Consolidated Financial Statements in IAS/IFRS

Question: Discuss about the Consolidated Financial Statements in IAS/IFRS. Answer: Introduction: SAI Global is mainly involved in providing diverse range of solutions to the businesses across the world for managing and controlling the risk. The company delivers solutions to its clients regarding management of risk for promoting their sustainable growth and development. The solutions include software for managing risk, regulatory content, ethics and compliance, risk assessments, certification, testing and auditing. In addition to this, SAI Global is also recognized globally for providing services related to company, personal and property (SAI Global Limited, 2017). The company has adopted standard accounting policies and procedures for disclosing the information relating to the performance of its operating segments. The financial statements notes in the directors report have clearly stated operating segments of the company are provided consistently as per the internal reporting system developed by the chief operating decision maker. The operating segments of the company as reported in the segment information are information services, compliance services, corporate services and assurance services. As per AASB 8, an operating segment can be defined as component of a business organization involved in income generating activities and also incur expenses. The result of an operating segment is analyzed and examined by chief operating decision maker for allocating resources to it and evaluating its performance (Compiled AASB Standard, 2015). The operating segments are the main areas involved in generating income to the company and also are significant ly associated with incurrence of heavy costs. Thus, disclosure of operating segments information is highly important in the financial reports of a business entity (SAI Global: Annual Report, 2014). Share capital of a company represents the funds acquired by it through equity financing that is in exchange of its shares. Share or contributed capital is represented in the balance sheet in the shareholders equity section. It summarizes the overall stock value that company has realized through issuing of common or preferred shares of stock (Dagwell et al., 2007). There are different types of share capital used by a company for its financial growth and progress such as authorized share capital, issued share capital, subscribed share capital, called up share capital and paid up share capital. Authorized share capital refers to the capital taken by a company from the investors through issuing of new shares whereas issued share capital is the capital that has been already issued by a company. Subscribed share capital refers to subscribed part of issued share capital by the investors. Called up share capital is the amount that has been called to be paid to the investors. At last, paid up share capital is the proportion of called up share that has been already paid to the investors. The share capital of SAI Global has changed over time due to issue of new shares. The company has acquired new capital through and thus the amount of contributed capital has increased with time with the supply of more equity funds. Thus, the share capital mainly used by SAI Global for financing its various operational activities is authorized share capital (SAI Global: Annual Report, 2014). Reserve account depicts the operating reserves maintained by a company and represents a proportion of shareholders equity. There are three main types of reserve account maintained by a company that are, capital reserves, revenue reserves and statutory reserves. Capital reserve is maintained by a company for reserving the funds to be invested in long-term projects. Revenue reserves denote the proportion of the companys profit that has been retained for future growth and not distributed among the shareholders. On the other hand, statutory reserves reflect those assets that should be legally maintained by a business entity in relation to the un-matured obligations. The reserve account is established by an organization in order to maintain adequate cash in hand for sustaining an organization. The net amount of retained earnings as reported in the financial reports of SAI Global is $376000 (SAI Global: Annual Report, 2014). The company has not reported any financial figure relating to acc umulated losses in its financial statements. Retained earnings represent the accumulated net income of company while accumulated losses depends net losses realized by it at the end of an accounting period (SAI Global: Annual Report, 2014). The profit of the company before the income tax of the company is $54,935,000 for year 2015. Income Tax Expenses for the same period is $ $15,382,000. The income tax expenses when multiplied by the company profit before income tax come out to be $54,935,000 *0.30 = $16,480,500. It is different due to the following reasons: The main difference between the tax paid by the company and actual tax liability is that there are taxes that have already paid has to be adjusted and there are some items that are not required to taxed as per the income tax act but they are included in the profit and loss account therefore it is essential to remove such items and recalculate the income tax to be paid. The different type of investor-investee relationship can be categorized as follows: Small Ownership: The relationship refers to the existence of very small level of ownership in investee. The level of ownership of investor is calculated as per financial asset accounting method. Investor-Associate: The investor has considerable influence over investee in this type of relationship. The inventor is said to possess 20%-50% share capital of investee and is calculated through equity financing method. Parent-Subsidiary: The investor possess complete power over investee and own more than 50% of investee share capital. It requires preparation of consolidated financial statements in the annual report of the parent company. Joint venture-Joint Venture: The two or more investors acquire full control over an investee in this type of relationship. The accounting