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Hello Mumbai!

Hello Mumbai!. Certificate Course of WIRC - DAY- 2, 09/01/2011, Sunday. Enron Scandal made headlines…. Companies have used off-balance-sheet entities responsibly and irresponsibly for some time……..

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Hello Mumbai!

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  1. Hello Mumbai! Certificate Course of WIRC - DAY- 2, 09/01/2011, Sunday CA Sandesh Mundra, Chartered Accountants

  2. CA Sandesh Mundra, Chartered Accountants

  3. Enron Scandal made headlines….. Companies have used off-balance-sheet entities responsibly and irresponsibly for some time…….. Companies could finance business ventures by transferring the risk of these ventures from the parent to the off-balance-sheet entities which sometimes did not qualify for the definition of subsidiary. ……..

  4. Consolidation, Associates, Joint Ventures (IAS 27, 28, 31) Jan 9, 2011

  5. Bird’s eye view….. CA Sandesh Mundra, Chartered Accountants

  6. CA Sandesh Mundra, Chartered Accountants

  7. Poser 1 M/s Urea Corporation Ltd sold all its three subsidiaries at different dates during the year. Whether is it required to present CFS? CA Sandesh Mundra, Chartered Accountants

  8. Poser 2 M/s Bottles International Ltd has 100 subsidiaries. It is preparing CFS, would it be still required to attach all subsidiaries FS as per Section 212 of The Companies Act, 1956? CA Sandesh Mundra, Chartered Accountants

  9. Pursuant to Section 212 of the Companies Act, 1956 the Company made an application to the Ministry of Corporate Affairs, Government of India, New Delhi and sought an exemption from attaching with the Balance Sheet of the company, the Accounts and other documents of each of the Subsidiary Companies of the company. The Ministry of Corporate Affairs, Government of India vide its letter No. XXX dated YYY, has granted their approval under Section 212(8) of the Companies Act, 1956 for not attaching the Balance Sheet etc. of the aforesaid subsidiaries for the financial year ended 31st March, 20XX. Accordingly provisions of Section 212 (1) of the Companies Act, 1956 in respect of these subsidiaries are not applicable. In compliance with the said approval the company has disclosed the information in respect of these subsidiaries as advised. The Company undertakes that annual accounts of the subsidiary companies and the related detailed information will be made available to the holding and subsidiary companies investors seeking such information at any point of time CA Sandesh Mundra, Chartered Accountants

  10. Poser 3 M/s HL Ltd and M/s HS Ltd each hold 50% equity in M/s HLHS Ltd. Each company exercises control over the board every alternate year. CA Sandesh Mundra, Chartered Accountants

  11. Poser 4 M/s ICAI Ltd owns more than 50% voting power of M/s ICSI Ltd. However ICAI Ltd argues that though it owns more than 50% voting power, however it does not intend to control the enterprise and thus does not want to consolidated. Whether is it required to present CFS? CA Sandesh Mundra, Chartered Accountants

  12. Poser 5 M/s Gujarat Ltd owns 60% in M/s Ahmedabad Ltd. M/s Ahmedabad Ltd owns 60% in M/s AMC Ltd. Thus indirectly M/s Gujarat Ltd owns 36% shares in M/s AMC Ltd. Is M/s AMC Ltd subsidiary of M/s Gujarat Ltd as per AS-21? CA Sandesh Mundra, Chartered Accountants

  13. Poser 6 M/s Sonia Ltd has four wholly owned subsidiaries which own 25% each in M/s Manmohan Ltd. Whether equity accounting would be required for the intermediary subsidiaries? Can M/s Sonia directly consolidate the associates? CA Sandesh Mundra, Chartered Accountants

  14. Poser 7 M/s China Ltd acquired 60% equity in M/s Tibet Ltd on 31-03-2000. However due to control restrictions it could not consolidate the entity. But w.e.f1-4-2010 all restrictions have gone . With reference to which date the goodwill calculation should be done? CA Sandesh Mundra, Chartered Accountants

  15. Poser 8 M/s ISI Ltd is completely funded by M/s Pakistan Ltd, although it is not owning any equity/control whether directly or indirectly as per AS-21. Would it be required to consolidate the same? CA Sandesh Mundra, Chartered Accountants

  16. CA Sandesh Mundra, Chartered Accountants

  17. OBJECTIVE ‘is to enhance the relevance, reliability and comparability of the information that a parent entity provides in its separate FS and in its consolidated FS’ Specifically: • Preparation and presentation of consolidated FS for a group of entities under the control of a parent; and • Accounting for investments in subsidiaries, jointly controlled entities, and associates when an entity elects, or is required by local regulations, to present separate (non-consolidated) FS.

