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Establishes principles for the presentation and preparation of consolidated financial statements • when an entity controls one or more entities Establishes principles for financial reporting by entities that have an interest in arrangements that • are controlled jointly Requires that interests in such entities are accounted for using the equity method of accounting • Requires an entity to disclose information about: • a) the nature of, and risks associated with, its interests in other entities; and b) the effects of those interests on the financial position, financial performance and cash flows Applied in accounting for investments in subsidiaries, joint ventures and associates when an entity • elects, or is required by law, to present separate financial statements Slide 3
Unilateral Control? No Yes Consolidate using Joint Control? Ind AS 110 Yes No Joint Venture Yes No Joint Operations
Indian GAAP Ind AS ++++ Slide 5
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Intermediate holding company − Wholly owned or partly owned subsidiary − Debt or equity not listed − Not files or in the process of filing securities in public market − Its ultimate or immediate Parent produce Ind AS CFS available for public use Investment entity − measure all its subsidiaries at fair value through profit or loss Exempted by law − Wholly owned subsidiary (incorporated in India) − Entities who do not have subsidiaries but associate and JV Slide 7
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Exposure to Link between power Control Power variable return and return Rights that give Requires analysis of: investor current Returns vary • Investor as ability to direct with investee principal vs agent “Relevant performance • Delegated activities” authority Rights include: Returns Voting rights include Potential Dividends voting rights Changes in Contractual value of rights investment × Protective Synergistic rights benefits Slide 10
What are relevant How decisions activities Purpose and design regarding relevant of the investee activities are made Nature of Ability to direct relationship with relevant activities other parties Exposure to Ability to use the variable returns power Slide 11
Selling and purchasing Selecting/acquiring/ goods/services disposing assets Appointing key Obtaining management funding Managing financial Researching/developing assets new products/processes Establishing budgets The determination of relevant activities is driven by facts and circumstances, purpose and design of each entity. Slide 12
Manufacturing entity Investor B Investor A Selecting vendors for Payroll processing key input material Approving purchase Managing the of patent for accounting production process function Slide 13
Agreement with 20% other shareholders to Entity A vote in same way as Other shareholders Entity A Entity B Relevant activities are controlled through voting rights and majority vote is required on all decisions Slide 14
Widely dispersed shareholders Entity A Many shareholders, each with Nominates majority of <5% of votes. directors that are No arrangements to vote approved due to A’s collectively. presence at general General representation at meetings. general meetings <30% for many years. 48% 52% Entity B – Listed No history of shareholder activism in listing country. Hostile takeovers unusual. Does entity A control entity B? Slide 15
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Investor B Investor C Investor A 26% 26% 45% Investors D, E, F 1% each Entity S Controlled by voting rights Slide 17
Examples Purchased options to Warrants Convertible debts acquire voting interest Slide 18
• Entities A, B and C own 40%, 30% and 30% respectively of entity D. • Entity A also owns call options that are exercisable at any time and if exercised would give it an additional 20% voting rights in entity D & reduce entity B's and entity C's interests to 20% each. What happens • Call options were entered into a year earlier. in case of a • The exercise price is lower than the fair value. ROFR? Does entity A controls entity D? 10% Call 10% Call 40% 30% 30% Slide 19
Call option Entity Y Entity X 50% 50% & Holds Patent Manufacturing entity • Entity X has an out of the money call option over the shares held by entity Y. • The patent will revert to entity Y if the call option is exercised. The product cannot be manufactured without the patent. • Neither party expects the call option to be exercised. The purpose is to allow entity X to take control of the entity in exceptional situations. Who controls the manufacturing entity? Slide 20
Criteria Principal Agent Scope of the decision Significant - Limited powers making authority involvement & - Approvals required discretion from other parties. Rights held by other Many parties are Single party has the parties required to act ability to remove the together to remove decision maker Remuneration and Greater magnitude - Commensurate with exposure to variability and higher variability the services of returns - Customary arm’s length conditions - Lower variability Slide 21
Is the fund manager a principal or an agent? Slide 22
Restricted activities Thin capitalisation Financing Narrow & well Non profit making Professional directors, defined objectives motive trustees or partners Domiciled in offshore Specified life tax havens Specific financial objective Slide 23
Consolidation begins when Uniform accounting investor obtains control policies Combine like Same reporting items date Non Loss of controlling control interest Slide 24
• Consideration is given to existing percentage of control and Non Controlling Interest (‘NCI’); • Profit or loss and each component of other comprehensive income is attributed to NCI; • Changes in proportion held by NCI which does not result in loss of control should be treated as an equity transaction and should not be charged to comprehensive income; • In case of loss of control: - De-recognise all assets and liabilities of subsidiary and NCI at carrying amount - Recognise fair value of consideration received - Re-classify to profit or loss the amount recognised in other comprehensive income - Recognise any gain or loss in profit or loss attributable to the parent Slide 25
Group financial statements single economic entity. TRANSACTIONS WITH EQUITY Equity providers include parent HOLDERS company shareholders & NCI - no goodwill and no gain/loss in income statement. Losses can be allocated to NCI even if result in debit balance Slide 26
De-recognise assets (inc. goodwill) and liabilities De-recognise NCI Recognise consideration received Difference to income statement Recognise at FV any investment retained NEW!! Reclassify to income statement any gain or IMPORTANT loss previously recognised in other CLARIFICATION comprehensive income Slide 27
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Unilateral Control? No Yes Consolidate using Joint Control? Ind AS 110 Yes No Joint Venture Yes No Joint Operations
Joint arrangements Joint Joint operations venture Rights to assets and obligations for the Rights to the net assets of the liabilities of the arrangement arrangement Slide 30
No Is the arrangement structured through a separate vehicle? Yes Yes Does the legal form confer direct rights to assets and obligations for liabilities to parties of the arrangement? No Does the contractual arrangement between parties confer direct Yes rights to assets and obligations for liabilities to the parties of the arrangement? No Do other facts and circumstances lead to direct rights to assets Yes and obligations for liabilities being conferred to the parties of the arrangement? No Joint Venture Slide 31
Ind AS Equity method of accounting Indian Proportionate consolidation method of GAAP accounting Slide 32
Parties that Consolidated financial Separate financial share joint statements statements control Joint Operations Recognise interest in the direct rights & obligations, and share of those assets, liabilities and transactions incurred jointly Joint Ventures Equity method Investment measured at cost or in accordance with Ind AS 109 Slide 33
Equity accounted investment in joint venture = total of the carrying amounts of the assets and liabilities previously proportionately consolidated by the entity (includes goodwill arising from the acquisition) The opening balance of the investment is regarded as the deemed cost for the investment. The entity then considers impairment which will be an adjustment to retained earnings at the beginning of the earliest period presented. After initial recognition, the entity should account for its investment in the joint venture using the equity method in accordance with Ind AS 111. Slide 34
Investment in associates even when When there is no subsidiary Power to participate in the financial Who and operating policy decisions Equity method of accounting How including share in OCI Slide 35
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Significant judgements and assumptions Interest in subsidiaries Investment entity Joint arrangements and associates Slide 37
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