requirements relates to recognizing investors share through equity accounting method (Henderson et al., 2015). The concept of control in financial management refers to adoption of adequate policies and procedures for managing the financial resources. On the other hand, the concept of significant influence in financial management refers to gaining the authority to participate in decision-making process relating to financial decisions of a business entity. The IFRS (International Financial Reporting Standards) incorporates the use of concept of significant influence for businesses at the time of developing their financial reports (Watkins, 2009). SAI Global is a part of consolidate group and has approximately about 72 subsidiaries across the world such as SAI Global Assurance Services, SAI Global US Holdings Inc, SAI Global Certification Services Pty Limited and many others (SAI Global: Annual Report, 2014). Consolidated financial statements represent the overall financial performance of parent company and its subsidiaries. It is prepared when there are number of subsidiaries business entities for a business corporation in order to represent the integrated financial position of parent company and its subsidiaries. The consolidated financial statements are developed by the parent company (Pham-Gia, 2009). The different steps involved in the process of preparing consolidated financial statements are as follows: A uniform accounting method is adopted by the parent company and its subsidiaries for developing their financial statements The financial statements of parent company and its subsidiaries are accounted through the use of generally accepted accounting principles (GAAP) The subsidiary equity accounts such as common stock or retained earnings are eliminated In case of subsidiary not fully owned, a non-controlling interest account is used The balance sheets of subsidiary company are readjusted to the current fair value existing in the market of the financial assets (Pham-Gia, 2009) The consolidation method of accounting incorporates the parent and subsidiary companies in a single economic entity through combining their financial performances. On the contrary, equity method of accounting the financial statements of parent company represents the investment made in the subsidiary company through the shares owned by subsidiary business entity. The main purpose of acquisition analysis in consolidated method of accounting is to analyze the sum of assets and liabilities acquired. Some assets are revalued during consolidation process as under acquisition method the accountants need to disclose contingencies relating to potential assets that the company may not recognize in future (What Are the Differences between the Acquisition Method and the Purchase Method in Accounting, 2017). SAI Global has associates that are business entities having a significant influence on the group through acquiring a shareholding between 20%-50% (SAI Global: Annual Report, 2014). Joint arrangement is referred to as association of two or more parties that have joint control. Joint venture refers to holding a proportionate amount of net assets in a business entity while joint operations are developed between two business entities that come together for the purpose of starting a joint operation (Henderson et al., 2015). SAI Global is not a part of any joint arrangement as analyzed from its annual report (SAI Global: Annual Report, 2014). The goodwill can be defined as an intangible asset that is realized when an organization entity acquires another organization at a premium value. Goodwill is recognized when a business entity gains control over other business at a higher price than the fair market value of assets. Goodwill is recognized as asset in the balance sheet of a business entity but cant be bought or sold. Businesses face huge difficulty in recognizing the accurate value of goodwill. The main method used by businesses for measuring goodwill is to separate tangible and intangible assets. Tangible assets such as buildings, land, and machinery are classified separately in the balance sheet from intangible assets such as goodwill, patents, trademarks and others. Goodwill is classified as purchased and non-purchased goodwill by business entities. Purchased goodwill refers to the goodwill created by a business entity through acquiring another one while non-purchased goodwill is developed over time and cannot be mea sured adequately. The goodwill is disclosed by a business entity on its balance sheet (Watkins, 2009). SAI Global has created goodwill and represents the largest asset class on its balance sheet. The annual report of the company has disclosed that its goodwill has decreased by a significant amount during the financial year. This is due to increase in financial expenditure relating to acquisition of IQMS. Also, the amount has reduced due to transfer to amortized intangible assets for the purpose of carrying out acquisitions. In addition to this, the reduction in company goodwill has also been done due to change in foreign exchange rates (SAI Global: Annual Report, 2014). References Compiled AASB Standard. 2015. [Online]. Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB8_08-15_COMPnov15_01-16.pdf [Accessed on: 12 April 2017]. Dagwell, R. et al. 2007. Corporate Accounting in Australia. UNSW Press. Henderson,S. et al. 2015. Issues in Financial Accounting. Pearson Higher Education AU. Pham-Gia, K. 2009. Consolidated Financial Statements in IAS/IFRS and German GAAP - Major Differences Explained. GRIN Verlag. SAI Global Limited. 2017. [Online]. Available at: https://www.saiglobal.com/en-au/about_sai_global/investor_information/results_and_announcements/ [Accessed on: 12 April 2017]. SAI Global: Annual Report. 2014. [Online]. Available at: https://annualreport2015.saiglobal.com/ [Accessed on: 12 April 2017]. Watkins, J. 2009. Financial Management. Elsevier. What Are the Differences Between the Acquisition Method and the Purchase Method in Accounting? 2017. [Online]. Available at: https://www.fool.com/knowledge-center/the-differences-between-the-acquisition-method-the.aspx [Accessed on: 12 April 2017].