is a small group according to ÅRL?
has a maximum of 50 employees, MSEK 40 in total assets, and MSEK 80 in revenues
