Question

If the company acquires another small company, assess how it would know if it has to consolidate its financial statements on an annual basis. Defend your response.

Answer 1

As per IFRS 10 Consolidated Financial Statements, an entity while preparing and presenting the consolidated financial statements, should consider those entities in which it has control.

“Entities in which it has control” means the following entities in which the investor has ;

1) Power over the investee: either through majority shareholding (more than 50%) or through the power to control the management.

2) Exposure or rights to variable returns from its involvement with the investee: It includes dividends received from the investee, exclusive rights of the investor over the assets of the investee’s assets, etc.

3) The ability to use its power over the investee to affect the amount of the investor’s returns.

In our case:

If the acquirer company (A) has control mentioned as per the above definition over the small company (B), then the acquirer company (A) should consolidate the financial statements of the small company (B) into the financial statements of the acquirer company (A).