Intro To Consolidation And Group Accounts – Which Method For Your Investment?
Last update: December 2024
Group accounting – what to do and how to start? The accounting method depends on the type of investment that an investor has.
In this article, you will learn:
- What shall we do to start?
- IFRS Accounting Standards dealing with group accounts
- How to account for your investment
- Video lecture, further reading + infographics
What Shall We Do?
First, you need to determine what type of investment you’re dealing with.
Then, you need to look in the appropriate IFRS standard and apply the appropriate rules.
In today’s article and video, I’d like to outline the basic types of investments, their accounting methods and the IFRS standards you should be looking at.
As the consolidation and group accounts belong to the most popular topics examined in any accounting exam, this is the first article in my “consolidation series”, which will be followed by IFRS summaries and on top of that, I’ll add full consolidation package of lectures and case studies into my IFRS Kit.
IFRS Accounting Standards Dealing with Group Accounts
There are 6 IFRS standards dealing with group accounts:
1. IAS 27 Separate Financial Statements
This standard prescribes how the investor shall present its investments in the individual or separate (non-consolidated) financial statements.
2. IAS 28 Investments in Associates and Joint Ventures
IAS 28 prescribes the accounting treatment of associates, or the entities in which the investor has significant influence (but not control or joint control).
Also, it prescribes applying equity method of accounting for both associates and joint ventures (those are one type of joint arrangements under IFRS 11 Joint Arrangements).
3. IFRS 3 Business Combinations
IFRS 3 outlines the accounting when the investor obtains a control over its investment.
People are often confused because both IFRS 3 and IFRS 10 deal with this situation, but each of these standards deals with its own aspects of the same thing.
IFRS 3 tells us what the business combination is, how to account for it at the recognition (but not when you perform consolidation afterwards – then it’s IFRS 10), how to measure goodwill, non-controlling interest and assets and liabilities acquired.
4. IFRS 10 Consolidated Financial Statements
This is the second standard dealing with the situation when the investor obtains a control over its investment.
As opposed to IFRS 3 mentioned above, IFRS 10 defines the control and gives a guidance to identify whether there is a control or not.
Then it also prescribes the consolidation procedures for preparing consolidated financial statements.
5. IFRS 11 Joint Arrangements
IFRS 11 deals with the third type of investment – joint arrangement, which could be a joint operation or joint venture. In both cases, investor obtains joint control over some business with some other investor.
Before 2013, IAS 28 included the rules for joint arrangements, but now, we should look to IFRS 11.
6. IFRS 12 Disclosure of Interests in Other Entities
IFRS 12 relates to all types of interests in other entities: subsidiaries, associates, joint arrangements and unconsolidated structured entities.
It requires disclosures of various kind of information about these interests.
How to Account for Your Investment
As I’ve already mentioned above, you should first determine WHAT TYPE of investment you deal with and based on the type, apply specified accounting treatment.
There are the 4 basic types of investments:
1. Subsidiaries
IFRS 10 defines a subsidiary as “an entity controlled by another entity”.
The basic indicator of having a control over subsidiary is the size of your share in it. If you own more than 50% of investment’s shares, then it indicates you control it.
However, that’s not always the truth and sometimes, investor does NOT have a control even if it owns more than 50% of shares. The opposite may be true: investor can have a control despite the share lower than 50%.
If there is a control, then investor must account for such an investment using the acquisition method and apply full consolidation procedures when making consolidated financial statements.
2. Associates
IAS 28 defines an associate as “an entity over which an investor has significant influence and which is neither a subsidiary nor an interest in joint venture”.
Here, the basic indicator of significant influence is the investors share between 20% and 50%, but similarly as with subsidiaries and control, there are situations where significant influence might or might not be demonstrated regardless the size of ownership.
If there’s a significant influence, then investor must account for such an investment using the equity method.
3. Joint Arrangements
IFRS 11 defines joint arrangement as “arrangement of which 2 or more parties have joint control”.
It does not make any sense to quantify the “share” here, because it should be equal for all the parties. So if there are 2 parties of arrangement, each party has 50% share. If there are 3 parties, each party has 33.3% share – you get the idea.
Instead, parties need to exercise joint control over the arrangement. It means that important decisions require unanimous consent of all parties of the arrangement and no single party can decide independently.
IFRS 11 requires accounting for joint arrangement based on its specific type:
- If parties established joint venture, then each party accounts for its investment using the equity method in line with IAS 28, and
- If parties established joint operation, then each party accounts for its own assets, liabilities, expenses, revenues and its share on all items incurred jointly.
4. Other Investments
If an investor acquires any other investment that does not fall into any of above categories, then it is accounted for as a financial instrument in line with IFRS 9.
