Rules consolidating subsidiaries
In the UK, the Companies Act 2006 (CA06) now requires medium-sized groups to prepare consolidated (group) accounts.
Under s399 of CA06, group accounts only have to be prepared where, at the end of a financial year, an undertaking is a parent company.
Thresholds CA06, which is effective for financial periods beginning on or after 6 April 2008, specifies benchmarks for groups to qualify as a ‘small’ group where 2 out of the following 3 conditions must be met: Exemptions CA06 at section 405 permits a subsidiary to be excluded from consolidation where its inclusion is not material for the purposes of giving a true and fair view. If you have 2 or more undertakings which, in isolation, are immaterial, but become material when taken together, they must be consolidated.
There are also further exemptions from consolidation where: Recap of the fundamentals It is important to remember that ‘control’ for the purposes of establishing whether (or not) there is a parent/subsidiary relationship is determined by either share of ownership (i.e.
where parent owns more than 50% of the shares in subsidiary) or the dominant influence approach (i.e.
where control is not obtained by share ownership, but by virtue of the fact that parent can influence the financial and operating policies of the investee).
Conclusion This article has looked at group accounting from a simple perspective.Figure 1 The Facts Parent company (P) has owned 80% of subsidiary (S) for a number of years.P’s year end is 31 December 2010 and it is preparing consolidated financial statements.Of course, there will be instances where consolidated financial statements are not as simple as this article has covered, however, this article has covered the “basic” approach to producing consolidated financial statements.Many accounts production software programmes do enable the production of consolidated accounts, but may require ‘tweaking’ which is where an understanding of the basic concepts of group accounts is needed.