Group Accounts & Long Term Investments

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Michael
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Group Accounts & Long Term Investments

Post by Michael »

At the acquisition date IFRS 3 and IAS 28 state that company interests should be recognised at cost, writing out the long term investment value on consolidation.

Where the single entity accounts measure company interests at fair value through other comprehensive income (FVOCI), the value of long term investments in company interests can increase in subsequent years. For example, based on an external valuer's assessment of future earning potential.

What is the correct treatment for differences between cost and fair value in the group accounts following acquisition?

Does the full value need to be offset or is it permissible to show the difference between cost at acquisition and FVOCI on the long term investments line on the group balance sheet?
JRSB
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Re: Group Accounts & Long Term Investments

Post by JRSB »

are you referring to minority equity holdings in companies, ie <20%, which are acquired as part of a business combination?
Michael
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Re: Group Accounts & Long Term Investments

Post by Michael »

This is for company interests that need to be consolidated into the group because the parent has control or significant influence.
JRSB
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Re: Group Accounts & Long Term Investments

Post by JRSB »

ok and I assume you're asking about the treatment in the standalone accounts of the parent (IAS 27 , rather than IFRS3).

policy choice is cost, fair value or equity accounted.

sounds like you use FVOCI having made the one-off OCI election?

but to answer your question, there is no impact in the group accounts of movements in FV because it's all removed on consolidation
Michael
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Re: Group Accounts & Long Term Investments

Post by Michael »

Thanks for your advice, it is helpful.

Yes, this is for the group accounts of the parent and FVOCI is used following the one-off election.

If possible, I am hoping to formalise an accounting policy on the removal of long term investment value on consolidation with reference to particular standards or areas of the conceptual framework. I am finding this difficult to locate at the moment and would be grateful for any suggestions.
Leo
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Re: Group Accounts & Long Term Investments

Post by Leo »

There have been many posts in this forum discussing this subject, and yes, totally agree with JRSB and every expert on the 3 choices.

But honestly, if you don't want to bother, write in your group accounting books that investments in sub are recognised at historical costs.
JRSB
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Re: Group Accounts & Long Term Investments

Post by JRSB »

Michael, you write "this is for the group accounts of the parent". to be clear, we are talking about standalone entity-only accounts here, not group accounts.

In group accounts you don't have investments in subsidiaries at all, because their results are consolidated.

so it's not really a policy you need here, as this is a basic requirement of consolidated financial statements. every set of group accounts you'll find will have that general principle in the accounting policies

the conceptual idea is the 'single entity concept'
Michael
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Re: Group Accounts & Long Term Investments

Post by Michael »

Thanks both.

Yes, to clarify, the question is focussed on the group accounts.

I still thought there would need to be an entry against 'Long Term Investments' to write out the consideration transferred at the acquisition date. To cancel the parent's investment in the company against the company’s pre-acquisition reserves and recognise any goodwill balance.

It would then seem that under the single entity concept any FVOCI movements related to long term investments in company interests following the acquisition date would need to be excluded from the parent's balance sheet for the purpose of consolidated statements.

I am happy to provide any further clarifications as needed, appreciate your assistance with this.
Leo
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Re: Group Accounts & Long Term Investments

Post by Leo »

Usually, groups do their consolidation using a software. Most software's have these basic rules in terms of elimination of investments :

Parent's balance sheet :
Investments : 100
Issued capital : 100

Sub's balance sheet :
Assets : 20 LC
Issued capital : 10 LC
Retained earnings : 10 LC

Parents bought Sub in the past, paid 100 LC to acquired a net assets of 20. Goodwill 80 LC.
Parent book for the Sub, in the consolidation software, the following accounting entry :
Goodwill : 80 LC
Retained : 80 LC

The consolidation software will run the following :
Step 1 : Conso rules running at entity's level (contributive)
For Parent :
Investments : 100 - 100 = 0 LC
Investments link account : 100 LC
Issued capital : 100 LC

Sub :
Assets : 20 LC
Investments link account : -100 LC
Issued capital : 10 - 10 = 0 LC
Retained earnings : 10 - 100 + 10 = -80 LC

Step 2 : compilation :
Parent + Sub = Group :
Assets 20

Issued capital 100
Retained earnings : -80

Step 3 : adding conso journal entries :
Assets : 20
Goodwill : 80

Issued Capital : 100
Retained earnings : 0
Leo
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Re: Group Accounts & Long Term Investments

Post by Leo »

I haven't seen, but maybe exist, how investments of sub at FVTPL or FVTOCI treated in a consolidation software.

Maybe it's useful to talk with accountants from the field ? sometimes policy makers omit how a policy can complicate the life of people who produce the numbers.
JRSB
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Re: Group Accounts & Long Term Investments

Post by JRSB »

Certainly the FV movements are eliminated. These things always make me wonder - why carry the investment in sub at FV! :shock:
Leo
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Re: Group Accounts & Long Term Investments

Post by Leo »

I think if you are an investment group, you apply the exemption in IFRS10 and then, it makes sense to carry it at fair value.
JRSB
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Re: Group Accounts & Long Term Investments

Post by JRSB »

for an investment group, ok.
Michael
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Re: Group Accounts & Long Term Investments

Post by Michael »

I have reached the following 'conceptual' reasons to substantiate the removal of FVOCI movements since acquisition. This is only my opinion, but hope it is useful.

1. Group accounts need to be prepared using the single economic entity concept.
2. Unearned revenue based on future performance expectations cannot be recognised as an asset.
3. Share capital is written out of the group accounts on consolidation, meaning that the parent's company interests cease to be categorised as financial instruments for the purposes of group reporting.
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Marek Muc
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Re: Group Accounts & Long Term Investments

Post by Marek Muc »

You're making this unnecessarily complicated. Consolidated financial statements simply cannot present a FV gain or loss arising on the parent’s investment in consolidated subsidiary. I don't think you need to look any further than IFRS 10.B86.
Michael
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Re: Group Accounts & Long Term Investments

Post by Michael »

Thanks Marek, yes that does seem a more straightforward basis to use.
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