Further reading and video
On these links, you can find the full collection of free lectures and articles related to these standards:
- IAS 28 Investments in Associates and Joint Ventures
- IFRS 3 Business Combinations
- IFRS 10 Consolidated Financial Statements
- IFRS 11 Joint Arrangements
Full consolidation learning package is included in my IFRS Kit so you can have a great resource and support for your exams 🙂
Meanwhile, you can watch the intro to consolidation here:
Download the infographics here
Please click here to download infographics with the summary of investments and their accounting under IFRS. It is free.
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76 Comments
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Hello Silvia, I hope you are doing all well.
I am facing an interesting and complicated case at my Company, well I am new to the Company, and this would be considered as my first challenge in which I would like to give a good impression, so I was hoping if you could please look into it and and tell your thoughts.
A a parent company has control over B by owning a 76% of it is shares. B a parent of C owning 100% of it is equity. C has shares in A 19% of it is shares and has no control neither a significant influence in A and the investment in C is classified as FVOCI as per IFRS 9.
Case 1: B decided to distribute the 19% of shares that C owns in A to B’s shareholders as a dividends in kind which will be declared at their annual meeting next month.
1- What is the accounting treatment in A & B records?
2- What is the value to be used when recording?
Case 2: after A gets it shares of the 19% they will trade them with the NCI for their shares in B assuming they reached to a conclusion where they agreed on the terms and no extra cash is needed? There will be extra cash paid by the parent but it is not of concern as this has been dealt with previously.
1- What is the accounting treatment in B’s records, as well as A?
2- What is the value to be used in both A & B for the value of shares to be used?
Would truly appreciate your assistance on this.
hi Silivia
when consolidating and the subsidiary i am acquiring has an Asset for sale reserve, how do i treat it?
Thank you Silvia for your explanation,
I have a question if the transactions between the parent and its subsidiary should be eliminate because the group its considered as one entity, what is the reason of eliminating the unrealized profit or loss between the entity and its associate?
Thanks in advance,
Kind regards
Because the Interpretations Committee decided that is is reasonably prudent to eliminate the parent’s share of the unrealized profits from transactions between the parent and its associate.
Thanks Silvia,
I appreciated a lot the information you share with your followers, it lets me know more every day about how to understand the set of IAS and the IFRS, in a simple and friendly manner.
Have a good day!
Hi Silvia,
I am short of words, cant believe that you can give all of these for free.
May God bless you.
This is simplified and easy to understand
I am writing from Nigeria. I was looking for extra material to read for ICAN exams
Thank you and remain blessed
Hi Silvia,
as you mentioned in the article “The basic indicator of having a control over subsidiary is the size of your share in it. If you own more than 50% of investment’s shares, then it indicates you control it.”
does ownership shall be directly by the entity or it could be indirectly (e.g. by entity’s subsidiary or associate). would you please elaborate more here?
for IAS 28, share in associate consider only the entity and entity’s subsidiaries (but not associates and JVs) [Ref IAS 28.27].
I need your help here
Hi Ramzi,
directly or indirectly. Indirect ownership also indicates control. As for IAS 28, yes you are right. S.
Selvia you make it easy to understand the IFRS you make it Lovely…. every time I read your mail I like to read more … pls don’t Stop
What the practical step of accounting for investment in subsidiary using FVTPL in accordance with IAS 39? The subsidiary is not listed in a stock exchange
Practically you need to determine the fair value of a subsidiary at the reporting date and then book any change (difference between current fair value and carrying amount) in profit or loss.
Hi Silvia, the challenge is, how do you determine the fair value when the subsidiary is unquoted?
I have never seen anyone as skilled in his field as you.
Hi. Can we apply IFRS 10 where IFRS 3 is not met?
I want to ask that when we consolidate financial statement we have to prepare many working note lengthy process in study but can you tell me that in practical life how to consolidate financial statement because I reality Parent company invest in many subsidiary company as well as in foreign so if I get subscription can I learn this technical thing how to consolidate in practical life
I want to ask that when we consolidate financial statement we have to prepare many working note lengthy process in study but can you tell me that in practical life how to consolidate financial statement because I reality c
Parent company invest in many subsidiary company as well as in foreign so if I get subscription can I learn this technical thing how to consolidate in practical life
Thank you Silvia,
I like your presentation in IFRS very much. Your articles and videos in this regard are very fruitful to me. IFRS contents provided are very easy to understand.
Thank you Silvia.
IFRS made simplificata. Meaning that you made IFRS simple. Your regular articles inspire me to fall in love with IFRS. I’m preparing for my ICAN skills level.
This is so wonderful.. thank you so much for this GOLDEN opportunity
Thanks so much Silvia, you really make these concepts easy for me to understand. I enjoy reading your articles. More grace!!!
