Combined financial statements - New entity added to the group

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hishamshams
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Combined financial statements - New entity added to the group

Post by hishamshams »

Hi guys,

This query/thread is in relation to combined financial statements. As per IFRS conceptual framework’s Chapter 3 (under “the reporting entity” section), if a reporting entity comprises two or more entities that are not all linked by a parent-subsidiary relationship, the reporting entity’s financial statements are referred to as ‘combined financial statements’.

Let’s say during the year ended December 31, 2019, management prepared combined financial statements encapsulating the results of 4 companies (all 4 companies are owned by the same shareholder who is an individual – not a company). For the year ended December 31, 2020, management intends to add a 5th company to the combined FS, for avoidance of any complexities, management intends to add this entity effective January 1, 2020. The 5th entity is an operational entity with retained earnings and operating results previously (however is not significant/material when compared to other 4 entities’ results and position).

How will the results of the 5th entity be added to the combined FS for the year ended December 31, 2020? Do we have to restate the comparative period (to factor in the comparative results of the 5th entity) or can we in fact add the opening equity position in the current year’s column (similar to an approach followed for business combination under common control)? Unfortunately, I couldn’t find any guidance online or any concrete lead in the standards with regards to this.
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Marek Muc
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Re: Combined financial statements - New entity added to the group

Post by Marek Muc »

what is the reason that the reporting entity comprises 5 entities effective 1 Jan 2020? Are there any objective triggers?
hishamshams
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Re: Combined financial statements - New entity added to the group

Post by hishamshams »

Hi Marek, there's no apparent reason for adding the 5th entity. Since owned by the same shareholder, he would like to include the 5th entity to the combined FS. Further, management expects the results of the 5th entity to improve over the next couple of years, so as an add-on, they would like to see the 5th entity forming part of the combined FS.
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Marek Muc
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Re: Combined financial statements - New entity added to the group

Post by Marek Muc »

Ok, so what is the purpose of these combined financial statements? It's crucial to have a clear basis for choosing the entities included there, if those financial statements are to be relied on.

In your case, I would restate comparatives and include the 5th entity in opening balances, as there isn't any event that warrants including the 5th entity from a certain date (unlike BCUCC)
JRSB
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Re: Combined financial statements - New entity added to the group

Post by JRSB »

I've seen some unusual arrangements like this and just requires a potentially quite extensive explanation of what is and isnt included and on what basis. Is it audited?
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