Scope of Consolidated Financial Statements

1. A parent which issues consolidated financial statements should consolidate all subsidiaries, foreign and domestic, regardless of the extent of ownership interests, other than those referred to in paragraph 15.

2. The consolidated financial statements include all enterprises that are controlled by the parent, other than those subsidiaries excluded for the reasons set out in paragraph 15. Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than one half of the voting power of an enterprise unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control. Control also exists even when the parent owns one half or less of the voting power of an enterprise when there is:

   1. power over more than one half of the voting rights by virtue of an agreement with other investors;

   2. power to govern the financial and operating policies of the enterprise under a statute or an agreement;

   3. power to appoint or remove the majority of the members of the board of directors or equivalent governing body; or

   4. power to cast the majority of votes at meetings of the board of directors or equivalent governing body.

1. In the case of companies incorporated under the Act, an investee-company shall be deemed a subsidiary if the investor company holds more than one half of the issued share capital of the investee-company (excluding any part thereof which consists of preference shares). In practice, however, where more than one company is thereby identified as a parent of one investee-company no more than one of those parents can have control as defined in paragraph 6.

2. Where the Act identifies more than one company as the parent of one investee-company, it is likely that they have shared control and therefore, their interests in the investee-company are in effect interests in a joint venture and should be treated in accordance with FRS 131₂₀₀₄, Financial Reporting of Interests in Joint Ventures. Alternatively, one or more of the companies identified under the Act as a parent may exercise a non-controlling but significant influence over the investee-company, in which case it would be more appropriate to treat the investee-company as an associate in accordance with FRS 128₂₀₀₄, Investments in Associates. In effect, in those rare circumstances where the definition of a deemed subsidiary under subsection 5(1)(a)(iii) of the Act is in conflict with the criterion of control for an enterprise to be regarded as a subsidiary following the definition in paragraph 6 of this Standard, the test of true and fair under subsection 169(14) of the Act should be applied in the preparation of the financial statements. This is consistent with the overall considerations for the presentation in FRS 101₂₀₀₄, Presentation of Financial Statements.

3. A subsidiary should be excluded from consolidation when:

   1. control is intended to be temporary because the subsidiary is acquired and held exclusively with a view to its subsequent disposal in the near future and the subsidiary has not previously been consolidated in the parent's consolidated financial statements; or

   2. it operates under severe long-term restrictions which significantly impair its ability to transfer funds to the parent. Subsidiaries excluded on the grounds of paragraphs 15(a) and 15(b) should be accounted for as if they are investments in accordance with FRS 125₂₀₀₄, Accounting for Investments.

1. When a subsidiary is acquired and held exclusively with a view to subsequent resale, it is evident that the parent intends to hold the interest only for the short-term, such as when the interest was acquired as a result of the enforcement of a security. An investment held exclusively with a view to its subsequent disposal in the near future for this purpose, implies an interest for which a purchaser has been identified or is being sought and is reasonably expected to be disposed of within approximately one year of its date of acquisition (or beyond that) if, at the date the financial statements are authorised, the terms of the sale have been agreed and the process of disposing that interest is substantially complete. Accordingly, in the period in which the acquisition occurs, it is inappropriate to include the subsidiary in the consolidated financial statements. The exclusion provided for in paragraph 15(a) applies only to subsidiaries that have never formed a continuing part of the group activities and have not previously been included in the consolidated financial statements of the group. A subsidiary acquired under such rare circumstance should normally be classified as a current investment and carried at the lower of cost and net realisable value.

2. Severe long-term restrictions justify exclusion of a subsidiary from consolidation only where the effects of those restrictions result in the parent having no effective control over the assets and management of the subsidiary. For example, when a subsidiary is subject to a compulsory liquidation proceeding, control over that subsidiary may have passed to a designated liquidator, with the effect that severe long-term restrictions are in force. Severe long-term restrictions should be identified by their effects in practice rather than by the way in which the restrictions are imposed. Thus, a subsidiary should not be excluded merely because restrictions are threatened or because another party has the power to impose them, unless such threats or the existence of such a power has a severe and restricting effect in practice in the long term on the rights of the parent. For example, exchange controls imposed on a foreign subsidiary would not normally justify exclusion of the subsidiary from consolidation. However, where the exchange controls imposed on the foreign subsidiary are so severe that they significantly impair the ability of the parent to control the transfer of funds, the subsidiary should be excluded from consolidation. A subsidiary excluded on the ground of severe long-term restrictions should be treated as an investment in accordance with FRS 125₂₀₀₄, Accounting for Investments. The initial carrying amount, calculated using the equity method, as at the date the restrictions came into effect should be regarded as cost thereafter. However, the carrying amount should be reviewed subsequently and adjusted for any impairment loss.

1. Sometimes it is argued that a subsidiary should be excluded from consolidation when its business activities are dissimilar from those of the other enterprises within the group. Exclusion on these grounds is not justified because better information is provided by consolidating such subsidiaries and disclosing additional information in the consolidated financial statements about the different business activities of subsidiaries. Accordingly, the usefulness of information provided by consolidating subsidiaries with dissimilar activities is enhanced if segmental information is provided to explain the different business activities of the group as per the requirements of FRS 114₂₀₀₄, Segment Reporting.

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