Consolidated Financial Statements

What is a group?

A group exists where one entity, the parent, has control over another entity, the subsidiary.

In accordance with IFRS 10 Consolidated Financial Statements control consists of three components:

• Power over the investee, which is normally exercised through the majority of voting rights (i.e. owning more than 50% of the equity shares).
• Exposure or rights to variable returns from involvement (e.g. a dividend).
• The ability to use power over the investee to affect the amount of investor returns. This is regarded as a crucial determinant in deciding whether or not control is exercised.

Requirement to prepare consolidated financial statements

If one company controls another then IFRS 10 requires that a single set of consolidated financial statements be prepared to reflect the financial performance and position of the group as one combined entity. This reflects the fact that the investment of the parents' shareholders is now tied up in more than one entity. Their returns and the stability of their investment now reflect the performance and position of both entities.

In order to make informed decisions about their investment, shareholders would need to read and interpret the financial statements of both companies. If there were more than one subsidiary company this could become quite complex for shareholders. To this end one set of financial statements is prepared where the revenues, expenses, assets and liabilities of the parent and subsidiary are combined for ease of understanding and analysis.

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