preparing consolidated accounts, but chooses or is required to prepare its annual
accounts in accordance with IFRS as adopted by the EU, those provisions...(now in
IFRS 10) setting out the requirement to prepare consolidated financial statements do
not apply. Such annual accounts (i.e. the separate financial statements) are described as
having been prepared in accordance with IFRS as adopted by the EU’2 (the 4th and 7th
Directives have now been replaced by a single EU Accounting Directive).
2.2.6
Combined and carve-out financial statements
Combined or carve-out financial statements are sometimes prepared under IFRS for a
‘reporting entity’ that does not comprise a group under IFRS 10. Although some GAAPs
draw a distinction between combined and carve-out financial statements, in our view,
the determination of whether these financial statements are permitted to be prepared
in accordance with IFRS is the same. Accordingly, where the term ‘combined’ financial
statements is used below, the views apply equally to carve-out financial statements.
Examples of when combined or carve-out financial statements might be requested
include the following:
• two or more legal entities under common control of the same individual or group
of individuals (e.g. ‘horizontal’ groups); or
• a group of business units that are intended to become a group in the future (e.g.
following an initial public offering or demerger), which may or may not be separate
legal entities.
In 2009, the Interpretations Committee received a request for guidance on whether a
reporting entity may, in accordance with IFRS, present financial statements that include
a selection of entities that are under common control, rather than being restricted to a
Consolidated financial statements 373
parent/subsidiary relationship as defined by IFRS. The Interpretations Committee
noted that the ability to include entities within a set of IFRS financial statements
depends on the interpretation of ‘reporting entity’ in the context of common control.
The Interpretations Committee decided not to add these issues on to its agenda.3
In our view, there are limited circumstances in which such combined financial statements
can give a true and fair view in accordance with IFRS and be presented as ‘general-
purpose’ financial statements. As a minimum, there must be both of the following:
• common control for the full or a portion of the reporting period (see 2.2.6.A below); and
• a clear purpose for which the combined financial statements will be used by clearly
identified intended users (see 2.2.6.B below).
In addition, the preparer must be able to coherently describe the various legal entities,
segments, reportable segments, branches, divisions, geographical jurisdictions, or other
‘units’ that will be included in the combined financial statements. Careful consideration
is required when concluding that it is appropriate to exclude any ‘units’ from the
combined financial statements (such as unprofitable operations) that are similar to the
‘units’ that are being included in the combined financial statements. Such exclusion must
be appropriate when considered in the context of the purpose of the financial
statements, the intended users, and the terms and conditions of any relevant agreements
(e.g. acquisitions, spin-offs). Other practical considerations related to the preparation of
combined financial statements are noted in 2.2.6.C below.
Although IFRS is unclear on this issue, we believe that the fact that IFRS for Small and
Medium-sized Entities specifically permits the preparation of combined financial statements,
and the fact that the revised Conceptual Framework for Financial Reporting (‘revised
Conceptual Framework’) refers to combined financial statements (see 11.1 below), together
provide a basis for preparing combined financial statements in appropriate circumstances.
2.2.6.A Common
control
Determining whether common control exists can be difficult, and requires judgement
based on the facts and circumstances (see Chapter 10 at 2.1.1). In our view, general-
purpose combined financial statements can only be prepared if the entities are under
common control for the full or a portion of the reporting period. Furthermore, the
financial results of each combined entity can only be included in the general-purpose
combined financial statements for the period in which that entity was under common
control. Events that occur after the end of a reporting period that result in common
control are non-adjusting events (see Chapter 34 at 2.1.3).
2.2.6.B
Purpose and users of combined financial statements
A reporting entity is an entity for which there are users who rely on the financial
statements as their major source of financial information about the entity. Therefore, it is
a matter of judgement of whether it is appropriate to prepare general-purpose combined
financial statements, depending upon the facts and circumstances related to both the
purpose and the users of the financial statements, considerations that are interrelated.
For example, the facts and circumstances usually indicate that it is appropriate to
prepare general-purpose combined financial statements when required by regulators
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on behalf of investors. This is because the regulators purport to represent the needs of
a wide range of users (investors) for a general purpose, for which the investors cannot
otherwise command the financial information. Situations where regulators typically
require combined financial statements include:
• carve-out transactions;
• spin-off transactions;
• financing transactions that require approval by a broad group of investors;
• transactions in which the combined entity will become the predecessor financial
statements of a new entity; or
• transactions in which the combined entity will be a material acquisition (for
the acquirer).
