Section 8: Consolidated and Separate Financial Statements (AASB1061_04-26)

This section sets out the accounting by an entity that is a parent or an investor in a notable relationship entity.

A parent is an entity (an investor) that controls another entity (an investee). An entity that is a parent shall present consolidated financial statements. An entity that is a parent may, in addition, present separate financial statements.

Notwithstanding paragraph 8.2, an entity, including a parent, may elect to collectively classify its investments in subsidiaries, investments in associates and interests in joint arrangements that involve a separate vehicle as investments in notable relationship entities. An investor that classifies these investments as investments in notable relationship entities does not present consolidated financial statements but prepares separate financial statements as its only financial statements in accordance with paragraphs 8.29–8.35.

A notable relationship between the entity and another entity (a ‘notable relationship entity’) exists when the investor has the power to, at a minimum, participate in the financial and operating policy decisions of that other entity. Paragraphs 13.5–13.7 provide guidance on when this might be evidenced. An entity that accounts for investments in notable relationship entities is not required to determine whether the nature of its relationship with the notable relationship entity is that of a parent, an investor in an associate, or a joint venturer or joint operator in a joint arrangement.

An entity does not need to hold an equity interest in another entity to be able to participate in the financial and operating policy decisions of that other entity. Similarly, an entity need not obtain a financial benefit from the other entity.

Consolidated financial statements are the financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity. A parent that presents consolidated financial statements in accordance with paragraph 8.2 shall present consolidated financial statements that include all subsidiaries of the parent. The consolidated financial statements shall not consolidate any entity that is not a subsidiary.

A subsidiary is an entity (an investee) controlled by another entity (an investor). An investor, regardless of the nature of its involvement with the investee, shall determine whether it is a parent by assessing whether it controls the investee.

An investor controls an investee when the investor has all the following: 

(a) power over the investee; 

(b) exposure, or rights, to variable returns from its involvement with the investee; and 

(c) the ability to use its power over the investee to affect the amount of the investor’s returns.

The investor shall reassess whether it controls an investee if circumstances indicate there are changes to one or more of the three elements of control listed in paragraph 8.8.

An investor has power over an investee when the investor has existing rights that give it the current ability to direct the relevant activities, which are the activities that significantly affect the investor’s returns. Relevant activities include, but are not limited to: 

(a) selling and purchasing goods or services; 

(b) selecting, acquiring or disposing of assets; 

(c) providing services in accordance with the investor’s objectives; 

(d) fundraising; 

(e) developing budgets in relation to the activities in (a)–(d); and 

(f) appointing and remunerating an investee’s key management personnel and terminating their employment.

An investor with the current ability to direct the relevant activities has power even if its rights to direct them have yet to be exercised. Evidence that the investor has been directing relevant activities can help determine whether the investor has power, but is not, in itself, conclusive in determining whether the investor has power over an investee.

An investor can have power even if it holds less than a majority of the voting rights of an investee, for example through: 

(a) a contractual arrangement between the investor and other vote holders; 

(b) rights arising from other contractual arrangements; 

(c) the investor’s voting rights; 

(d) potential voting rights; 

(e) rights to appoint, reassign or remove members of an investee’s key management personnel who have the ability to direct the relevant activities; or 

(f) a combination of (a)–(e).

When determining whether it has power, an investor considers its potential voting rights as well as potential voting rights held by other parties. Potential voting rights are rights to obtain voting rights of an investee, such as those arising from convertible instruments or options, including forward contracts. Those potential voting rights are considered only if the holder of the right has the practical ability to exercise that right. Usually, for the holder of the right to have the practical ability to exercise that right, the right needs to be currently exercisable.

If an investor also has voting or other decision-making rights relating to the investee’s relevant activities, the investor assesses whether those rights, in combination with potential voting rights, give the investor power.

An investor is exposed, or has rights, to variable returns from its involvement with the investee when the investor’s returns from its involvement have the potential to vary as a result of the investee’s performance. The investor’s returns can be only positive, only negative or both positive and negative.

An investor’s returns from its involvement with an investee are broad in nature, encompassing financial, non-financial, direct and indirect benefits, such as when the furtherance of the investee’s financial and non-financial objectives contributes to the furtherance of the investor’s financial and non-financial objectives. For example, the provision of goods or services by the investee to its beneficiaries might further the achievement of the investor’s social policy objectives. These returns to the investor would reflect factors such as the efficiency and effectiveness of delivery of the goods and services and changes in the outcomes for beneficiaries.

