AC506 lecture 2

1. AC506 lecture 2 • Historical background to group accounts • When do we need to prepare group accounts?

2. Background to group accounts • What is a ‘group’? • A reporting entity which consists of a parent undertaking, its subsidiaries, associates, joint ventures and interests in joint arrangements • Where a parent undertaking exercises varying degrees of influence over other undertakings, it may be necessary to present the results and position of all undertakings as though they are the results and position of a single undertaking • Group versus consolidated accounts

3. Background to group accounts • Historical influences • Industrial revolution • US developments at the beginning of the 20th Century • Later development in UK and Ireland • Introduction of legislation in Ireland • Group accounts requirement based on legal control • No detailed definition of group accounts • CA 1963, sections 150 ff.

4. FRS 2 - Accounting for subsidiary undertakings • Parent/subsidiary relationship exists if any of the following apply (Para 14): • Parent holds a majority of the voting rights • Parent is a member of the undertaking and has the right to appoint or remove directors holding a majority of the voting rights at meetings of the Board on all, or substantially all, matters • Parent has the right to exercise dominant influence (influence to control operating and financial policies, notwithstanding rights or influences of other parties)

5. FRS 2 - Accounting for subsidiary undertakings • Examples of dominant influence • provisions contained in memorandum or articles of association • control contract authorised by memorandum or articles of association • Parent is a member of the undertaking and controls it alone pursuant to agreement with other shareholders • Parent has a participating influence and (i) actually exercises dominant influence or (ii) both are managed on a unified basis • Parent of a subsidiary is also the parent of any sub-subsidiaries • A participating influence is an interest held on a long term basis with a view to securing a contribution to its own activities. Twenty percent or more is presumed to be a participating influence.

6. Group accounts • Parent/subsidiary relationship is not only based on percentage ownership • Company A owns 20% of company B. Majority board representation and controls all decisions. Is company B a subsidiary of company A? • All parents must prepare group accounts, subject to exemptions and exclusions

7. Exemptions • Group is classified as ‘small’. Two of following criteria must be met for two successive years: • balance sheet total< IR£6 million • annual turnover<IR£12 million • average number of employees<250 • Parent undertaking is not a company limited by shares or by guarantee • Above exemption does not apply to banks, insurance companies or public limited companies • Intermediate parent undertaking • Irish parent it itself a 90% or greater subsidiary of an undertaking established under EU law and any minority have approved an exemption for Irish company from preparing group accounts

8. Excluding subsidiaries • FRS2 requires exclusion of subsidiaries in following circumstances: • severe long term restrictions substantially hinder the rights of the parent to the assets or management of the company • interest in the subsidiary is held exclusively for resale and has not previously been consolidated • activities of the subsidiary are so different from those of other undertakings to be included in the consolidation that to consolidate would be incompatible with the obligation to present a true and fair view • FRS2 does not allow exclusion on the basis of undue expense or delay required to acquire the information

9. Examples • T plc has two subsidiaries, one of which, R Limited has a 90% subsidiary. T plc is itself a subsidiary of D GmbH. Is T plc required to prepare consolidated accounts? • A plc has one 100% subsidiary, P Limited, for the last three years. In December 2001, A plc decides to sell P Limited. There are interested buyers but, by March 2002, the sale is still outstanding. The directors believe this is temporary and fully expect the sale to go through in April. Should P Limited be included in the 2001 year end consolidated accounts?

10. Example • Swift plc has investments in F Ltd (50%), M Ltd (65%) and Slow Ltd (90%). Swift plc holds a majority of the voting equity in F Ltd and M Ltd and has changed the composition of those Boards since they were acquired. It only has 40% of the voting equity in Slow Ltd and failed in any attempts to change the composition of the Board. How should Slow Ltd be treated for consolidation purposes?

11. Associate definition - FRS 9 • An associate is an undertaking in which another undertaking has a ‘participating interest’ and • over which that other undertaking has significant influence and • is not controlled by that other undertaking either solely or jointly • No minimum shareholding necessarily indicative of significant influence but 20% is the rebuttable presumption • Active involvement and influence in the strategic issues of an entity would indicate significant influence