1. GROUP ACCOUNTS
Group is defined as an economic entity formed of a set of companies which are either companies
controlled by the same company, or the controlling company itself.
Control: The power to govern the financial and operating policies of an enterprise so as to obtain
benefits from its activities.
Control is presumed when the parent acquires more than half of the voting rights of the
Even when more than one half of the voting rights are not acquired, control may be evidenced
(i) Over more than one half of the voting rights by virtue of an agreement with other
(ii) To govern the financial and operating policies of the other enterprise under a statute or
an agreement; or
(iii) To appoint or remove the majority of the members of the board of directors; or
(iv) To cast the majority of votes at a meeting of the board of directors. The parent company
need not present consolidated financial statements in the following
Subsidiary- it is an enterprise that is controlled by another i.e. its financial and operating
policies are designed and governed by another.
An entity, including an unincorporated entity, which is controlled by another entity (IAS 27).
According to the companies Act, a company shall be deemed to be a subsidiary of another
company if, but only if the other company:
i)is a member of it and controls the composition of its board of directors; or
ii)holds more than half in nominal value of its equity share capital; or
iii)the first-mentioned company is a subsidiary of any company which is that other’s(holding)
Holding company – The company that controls the subsidiary.It has over 50% of ownership in
Consolidated financial statements: The financial statements of a group presented as those of a
single economic entity. IFRS 10 defines them as the financial statements of a group in which the
assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are
presented as those of a single economic entity.
2. Associate: An enterprise in which an investor has significant influence but not control or joint
Significant influence: Power to participate in the financial and operating policy decisions but
not control them.
Equity method: A method of accounting by which an equity investment is initially recorded
at cost and subsequently adjusted to reflect the investor’s share of the net profit or loss of the
Investment entity is an entity that obtains funds to invest them to get returns from capital
appreciation and investment income.Such investments performance is evaluated on fair value
Joint venture: A contractual arrangement whereby two or more parties undertake an economic
activity that is subject to joint control.
Venturer: A party to a joint venture and has joint control over that joint venture.
Investor in a joint venture: A party to a joint venture and does not have joint control over that
The relationship between the holding company and the subsidiaries is referred to as the group
structure. Apart from a situation where the holding company has only one subsidiary, the
following are examples of different types of structures and their accounting approach:
(i) Holding company with more than one subsidiary: This type of situation is straight forward as
the procedure involves consolidating the results of the holding with its subsidiaries the normal
way. However separate computation of goodwill for each subsidiary is required.
(ii) Holding company with a subsidiary company and a sub-subsidiary:In these type of structure,
the holding company owns a subsidiary company which owns another subsidiary company called
a sub-subsidiary company: The consolidation process is also the same as before only that for the
purpose of consolidating the sub-subsidiary, we need to determine the effective shareholding and
minority interest for the group.
(iii) Multiple group structure: In this type of Structure the holding company has several
subsidiaries that also have sub-subsidiaries. It is not examinable within this scope and applies
only in practice.
3. LEGAL REQUIREMENTS
The Company’s Act requires that if a company has subsidiaries,group accounts consisting of
consolidated balance sheet and consolidated profit and loss account be prepared at the year end
and presented together with the company’s own balance sheet and profit and loss account during
the general meeting.
However group accounts shall not be required where:
The company is at the end of its financial year the wholly owned subsidiary or is a
partially owned subsidiary of another body corporate incorporated in Kenya and its other
owners, including those not otherwise entitled to vote, have been informed about,and do
not object to the parent not presenting consolidated financial statements;
The parent's debt or equity instruments are not traded in a public market;
The ultimate or any intermediate parent of the parent produces consolidated financial
statements available for public use that comply with International Financial Reporting
The parent did not file, nor is it in the process of filing, its financial statements with a
regulatory organization for the purpose of issuing any class of instruments in a public
Post-employment benefit plans or other long-term employee benefit plans to which IAS
19 Employee Benefits applies exist.
The entity is an investment entity. However, an investment entity is still required to
consolidate a subsidiary where that subsidiary provides services that relate to the
investment entity’s investment activities. a parent of an investment entity is required to
consolidate all entities that it controls, including those controlled through an investment
entity subsidiary, unless the parent itself is an investment entity.
the company’s directors are of opinion that:—
(i) it is impracticable, or would be of no real value to members of the company, in
view of the insignificant amounts involved, or would involve expense or delay out of
proportion to the value to members of the company; or
(ii) the result would be misleading, or harmful to the business of the company or any
of its subsidiaries; or
The consolidated accounts should include all of the parent’s subsidiaries, both domestic and
foreign. There is no exception for a subsidiary whose business is of a different nature from the
parent. This is addressed by segmental reporting. Also, as a result of an amendment of IAS 27 by
IFRS 5 in March 2004, there is no exception for a subsidiary for which 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.