When an investor with decision-making rights (a decision-maker) assesses whether it controls an investee, it shall determine whether it is a principal or an agent. An investor shall also determine whether another entity with decision-making rights is acting as an agent for the investor. An agent is a party primarily engaged to act on behalf and for the benefit of another party or parties (the principal(s)) and therefore does not control the investee when it exercises its decision-making authority. Thus, sometimes a principal’s power may be held and exercisable by an agent, but on behalf of the principal. A decision-maker is not an agent solely because other parties can benefit from the decisions it makes.

In preparing consolidated financial statements, an entity shall: 

(a) combine the financial statements of the parent and its subsidiaries line by line, by adding together like items of assets, liabilities, equity, income, expenses and cash flows; 

(b) eliminate the carrying amount of the parent’s investment in each subsidiary and the parent’s portion of equity of each subsidiary; 

(c) eliminate in full intragroup assets, liabilities, equity, income, expenses and cash flows (including dividends). Profits and losses resulting from intragroup transactions that are recorded in assets, such as inventory and property, plant and equipment, are eliminated in full. Intragroup losses may indicate an impairment that requires recording in the consolidated financial statements (see Section 22); 

(d) measure and present non-controlling interests in the profit or loss of consolidated subsidiaries for the reporting period separately from the interests of the owners of the parent; and 

(e) measure and present non-controlling interests in the net assets of consolidated subsidiaries separately from the parent owners’ equity in them. Non-controlling interests in the net assets consist of: 

(i) the amount of the non-controlling interests at the date of the original combination calculated in accordance with Section 17; and 

(ii) the non-controlling interests’ share of changes in equity since the date of the combination.

The proportions of profit or loss and changes in equity allocated to the owners of the parent and to the non-controlling interests are determined on the basis of existing ownership interests and do not reflect the possible exercise or conversion of potential voting rights.

The financial statements of the parent and its subsidiaries used in the preparation of the consolidated financial statements shall be prepared as of the same reporting date unless doing so is impracticable. If it is impracticable to prepare the financial statements of a subsidiary as of the same reporting date as the parent, the parent shall consolidate the financial information of the subsidiary using the most recent financial statements of the subsidiary, adjusted for the effects of significant transactions or events that occur between the date of those financial statements and the date of the consolidated financial statements. In any case, the difference between the date of the subsidiary’s financial statements and that of the consolidated financial statements shall not exceed three months, and both the length of the reporting periods and any difference between the dates of the financial statements shall be the same from period to period.

Consolidated financial statements shall be prepared using uniform accounting policies for like transactions, other events and conditions in similar circumstances. If a subsidiary uses accounting policies other than those adopted in the consolidated financial statements for like transactions, other events and conditions in similar circumstances, appropriate adjustments shall be made to its financial statements in preparing the consolidated financial statements to ensure conformity with the group’s accounting policies.

The income and expenses of a subsidiary are included in the consolidated financial statements from the acquisition date until the date on which the parent loses control of the subsidiary.

If a parent loses control of a subsidiary, the parent: 

(a) ceases recording: 

(i) the assets and liabilities at their carrying amounts at the date control of the former subsidiary is lost; and 

(ii) the carrying amount of any non-controlling interests in the former subsidiary at the date control is lost (including any components of other comprehensive income attributable to them); 

(b) records: 

(i) the fair value of the consideration received, if any, from the transaction, other event or circumstances that resulted in the loss of control; and 

(ii) any investment retained in the former subsidiary at its fair value as at the date control is lost; and 

(c) records the gain or loss associated with the loss of control attributable to the former controlling interest.

If a parent loses control of a subsidiary but continues to hold an interest in the former subsidiary, that interest shall be accounted for in accordance with the appropriate section of this Standard. If the retained interest is a financial asset, Section 10 applies; and if it is an interest in an associate or a joint venture, Section 13 applies. The fair value of the retained interest at the date control is lost shall be regarded as the fair value on initial recording of a financial asset or the cost on initial recording of an investment in an associate or joint venture, if applicable.

An entity shall present non-controlling interests in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent, as required by paragraph 3.2(n).