Silvia, I am really amazed with your IFRS technical resources, Please keep updtaing with the best and simplistic concepts that you are providing us
Thnx Silvia. Brilliantly done.
Thank you 🙂
Hello there,
Just an inquiry. For consolidation and separate reports of the parent and subsidiaries, can a subsidiary use different accounting policies in presenting its separate financial statement and adjust the same for consolidation purposes?
For example, a subsidiary uses revaluation method in accounting for its Property and equipment while the parent company uses the cost method less depreciation. Is this allowed by IFRS? to consolidate different accounting policies? or just for the purpose of consolidation, the subsidiary needs to adjust its accounting policy uniform to the parent company but retain its presentation on the separate financial statement?
Thank you Silvia! You are the best!
I don’t need classes now to learn IFRS.
Do you have a help section where we can ask questions from you?
I’m looking forward to buy your Kit as well.
Keep doing what you are doing!!!
Hope to see you in person and also would like to work with you to make the Accounting Global , “Perfect”.
Hi Sanath, glad you like my page and thank you for your kind words 🙂 You can ask questions here in the comments below articles, I often respond. Best! S.
Hi Silvia.
Thank you for your excellent explanation. I have one question. What happens if the subsidiary has a new parent which is not under IFRS? Should this parent adopt IFRS 1 with the comparative information (3 statements of financial position, 2 comprehensive income statements, 2 cash flow statements, etc)?
Or… Is there an optional exception to the comparative information? Can the new parent use the book value of the subsidiary (under IFRS) to consolidate and indicate in its notes to the financial statements that the parent is under IFRS?
Thank you so much for your attention to this 🙂
Dear Elder,
hmmm, if the parent is NOT under IFRS, does it prepare the IFRS financial statements? Because if not, and the parent prepares its financial statements under totally different standards, then IFRS 3, IFRS 10 and nothing applies. The parent should rather look to its own reporting rules and consolidate accordingly. Anyway, I think that 1 rule is universal: when you consolidate, both parent and subsidiary should use the same accounting policies, and therefore, it would be necessary to restate subsidiary’s numbers. S.
Dear Silvia,
You are really great. I just love your way of presentation . Please mail me your email id for discussion.
Thanks & Regards,
Shikha
Hi Silvia
Great work..:)
Hi Silvia,
I’ve discovered this website about IFRS by accident and it’s been great discovering your tips and explanations. they are direct, simple and very useful. Thank you!
It just simplifies everything… very effective… !!!
Dear Silvia,
If the parent company financial year end on 31 March 2016, one of the subsidiary companies financial year end on 31 December 2015 and one of the subsidiary companies financial year end on 30 April 2016. Is it possible to prepare consolidated financial statements for parent company for the year ended 31 March 2016? Please note that there is no significant material transaction occurred in subsidiary companies from 01 January 2016 to 30 April 2016.
Thanks and Regards,
Hi Silvia, I got a question, how does company consolidate while there is no investment incurred except common shareholders. Is it the full consolidation apply? Also, there is no control over both companies.
Dear James, I don’t understand your question. Who should/should not consolidate? What “both” companies? If there is a company A having 2 shareholders, then there’s nothing to consolidate. Please explain it further. S.
Hi Silvia,
First of all, sorry for my bad English. Let me try to explain further my situation.
I am the sole shareholders for company A & B. But the company was run by 2 different directors and management. For some reason, the auditor of company A find out that the company B has the same shareholder and the auditor for company A request to consolidate the account for company A & B. How can it be done? And i can’t find any relevant information and reasons to consolidate the accounts. If so, how will it affect company A.
Thanks in advance.
Hi Silvia!
I have a question regarding IAS 10. Would you do full consolidation of Company A, 3% of share capital of which is directly owned by Company B, assuming that the remaining 97% of shares Company A holds as treasury stock? Does it matter when this 3% stake in Company A was bought by Company B: before or after the treasury stock was built by Company A?
Dear Alexander,
this is a very interesting structure; however in this case it’s absolutely necessary to examine who controls Company A. The size of the share is not as important as control. So, is Company B able to exercise control? If yes, then yes, I would consolidate, no matter company B has only 3%. Hope this helps. S.
spanish pelease ¡,,,
Thank you, Silvia!
I used your materials to training IFRS for my students. Hope see you in Vietnam.
Hello Silvia
What are the cases where a parent may have 50% or more of the investment shares in a subsidiary and yet not have a controlling interest? What then determines the controlling interest if not the investment shares held?
Power to influence the economic decision making of the entity, and rights to resulting gain/losses determines control. (“Control requires exposure or rights to variable returns and the ability to affect those returns through power over an investee”.)
I just landed on your website but was amazed with the ease with which you explain group accounting. Please include something on consolidating situations with subsidiaries and sub-subsidiaries. I am a Ugandan CPA but now have challenges with purchasing your IFRS toolkit. What is the best way of paying?