  18. Consolidation - Combination Merger Acquisition Hostile take-over Common Control Joint Venture De facto Control Need for consolidated information CA Sandesh Mundra, Chartered Accountants

  19. Indian Companies – Some stats Bosch – 2005 - Subs – 35 JV – 1 RIL – 2006-07 – Subs – 20 Associates – 5 TCS – FY 07-08 – Subs – 85, Associates – 3 L & T – Subs and Associates – 25 CA Sandesh Mundra, Chartered Accountants

  20. Important Definitions:- Consolidated financial statements are the financial statements of a group presented as those of a single economic entity. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Non-controlling interest is the equity in a subsidiary not attributable, directly or indirectly, to a parent. Separate financial statements are those presented by a parent, an investor in an associate or a venturer in a jointly controlled entity, in which the investments are accounted for on the basis of the direct equity interest rather than on the basis of the reported results and net assets of the investees. A subsidiary is an entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the parent). CA Sandesh Mundra, Chartered Accountants

  21. CA Sandesh Mundra, Chartered Accountants

  22. CA Sandesh Mundra, Chartered Accountants

  23. In practical scenario, its very difficult to judge the intentions of the management. If they wish to boost the top line, they would say that the entity is a subsidiary……..if you argue as auditors they might settle for JV. So there’s lot of juggling…. CA Sandesh Mundra, Chartered Accountants

  24. CA Sandesh Mundra, Chartered Accountants

  25. CA Sandesh Mundra, Chartered Accountants

  26. Scope Exclusions • Under IAS 27, Standard does not deal with business combinations and their effect on consolidation including goodwill arising on consolidation. • Under Indian GAAP, acquisition of controlling interest including Goodwill is specially dealt with AS 21 “Consolidated Financial Statements” and AS14 separately deals with amalgamations and merger.

  27. Goodwill • As per Indian GAAP, Accounting for goodwill or capital reserve on consolidation is prescribed under AS 21 - Consolidated Financial Statements • Requires amortization of Goodwill in case of amalgamation (AS-14) • Entities have possibilities of reversal of impairment losses on goodwill in subsequent periods • Under IFRS, Accounting for Goodwill or Negative goodwill whether on consolidation or business combination is prescribed under IFRS 3 – Business Combination • Prohibition of amortization of Goodwill; only tested for impairment • Prohibits reversal of impairment losses on goodwill in subsequent periods

  28. Goodwill vs Negative Goodwill Under Indian GAAP Negative Goodwill to be capital reserve Under IFRS Negative Goodwill to be credited to profit & loss account (Bargain Purchase) Under IND-AS ?? CA Sandesh Mundra, Chartered Accountants

  29. Mandatory Consolidation • Mandatory Consolidation - Exceptions subject to satisfying below conditions • the parent is itself a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners, do not object to the parent not presenting CFS; • debt/equity are not publicly traded of the parent • Parent is not planning a public issue of any of its securities and • the ultimate or immediate parent produces IFRS compliant CFS available for public • The application of equity method for associates/Joint ventures is mandatory even if an entity does not have subsidiary.

  30. Case Study Entity A Entity B Entity C Entity D Whether Entity B has to prepare consolidated financial statement ? Yes, if Entity B, if partially owned then, such owners object to, not presenting CFS Yes, if Entity B is listed or is in process of listing Yes, if Entity A, the ultimate parent company is not presenting CFS for public use that comply with IFRS

  31. Mandatory Consolidation Subsidiary operates under severe long term restrictions • Indian GAAP – Exemption from consolidation • IFRS – No exemption Investment in subsidiaries for temporary purpose or held for sale • Indian GAAP – Exemption from consolidation • IFRS – Does not give exemption from consolidation except investment in subsidiary meets the criteria to be classified as held for sale, in that case it shall be accounted for as per IFRS 5, Non-current Assets held for Sale and Discontinued Operations.