Special purpose entities (SPEs) should be consolidated where the substance of the relationship
indicates that the SPE is controlled by the reporting enterprise. This may arise even where the
4. activities of the SPE are predetermined or where the majority of voting or equity are not held by
the reporting enterprise. Once an investment ceases to fall within the definition of a subsidiary, it
should be accounted for as an associate under IAS 28, as a joint venture under IAS 31 or as an
investment under IAS 39, as appropriate.
The consolidation process
IAS 27(separate financial statements) has the objectives of setting standards to be applied in the
preparation and presentation of consolidated financial statements for a group of entities under the
control of a parent; and in accounting for investments in subsidiaries, jointly controlled entities,
and associates when an entity elects, or is required by local regulations, to present separate (non-consolidated)
financial statements. IFRS 10 (Consolidated Financial Statements) outlines the
requirements for the preparation and presentation of consolidated financial statements, requiring
entities to consolidate entities it controls.
IFRS 10 defines the principle of control and establishes control as the basis for determining
which entities are consolidated in the consolidated financial statements. 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.
The IFRS sets out requirements on how to apply the control principle:
(a) in circumstances when voting rights or similar rights give an investor power, including
the investor holds less than a majority of voting rights and in circumstances involving potential
(b) in circumstances when an investee is designed so that voting rights are not the dominant
deciding who controls the investee, such as when any voting rights relate to administrative tasks
and the relevant activities are directed by means of contractual arrangements.
(c) in circumstances involving agency relationships.
(d) in circumstances when the investor has control over specified assets of an investee.
Consolidated financial statements shall:
combine like items of assets, liabilities, equity, income, expenses and cash flows of the
parent with those of its subsidiaries
5. eliminate the carrying amount of the parent's investment in each subsidiary and the
parent's portion of equity of each subsidiary.
eliminate in full intragroup assets and liabilities, equity, income, expenses and cash
flows relating to transactions between entities of the group as well as profits or losses
resulting from such transactions.
The financial statements of the parent and its subsidiaries used in preparing the consolidated
financial statements should all be prepared as of the same reporting date, unless it is
impracticable to do so. If it is impracticable a particular subsidiary to prepare its financial
statements as of the same date as its parent, adjustments must be made for the effects of
significant transactions or events that occur between the dates of the subsidiary’s and the parent’s
financial statements. And in no case may the difference be more than three months.
Consolidated financial statements must be prepared using uniform accounting policies for
transactions and other events in similar circumstances.
Minority interests should be presented in the consolidated balance sheet within equity, but
separate from the parent’s shareholders’ equity. Minority interests in the profit or loss of the
group should also be separately presented.
Where losses applicable to the minority exceed the minority interest in the equity of the relevant
subsidiary, the excess, and any further losses attributable to the minority, are charged to the
group unless the minority has a binding obligation to, and is able to, make good the losses.
Where excess losses have been taken up by the group, if the subsidiary in question subsequently
reports profits, all such profits are attributed to the group until the minority’s share of losses
previously absorbed by the group has been recovered.
Changes in the ownership interests
Changes in a parent’s ownership interest in a subsidiary that do not result in the parent losing
control of the subsidiary are equity transactions.
If a parent loses control of a subsidiary, the parent:
(a) derecognizes the assets and liabilities of the former subsidiary from the consolidated
statement of financial position.
(b) recognizes any investment retained in the former subsidiary at its fair value when control is
lost and subsequently accounts for it and for any amounts owed by or to the former subsidiary in
accordance with relevant IFRSs. That fair value shall be regarded as the fair value on initial
recognition of a financial asset in accordance with IFRS 9 or, when appropriate, the cost on
initial recognition of an investment in an associate or joint venture.
(c) recognises the gain or loss associated with the loss of control attributable to the former
6. Requirements of IFRS 3 Business combination
The holding company measures the cost of a business combination at the sum of the fair values,
at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments
issued by the acquirer, in exchange for control of the subsidiary; plus any costs directly
attributable to the combination.
