Why Combined Financial Statements Are the Dating Apps of the Accounting World
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Accounting for SMEs can be a balancing act, and when it comes to group financial statements, the stakes get even higher. The concept of consolidated and separate financial statements can feel like a labyrinth. But within the maze of technical terms and procedural requirements lies a pathway to presenting financial information that is clear, compliant, and credible. Section 9 of the IFRS for SMEs is your guide to understanding when and how to present consolidated, separate, and even combined financial statements.
This article will not only walk you through the key principles of Section 9 but also translate them into practical insights you can apply in your practice. As a CIBA member, whether you are in public practice or commerce, mastering this section means you can confidently advise your clients, ensure compliance, and even position yourself as an expert in financial reporting.
What Section 9 Covers
Section 9 of IFRS for SMEs focuses on:
The scope and requirements for presenting consolidated financial statements.
The conditions under which a parent can avoid consolidation.
Detailed procedures for consolidation, including eliminating intercompany transactions.
How to account for non-controlling interests and disclosure requirements.
Guidance on preparing separate and combined financial statements.
Understanding Consolidated Financial Statements
Consolidated financial statements present the financial information of a parent company and its subsidiaries as a single economic entity. This means you are not just looking at the parent’s own financial results but also those of any subsidiaries it controls.
Who Must Present Consolidated Financial Statements?
A parent must present consolidated financial statements unless:
It is itself a subsidiary and its ultimate parent produces consolidated financial statements in full compliance with IFRS or IFRS for SMEs.
It has no subsidiaries other than those it does not need to consolidate under Section 9.3A (subsidiaries held for sale within a year).
Control is Key
To decide if consolidation is required, the parent must establish control over the subsidiary. Control exists if the parent has:
Power over the investee (the ability to direct relevant activities).
Exposure to variable returns from its involvement with the investee.
The ability to use its power to affect those returns.
For most SMEs, this is typically determined by ownership of a majority of voting rights. But it can also exist without a majority shareholding, through arrangements like:
Contractual rights.
Potential voting rights (e.g., options or convertible instruments).
Decision-making powers that impact the investee’s returns.
The Consolidation Process
If a parent is required to present consolidated financial statements, the process involves:
Combining Assets, Liabilities, Income, and Expenses: The parent’s and its subsidiaries’ financial statements are added line by line.
Eliminating Intercompany Transactions: Any transactions between the parent and subsidiaries (like sales or loans) are removed to avoid double counting.
Measuring Non-Controlling Interests (NCI): The portion of the subsidiary’s equity that is not owned by the parent is shown separately.
Uniform Reporting Dates and Policies: All group entities must follow the same accounting policies and report as of the same date unless impractical.
Exceptions: Subsidiaries Held for Sale
A parent may exclude a subsidiary from consolidation if it was acquired for the purpose of resale and is expected to be sold within one year. But if this does not happen within a year, the parent must consolidate it retrospectively from the acquisition date, unless the delay is beyond the parent’s control.
Separate Financial Statements: When and How
Separate financial statements are those where the parent reports its own assets, liabilities, and financial results without consolidating its subsidiaries. This can be useful for SMEs whose users (like lenders or tax authorities) are interested only in the parent’s performance.
In separate financial statements, a parent can account for its investments in subsidiaries using:
Cost less impairment.
Fair value through profit or loss.
The equity method (like in the main financial statements).
Combined Financial Statements: A Rare but Useful Option
Combined financial statements are not mandatory but can be prepared when two or more entities are under common control but are not in a parent-subsidiary relationship. For example, a group of businesses owned by the same family but operated separately.
Disclosure Requirements
The final step is getting disclosures right. Section 9 mandates that you provide clear information about:
The fact that the financial statements are consolidated, separate, or combined.
The accounting policies applied for investments.
The nature and extent of any significant restrictions (like foreign exchange controls) on transferring funds within the group.
Practical Tips for CIBA Members
Here’s how you can make this standard work for you:
For Accountants in Practice: Use your knowledge of consolidation to offer advisory services to clients with multiple businesses. This is a billable service that helps them maintain compliance.
For Accountants in Commerce: Understanding consolidation means you can confidently prepare or review group financial statements and advise your CFO or board.
For Both: Don’t just look at Section 9 as a compliance exercise—see it as an opportunity to showcase your expertise and make yourself indispensable.
Final Thoughts
Section 9 of IFRS for SMEs is more than just a technical requirement—it is a tool that allows you to present a clear and accurate picture of a group’s financial position. By mastering the principles of consolidation, separate, and combined financial statements, you enhance your value as a trusted advisor, whether to your clients or your company.
If you are not yet offering consolidation advisory as a service to your clients, you are leaving money on the table. Would you like to be the one they turn to for help? Now you have the knowledge—go and use it.
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