November 30, 2023 Consolidated Financial Reporting: Do you need to Consolidate?
At a time when firms are preparing their accounts, we often get asked to explain the rules around consolidated reporting. In this article we take a quick look at:
- An introduction to the consolidated reporting rules
- Who needs to prepare consolidated reports
- Notable exceptions
- How we can help
If you are not already consolidating your accounts, this guide will help you to understand if you may need to.
An introduction to consolidated reporting
IFRS defines consolidated financial statements as “financial statements that present the assets, liabilities, equity, income, expenses and cash flows of a parent and its subsidiaries as those of a single economic entity.”
They were introduced to portray the results of a group in line with its economic substance, which is that of a single entity. Economic substance essentially reports the “commercial reality” of a transaction, which in this case is the performance of the group overall, rather than the separation of the results across a number of different entities. Ultimately, consolidated accounts provide greater transparency to those trying to understand an entity’s overall financial performance.
Who needs to prepare consolidated reports?
Section 399(2) of the Companies Act 2006 states that if, at the end of the year, a company is a parent company, the directors must prepare group accounts for the year as well as individual accounts unless the company is exempt from the requirement.
A subsidiary is considered a part of a group to be consolidated when the parent has control over their operating and financial policies. Generally, this means any subsidiary where the parent owns >50% of the total share capital will need to be included in the consolidation.
Notable Exemptions
There are some notable exceptions if the parent is of a certain size, if the parent is itself a subsidiary, or if the parent is a recognised investment entity.
The parent company is small
The Companies Act 2006 provides an exemption from preparing consolidated financial statements for a small group. A group is small where it meets two of the following three criteria:
- Aggregate turnover = not more than £10.2m net (or £12.2m gross)
- Aggregate balance sheet total = not more than £5.1m net (or £6.1m gross)
- Aggregate number of employees = not more than 50
References to ‘gross’ in the above table mean the effects of intra-group trading have not been eliminated, whereas references to ‘net’ mean they have.
The parent company is itself a subsidiary
In general, a parent company will be exempt from preparing consolidated accounts if the parent is a subsidiary of another entity and consolidated financial statements for the larger group are prepared to an equivalent set of accounting standards and are publicly available. Any subsidiaries can be excluded from consolidation if it is not material to giving a true and fair view.
Parent company in an Investment Entity
If the parent company is an investment entity as defined by IFRS 10, they will be exempt from preparing consolidated accounts. Instead, the company-only accounts will need to be prepared under IFRS, accounting for the investments at fair value with any subsequent gains or losses on these valuations being recognised in the profit and loss (IFRS 9). Please note there is no similar exemption available under UK GAAP (FRS102) reporting.
How we can help
Our Tax and Accountancy team can help you understand if you are required to prepare consolidated accounts or if you will qualify for any of the exemptions as set out above.
Should the consolidation need to be prepared, this will have to be done under either IFRS or FRS 102. Our team are experienced in preparing consolidated accounts under both standards. They will be able to explain the steps involved and carry out the necessary work for you.
If you think you are affected by the rules or think you may qualify for an exemption please get in touch with your usual contact or here.