In addition, there may be circumstances when several third parties (banks, acquirers in
a private bidding process) all request financial statements that combine the same entities
– that is, the same combined financial statements. In such cases, the combined financial
statements might be ‘general-purpose’, because they are used by a wide range of users.
2.2.6.C
Preparation of combined financial statements
Combined financial statements must include all normal consolidation entries (such as
elimination of group transactions, unrealised profit elimination, etc.). In our view, the
combined financial statements should disclose:
• the fact that the financial statements are combined financial statements;
• the reason why combined financial statements are prepared;
• the basis for determining which ‘units’ are included in the combined financial
statements;
• the basis of preparation of the combined financial statements; and
• the related party disclosures required by IAS 24 – Related Party Disclosures.
In addition, management should consider who has the appropriate knowledge and
authority to authorise the general-purpose combined financial statements for issue
(see
Chapter 34 at 2.4).
While regulators may require combined or carve-out financial statements, IFRS does
not describe how to prepare such information. Accordingly, practical issues frequently
arise when preparing financial statements on a combined or carve-out basis, including
the items below:
• Management judgement and hindsight: Absent clear legal boundaries, determining
whether certain items are part of a combined reporting entity often requires
significant management judgement and possibly the use of hindsight;
• Comparative periods: There is a risk that comparative information is prepared on
a basis that reflects the impact of events before they actually occur (e.g. disposals
of assets). Once it is determined what ‘units’ are being included in the combined
financial statements, the comparative information presented is the comparative
information for such units;
Consolidated financial statements 375
• Allocation of overhead costs: Combined reporting entities that are part of a larger
group often benefit from certain overheads (e.g. legal or administrative);
• Transfers of assets: The group that owns the combined reporting entity may have
been reorganised, resulting in the transfer of assets between ‘units’. This raises
questions about recognising gains or losses on disposals and the appropriate cost
basis of assets acquired;
• Financing costs: It is often not clear how to allocate a group’s liabilities and equity
to the individual ‘units’ that it owns. The individual ‘units’ may differ considerably
in nature, e.g. a group may own both low-risk established ‘units’ and a high-risk
new venture. Therefore, it is not clear how to allocate interest expenses and other
aspects of an entity’s funding structure (e.g. embedded derivatives and compound
financial instruments);
• Taxation and employee benefits: Legal and other requirements often create
practical issues when determining the amount of the tax or employee benefit
liabilities that are recognised in combined or carve-out financial statements; and
• Designation: Accounting under IFRS sometimes relies on management’s stated
intent and other designations (e.g. financial instrument and hedge designations,
intent regarding assets held for sale and designation of groups of cash-generating
units). It is often not clear how to reflect management’s intent and designations in
combined or carve-out financial statements.
There is a risk that an inappropriate allocation could result in a set of financial
statements that does not offer a ‘true and fair view’ of the reporting entity. Preparation
of financial information on a combined or carve-out basis generally requires a
substantial number of adjustments and allocations to be made, and draws heavily on
pronouncements of other standard-setting bodies that are referred to by the hierarchy
of authoritative guidance in IAS 8 – Accounting Policies, Changes in Accounting
Estimates and Errors.
Absent clarification by the IASB or the Interpretations Committee, diversity in practice
will continue to exist. Therefore, the basis of preparation should disclose:
• which accounting standards have been applied; and
• the significant accounting judgements that were made, including the adjustments
and allocations.
2.2.6.D
When combined financial statements are not general-purpose
In our view, it is generally not appropriate to present ‘general-purpose’ combined
financial statements when requested by parties that can obtain the desired combined
financial information through other means. In such cases, the combined financial
statements are often deemed ‘special-purpose’. Examples of such parties include:
• lenders (banks) for the purpose of approving a loan or ensuring covenant compliance;
• governments and their agencies other than investor regulators (e.g. tax authorities);
• a single potential acquirer; or
• a board of directors or management.
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6
When a group of family members prepares combined financial statements, judgement
is required to assess the facts and circumstances, as to whether such combined financial
statements are ‘general-purpose’ or ‘special-purpose,’ depending on the purpose for
which the family intends to use the combined financial statements.