If equity instruments are issued as consideration for the acquisition, the market price of those
equity instruments at the date of exchange is considered to provide the best evidence of fair
value. If a market price does not exist, or is not considered unreliable, other valuation techniques
are used to measure fair value.
If a business combination involves more than one exchange transaction, each exchange
transaction shall be treated separately by the acquirer, using the cost of the transaction and fair
value information at the date of each exchange transaction, to determine the amount of any
goodwill associated with that transaction.
Goodwill is recognized by the acquirer parent as an asset from the acquisition date and is initially
measured as the excess of the cost of the business combination over the acquirer’s share of the
net fair value of the subsidiary identifiable assets, liabilities and contingent liabilities.
IFRS 3 prohibits the amortisation of goodwill; instead goodwill must be tested for impairment at
least annually in accordance with IAS 36 Impairment of Assets.
If the acquirer’s interest in the net fair value of the acquired identifiable net assets exceeds the
cost of the business combination, that excess (negative goodwill) must be recognised
immediately in the income statement as a gain. Before concluding that “negative goodwill” has
arisen, however, IFRS 3 requires that the acquirer reassess the identification and measurement of
the subsidiaries’ identifiable assets, liabilities, and contingent liabilities and the measurement of
the cost of combination.
ASSOCIATES COMPANIES (IAS 28)
IAS 28 applies to all investments in which an investor has significant influence but not control or
joint control except for investments held by a venture capital organization, mutual fund, unit
trust, and similar entity that (by election or requirement) are accounted for as held for trading
under IAS 39. Under IAS 39, those investments are measured at fair value with fair value
changes recognised in profit or loss.
Identification of Associates
7. If the holding is less than 20%, the investor will be presumed not to have significant influence
unless such influence can be clearly demonstrated. The existence of significant influence by an
investor is usually evidenced in one or more of the following ways:
(i) Representation on the board of directors or equivalent governing body of the
investee;participation in the policy-making process;
(ii) Material transactions between the investor and the investee; interchange of managerial
(iii) Provision of essential technical information.
(iv) Potential voting rights are a factor to be considered in deciding whether significant
influence existing its consolidated financial statements,
An investor should use the equity method of accounting for investments in associates, other than
in the following three exceptional circumstances:
(i) An investment in an associate that is acquired and held exclusively with a view to its disposal
within 12 months from acquisition should be accounted for as held for trading. Those
investments are measured at fair value with fair value changes recognised in profit or loss.
(ii) A parent that is exempted from preparing consolidated financial statements by IAS 27 may
prepare separate financial statements as its primary financial statements. In those separate
statements, the investment in the associate may be accounted for by the cost method.
(iii) An investor need not use the equity method if all of the following four conditions are
a. the investor is itself a wholly-owned subsidiary, or is a partially-owned subsidiary of
another entity and its other owners, including those not otherwise entitled to vote,
have been informed about, and do not object to, the investor not applying the equity
b. the investor’s debt or equity instruments are not traded in a public market;
c. the investor did not file, nor is it in the process of filing, its financial statements with a
securities commission or other regulatory organizat ion for the purpose of issuing any
class of instruments in a public market; and
d. the ultimate or any intermediate parent of the investor produces consolidated financial
statements available for public use that comply with International Financial Reporting
8. JOINTLY CONTROLLED ENTITIES (IAS 31)
IAS 31 applies to accounting for all interests in joint ventures and the reporting of joint venture
assets, liabilities, income, and expenses in the financial statements of ventures and investors,
regardless of the structures or forms under which the joint venture activities take place, except
for investments held by a venture capital organisation, mutual fund, unit trust, and similar entity
that (by election or requirement) are accounted for as held for trading under IAS 39.
Refers to the power to govern the financial and operating policies of an activity so as to obtain
benefits from it.
The contractually agreed sharing of control over an economic activity such that no individual
contracting party has control.
IAS 31 deals with three types of joint Ventures
(i) Jointly Controlled Operations
Jointly controlled operations involve the use of assets and other resources of the venturers rather
than the establishment of a separate entity. Each venturer uses its own assets, incurs its own
expenses and liabilities, and raises its own finance. IAS 31 requires that the venturer should
recognise in its financial statements the assets that it controls, the liabilities that it incurs, the
expenses that it incurs, and its share of the income from the sale of goods or services by the joint
venture. [IAS 31.15]
(ii) Jointly Controlled Assets
Jointly controlled assets involve the joint control, and often the joint ownership, of assets
to the joint venture. Each venturer may take a share of the output from the assets and each
bears a share of the expenses incurred. IAS 31 requires that the venturer should recognise in its
financial statements its share of the joint assets, any liabilities that it has incurred directly and its
share of any liabilities incurred jointly with the other venturers, income from the sale or use of its
9. share of the output of the joint venture, its share of expenses incurred by the joint venture and
expenses incurred directly in respect of its interest in the joint venture.