Hi Michael, yes, maybe in the future, I’ll include some example with sub-subsidiaries. In relation to the IFRS Kit, you can contact me via my contact form. S.
Hi Silvia. Thanks. I was of the same opinion but wanted to confirm.
Regards
Naseem
Hi. Thanks. But the subsidiary does not fall under the definition of an investment entity.
Thanks
Naseem
Subsidiary not, but maybe the parent.
Hi. Thanks. But the parent is also not an investment entity.
Thanks
Naseem
OK, that was just 1 exception. There are some more exceptions (e.g. when an ultimate parent prepares consolidated FS, then intermediate parent does not need so in some circumstances), but most of the time – 100% share indicates control and if there’s control, then there’s a need to consolidate.
Hi Sivia,
Thanks for your good presentation. A wholly owned subsidiary should be consolidated, is there any exception for not consolidating the 100 per cent subsidiary. If yes, could you please indicate the conditions for the exception.
Thanks
Naseem
Hi there, for example, “investment entities” exception under newly amended IFRS 10. S.
I really love your videos and your summaries its wonderful and very easy to understand, thank you so much Miss Silvia. Hope to get more videos on the updated IFRS’s like 9 and 15.
Please, how can tabular method of group consolidated accounts be done using excel? Please, the inter company adjustments should be specified in the tabular excel worksheet.
Hi Emma, I think I have covered this topic in the other article in which I illustrated the “tabular method”. Please try to search for “How to consolidate”. It’s coming with the video. Of course, the details including intercompany balances are in my IFRS Kit. S.
Silvia you are soo awesome and your explanation is the best. I now really understand the concept of consolidation.
Thank you Christabel, it’s important to know that you actually gained something from my lectures. All the best! S.
You make teaching and learning IFRS easy and fun….thank you.
Sorry to see that comments not like “God bless you Silvia, you have made be a better person in IFRS within just 1week” are simply deleted.
Puts the integrity of your site into serious question.
Hi Robert, did you make any comment that was deleted? I don’t remember deleting any similar comment.
You know, I try to educate people in a very simple way and I really appreciate their feedback. It makes me feel that my work helps someone.
However, I don’t understand people like you. I know you’re an IFRS expert, coming from Czech Republic. Your IFRS knowledge is so great – I know it, as I’ve read some of your valuable commentaries in other sites (including your articles in your Czech site). So I’m quite surprised you rather attack other people instead of putting the brains together and creating something great for others. Silvia
Silvia, you rock!!! You are great, both as accountant and as person.
Robert, don’t spit out your jealousy here on Silvia. She does her best for us, and you???
A very nice basic summary. Though I think you should consider emphasising that power, not voting rights, is the criteria for assessing control. In sticking with voting rights, and especially the percentages, you run the risk of having people assume that current IFRS guidance still comparable to US GAAP, where these bright lines are still in force.
Hi, yes, you’re right – the power rules. However, but this was just basic summary to introduce people to this complex topic. Please note I’m not emphasizing the “percentages” – I rather write that it’s just an indicator and the opposite can be truth. I write more about the power in my IFRS 10 summary here: http://www.cpdbox.com/ifrs-10-consolidated-financial-statements/
PS – now I understood your second comment. You thought I deleted this one. No, I did not. The reason it did not appear immediately is that I approve all comments manually due to high amount of automatic machines’ spammers, etc. I do it once in 12-24 hours, so you were too quick. Anyway, I left it there because I feel I need to defend myself and my work for the good of others. Good luck.
thanks Silvia , very nice presentation & easy to understand.
Unbelievable. Its like ABC
Thanks Silivia , Iam very happy to vist you website .God bless you
God bless you Silvia, you have made be a better person in IFRS within just 1week of my joining your website http://www.cpdbox.com, may God continue to increase your knowlesge
what i would say is, this is just “awesome & user friendly”
many thanks Silvia for sharing such a great topic in a simple way, users like me can understand the basics well.
expecting more on IFRS
regards
Hi Silvia
It’s been a while since your last email. Hope all is well
Fantastic summary. You have a natural ability to simplify difficult subject matter. Really admire that…
Thank
Hi Raj, glad you liked that!
Well, my kids are on their vacation, so I post once per 2 weeks during this time – the family is still my priority 🙂 But after that, I’ll return to once per week.
Take care!
S.
“wonderful, wonderful”” Silvia M. you turn IFRS into a reading novel for people to have standard knowledge.
Good Job.
Thank you so much for this poetic comment! 🙂 Enjoy! S.
SIlvia, you are simply wonderful. You are a great blessing to the world of IFRS
Thank you, Francis 🙂 This always makes me feel good 🙂 S.
hie silvia thank you for the great stuff.