Where it is not appropriate to present combined financial statements as ‘general-
purpose,’ either because they are requested by a party that has the ability to otherwise
command the information, or because there are deviations from IFRS as issued by the
IASB due to the specific nature and purpose of the combined or carved-out financial
statements, alternative options might include preparing:
• financial statements of each of the entities that would have been included in the
combined financial information; or
• special-purpose financial statements.
2.2.6.E
The reporting entity in combined financial statements and in
consolidated financial statements
In certain circumstances, entities prepare general purpose combined financial
statements in compliance with IFRS followed by consolidated financial statements
in accordance with IFRS. Sometimes, group entities may be excluded from a
parent’s combined financial statements despite the fact that they are controlled by
the parent, and would otherwise be consolidated by the parent under IFRS 10. For
example, a subsidiary that will not form part of a sub-group to be listed may be
excluded from the combined financial statements. In our view, the subsequent
consolidated financial statements must be prepared according to IFRS 10 and
therefore must include all subsidiaries controlled by a parent. This is because
IFRS 10 defines consolidated financial statements as those including assets,
liabilities, equity, income, expenses and cash flows of the parent and its
subsidiaries. [IFRS 10 Appendix A]. A subsidiary is derecognised at the date that control
is lost. [IFRS 10.20, 25]. IFRS 10 does not provide any exceptions to these
requirements. Example 6.3 below illustrates the differences in the scope of
consolidation that can arise where an entity prepares both combined and
consolidated financial statements.
Example 6.3:
Preparation of consolidated financial statements after combined
financial statements
In 2019, intermediate parent (P), which has three subsidiaries (S1, S2 and S3), is preparing for an IPO.
P has historically not prepared consolidated financial statements as it has applied the exemption in
IFRS 10.4(a). One of the subsidiaries, S3, is to be transferred to the ultimate parent prior to the listing,
and will not form part of the sub-group to be listed. In the prospectus, combined financial statements
are presented including P, S1 and S2 for the annual periods ending 31 December 2017 and 2018. The
combined financial statements are deemed to be general purpose financial statements in compliance
with IFRS, as the combined entities have been under common control for the entire reporting period,
and the combined financial statements are required by the regulator on behalf of investors, representin
g
a wide range of users. The transfer of S3 to the ultimate parent occurred in August 2019 and P group
was listed in October 2019.
Consolidated financial statements 377
When preparing the 2019 consolidated financial statements, should (now listed) P:
(a) present consolidated financial statements for 2019 (P+S1+S2+S3), showing comparatives for 2018 and
consolidating S3 until August 2019; or
(b) present consolidated financial statements for 2019 excluding S3 (P1+S1+S2), showing comparative
information for 2018 for only P1+S1+S2, as per the combined financial statements?
The consolidated financial statements must be prepared according to IFRS 10 and therefore the 2019
consolidated financial statements of P must include S3 in the 2018 comparatives and until control ceased in
August 2019 (option (a) above).
3 CONTROL
An investor, regardless of the nature of its involvement with an entity (the investee),
determines whether it is a parent by assessing whether it controls the investee. [IFRS 10.5].
An investor controls an investee when it is exposed, or has rights, to variable returns
from its involvement with the investee and has the ability to affect those returns through
its power over the investee. [IFRS 10.6].
Thus, an investor controls an investee if and only if the investor has all of the following:
(a) power over the investee;
(b) exposure, or rights, to variable returns from its involvement with the investee; and
(c) the ability to use its power over the investee to affect the amount of the investor’s
returns. [IFRS 10.7].
Although not a defined term, IFRS 10 uses the term ‘investor’ to refer to a reporting
entity that potentially controls one or more other entities, and ‘investee’ to refer to an
entity that is, or may potentially be, the subsidiary of a reporting entity. Ownership of a
debt or equity interest may be a key factor in determining whether an investor has
control. However, it is also possible for a party to be an investor and potentially control
an investee, without having an equity or debt interest in that investee.
An investor has to consider all facts and circumstances when assessing whether it
controls an investee. [IFRS 10.8].
Only one party, if any, can control an investee. [IFRS 10.BC69]. However, IFRS 10 notes
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 75