(iii) Jointly Controlled Entities
A jointly controlled entity is a corporation, partnership, or other entity in which two or more
venturers have an interest, under a contractual arrangement that establishes joint control over
the entity. Each venturer usually contributes cash or other resources to the jointly controlled
entity. Those contributions are included in the accounting records of the venturer and recognised
in the venturer’s financial statements as an investment in the jointly controlled entity.
IAS 31 allows two treatments of accounting for an investment in jointly controlled entities
– except as noted below:
(i) Proportionate consolidation.
(ii) Equity method of accounting.
Proportionate consolidation or equity method is not required in the following exceptional
(i) An investment in a jointly controlled entity that is acquired and held exclusively with a
view to its disposal within 12 months from acquisition should be accounted for as held
for trading under IAS 39. Under IAS 39, those investments are measured at fair value
with fair value changes recognised in profit or loss.
(ii) A parent that is exempted from preparing consolidated financial statements by paragraph
10 of IAS 27 may prepare separate financial statements as its primary financial
statements. In those separate statements, the investment in the jointly controlled entity
may be accounted for by the cost method or under IAS 39.
An investor in a jointly controlled entity need not use proportionate consolidation or the equity
method if all of the following four conditions are met:
1. the investor is itself a wholly-owned subsidiary, or is a partially-owned subsidiary of
another entity and its other owners, including those not otherwise entitled to vote, have
been informed about, and do not object to, the investor not applying proportionate
consolidation or the equity method;
10. 2. the investor’s debt or equity instruments are not traded in a public market;
3. the investor did not file, nor is it in the process of filing, its financial statements with a
securities commission or other regulatory organization for the purpose of issuing any
class of instruments in a public market; and
4. the ultimate or any intermediate parent of the investor produces consolidated financial
statements available for public use that comply with International Financial Reporting
i) Proportionate Consolidation
Under proportionate consolidation, the balance sheet of the venturer includes its share of the
assets that it controls jointly and its share of the liabilities for which it is jointly responsible. The
income statement of the venturer includes its share of the income and expenses of the jointly
IAS 31 allows for the use of two different reporting formats for presenting proportionate
The venturer may combine its share of each of the assets, liabilities, income and expenses of the
jointly controlled entity with the similar items, line by line, in its financial statements; or
The venturer may include separate line items for its share of the assets, liabilities, income and
expenses of the jointly controlled entity in its financial statements.
Issues relating to minority interest:
o Whether a minority interest's share of goodwill should be recognised
o Whether the purchase of a minority interest should be treated as the purchase of equity
o Decreases in the parent's ownership interest after a business combination (both with and
without loss of control)
o Display of minority interests in the consolidated income statement or statement of
changes in equity.
2. Treatment of successive share purchases
3. Issues relating to the measurement of consideration for the acquisition:
11. o Measurement date for equity securities issued as consideration
o Date of acquisition
o Whether there should be an adjustment from a quoted market price when determining the
value of a block of securities issued as consideration
o Treatment of direct costs of the acquisition
o Recognition and measurement of contingent consideration
o Should businesses or other non-monetary assets exchanged for an interest in a subsidiary
be accounted for at fair value at the date of the transaction or at previous carrying
o How should any gain or loss arising on the transaction be reported?
4. Issues relating to the measurement of the identifiable net assets acquired:
o Recognition of restructuring provisions. Specifically, whether the recognition criteria set
out in IAS 37 Provisions, Contingent Liabilities and Contingent Assets, should be
o Deferred revenue. This is a wider issue than recognition of items within a business
combination, and this wider context will need to be borne in mind when the issue was
o Income taxes. Although IASB and FASB guidance on income taxes will not be
reconsidered as part of this project, the project will include the specific issue of the
treatment of acquired deferred tax assets that are recognised after the business
o Guidance on determining the fair value of liabilities
o Assets expected to be disposed of
o Contingencies of the acquired entity
o The period in which the allocation of the fair value of the acquisition to identifiable net
assets can be revised.