  32. CA Sandesh Mundra, Chartered Accountants

  33. Definition of Control • Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. • Specific guidance on the following from control perspective; • Potential voting Rights (PvRs) & Special purpose Vehicle (SPEs) • As per Indian GAAP — Accounting Standard (AS) 21 Consolidated Financial Statements, Control means • (i) the ownership, directly or indirectly through subsidiary(ies), of more than one-half of the voting power of an enterprise; or • (ii) control of the composition of the BOD in the case of a company or of the composition of the corresponding governing body in case of any other enterprise so as to obtain economic benefits from its activities

  34. Case Study Entity A Entity B Investment of more than half the total no. of shares Governs Financial & Operating Policies Entity X • Which Entity will apply Standard on consolidation as per ? • Indian GAAP • - IFRS

  35. Case Study Entity A Investment less than 50% Entity B • Entity A has no control over the board of director, however it governs financial and operating policies • Whether Entity B needs to be consolidated in Entity A ? • IFRS • Indian GAAP

  36. Potential voting Rights • Definition of PvRs: An entity may own securities that are convertible into ordinary shares or other similar instruments that have the potential, if exercised or converted, to give the entity voting power or reduce another party’s voting power over the financial and operating policies of another entity. • Examples of PvR: Some of the key instruments that are considered to have potential voting rights are as under: • Equity Share Warrants • Share Call Options • Convertible Preference Shares • Convertible Debts

  37. Potential voting Rights Salient Features of PvR • Convertible instruments • Currently exercisable/convertible • Intention of management should not be considered • the proportion allocated to parent/non-controlling interests (or equity %) should be based only on present ownership interests. Indian GAAP • AS 21 does not specifically exclude potential voting rights, Accounting Standards Interpretation (ASI) 18 states that the effects of potential voting rights are not to be considered for the purpose of determining control with respect to Investments in Associates (AS 23)

  38. Entity A 35% Equity Stake in Entity B 20% Call Option in Entity B – Currently exercisable Entity B Case Study Will this lead to consolidation as per IAS 27?

  39. Case Study Entity A 20% FCCB in Entity B, convertible after 2 years & redeemable after 5 year 35% Equity Stake in Entity B Will this lead to consolidation as per IAS 27? Entity B The existence and effect of only those potential voting rights that are currently exercisable or convertible are considered when assessing whether an entity has the power to govern the financial and operating policies of another entity. Potential voting rights are not currently exercisable or convertible when they cannot be exercised or converted until a future date or until the occurrence of a future event.

  40. Deferred tax on consolidation • As per IAS 27, Company need to calculate deferred tax assets or liability on consolidation of the group under • Foreign Currency Translation Reserves (FCTR) • Inter company Transactions • Under Indian GAAP • Aggregation of the deferred taxes of all the subsidiaries for preparation of CFS (As per ASI 26 “Accounting for Taxes on Income in Consolidated Financial Statements”)

  41. Case Study – Foreign Currency Translation Reserve DTL on 300 @ 30% = 90

  42. Deferred tax on elimination of unrealised profit Company X (Holding) Cost to X = $ 120,000 Sold to Y = $ 140,000 Consolidated Accounts Stock = $ 140,000 Unrealised Gain = ($ 20,000) Net Stock = $ 120,000 Company Y (Subsidiary) Tax Rate for X = 34% Tax Rate for Y = 30% What would be the treatment in the consolidated financial statement of X?

  43. Solution The profit made by X on sale to Y would be eliminated Under IAS 12, a deferred tax asset would be recognised on the unrealized profit of $ 20,000 based on Y’s 30% tax rate i.e. $ 6,000 The accounting entry being Dr Current Tax (income statement) $ 6,800 Cr Current Tax (balance sheet) $ 6,800 Dr Deferred Tax (balance sheet) $ 6,000 Cr Deferred Tax (income statement) $ 6,000

  44. Maximum Reporting Gap Under IFRS The difference between reporting date of the subsidiary and that of the parent should not be more than 3 months Indian GAAP The difference between reporting date of the subsidiary and that of the parent should not be more than 6 months

  45. Other Concepts • Uniform accounting policy mandatorily required as per IFRS, unlike under Indian GAAP; if impracticable, disclosure of items where different policies followed • Non controlling interest disclosed within equity, separately from the owners of the parent, unlike under Indian GAAP; Disclosed separately from liability and equity of parent shareholder • Under IFRS, 1 subsidiary have 1 parent reporting entity only, unlike under Indian GAAP as per Under ASI 24 (Definition of Control), an entity can be subsidiary of two entities

  46. Other Concepts • Accounting of Investments in subsidiary, associate and jointly controlled entity in parents separate financial statement shall be • At Cost or • As Available for sale financial assets as described in IAS 39 • Under Indian GAAP, Should be accounted for in accordance with AS 13 (at cost as adjusted for diminution other than temporary in value of those investments)

  47. Other GAAP Differences….. CA Sandesh Mundra, Chartered Accountants

  48. Hope you are Ok!!! CA Sandesh Mundra, Chartered Accountants

  49. First time Adoption On the date of transition Identify all the entities which may be required to be consolidated Restate the opening balance sheet for all the entities as per IFRS 1 Then proceed for consolidation

  50. CA Sandesh Mundra, Chartered Accountants

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