An entity shall treat changes in a parent’s controlling interest in a subsidiary that do not result in a loss of control as transactions with owners acting in their capacity as owners. Accordingly, the carrying amount of the non-controlling interests shall be adjusted to reflect the change in the parent’s interest in the subsidiary’s net assets. Any difference between the amount by which the non-controlling interests are so adjusted and the fair value of the consideration paid or received, if any, shall be recorded directly in equity and attributed to owners of the parent. An entity shall not record any gain or loss on these changes. Also, an entity shall not record any change in the carrying amounts of assets or liabilities as a result of such transactions.

Profit or loss and each component of other comprehensive income shall be attributed to the owners of the parent and to the non-controlling interests. Total comprehensive income shall be attributed to the owners of the parent and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.

In addition to the disclosures specified by Section 27, an entity shall disclose in its consolidated financial statements: 

(a) that the financial statements are consolidated financial statements; 

(b) the basis for concluding that control exists if the parent does not own, directly or indirectly through subsidiaries, a majority of the voting rights of the other entity; 

(c) any difference between the reporting dates of the financial statements of the parent and its subsidiaries used in the preparation of the consolidated financial statements; and 

(d) the nature and extent of any significant restrictions (for example, resulting from borrowing arrangements or regulatory requirements) on the ability of subsidiaries to transfer funds to the parent in the form of cash dividends or to repay loans.

Separate financial statements are: 

(a) the financial statements presented by an investor that accounts for investments in notable relationship entities; 

(b) a second set of financial statements that a parent elects to present in addition to consolidated financial statements; or 

(c) a second set of financial statements that an investor that is not a parent but has one or more investments in associates or joint ventures elects to present.

An entity shall measure investments in notable relationship entities at: 

(a) cost, less any accumulated impairment losses determined consistently with the requirements in Section 10 for identifying and measuring impairment of financial assets measured at cost; 

(b) fair value; or 

(c) the equity method-based amount, determined by following the procedures in paragraph 13.22. 

The entity shall apply the same accounting policy to all investments in notable relationship entities.

Changes in the fair value of investments in notable relationship entities measured at fair value shall be presented in profit or loss unless the entity makes an irrevocable election, on the initial recording of the first asset in this class of assets, to present such changes in other comprehensive income. When an entity presents changes in the fair value of investments in notable relationship entities in other comprehensive income, those changes shall not subsequently be transferred to profit or loss.

Notwithstanding paragraph 8.30, an entity that elects to measure investments in notable relationship entities at fair value shall discontinue measuring an investment that is represented by unlisted equity instruments at fair value when the variability in the range of reasonable fair value measures is significant, and the probabilities of the various measures cannot be reasonably assessed. Such investments shall be measured at cost less any accumulated impairment losses. In these instances, the carrying amount of the investment on the date its fair value was last reliably determinable shall be regarded as its cost. An entity shall resume measuring the investment at fair value when these conditions are no longer relevant. A change in the measurement of an investment in the circumstances described in this paragraph is not a change in accounting policy.

When an entity that classifies its investments as subsidiaries, associates or joint ventures prepares separate financial statements, the entity shall apply one of the accounting policies specified in paragraph 8.30 to a class of investments. Under the fair value model, changes in fair value shall be recorded in profit or loss unless the entity makes an irrevocable election, on the initial recording of its first investment in each class of asset, to record those changes in other comprehensive income. Any such election applies to the entire class of investments. Those changes shall not subsequently be transferred to profit or loss.

When an entity prepares separate financial statements, those separate financial statements shall disclose: 

(a) that they are separate financial statements; and 

(b) a description of the method(s) used to account for its investments in notable relationship entities, or for its investments in subsidiaries, associates and joint ventures.

In addition to the disclosures specified by Section 27, in respect of each notable relationship entity, an entity shall disclose: 

(a) the name of the notable relationship entity; 

(b) a description of the notable relationship entity’s primary purpose and an indication of the nature of its operations; 

(c) a description of the notable relationship entity’s relationship with the reporting entity (eg that the entities operate a partnership, that the reporting entity is able to appoint the key management personnel of the notable relationship entity, or that the entity controls the notable relationship entity); and 

(d) whether the notable relationship entity prepares audited or reviewed financial statements.