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THE PROVISIONS OF RELEVANT ACCOUNTING STANDARDS FOR THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS OF A SIMPLE GROUP (IAS 27, IAS 28, IFRS 3 AND IFRS 10), INCLUDING THE USE OF FAIR VALUE FOR NON-CONTROLLING INTEREST

Introduction

The preparation of consolidated financial statements for a group of companies is a cornerstone of financial reporting under International Financial Reporting Standards (IFRS). A group is constituted when a parent entity controls one or more subsidiary entities. When a parent company issues consolidated financial statements, it should consolidate all subsidiaries, both domestic and foreign, presenting the results of the group as those of a single economic entity.

Four key standards govern the preparation and presentation of group financial statements: IAS 27 Separate Financial Statements, IAS 28 Investments in Associates and Joint Ventures, IFRS 3 Business Combinations, and IFRS 10 Consolidated Financial Statements. Together, these standards establish the principles for identifying subsidiaries and associates, accounting for business combinations, and preparing consolidated financial statements.

This comprehensive guide examines the provisions of these relevant accounting standards for the preparation and presentation of financial statements of a simple group, including the use of fair value for non-controlling interest.

The Pain Points: Why Group Financial Statements Pose Challenges

The Classification Challenge

The most critical judgment in group reporting is determining whether an entity should be classified as a subsidiary, associate, or simple investment. Misclassification can entirely change the accounting treatment—full consolidation versus equity method versus fair value through profit or loss.

The decision is not based on ownership percentage alone. IFRS focuses on substance over legal form, and while a holding of 20% or more of voting power is presumed to give significant influence, this is a rebuttable presumption. Similarly, holding less than 50% may still give control if the investor can exercise power over the investee.

The Fair Value Measurement Challenge

IFRS 3 requires the acquirer to measure the identifiable assets acquired and liabilities assumed at their acquisition-date fair values. This can be complex, particularly for intangible assets, contingent liabilities, and assets with no active market. For non-controlling interest, the fair value option adds another layer of complexity.

The choice of measuring NCI at fair value (the “full goodwill” method) or at its proportionate share of the acquiree’s identifiable net assets is a key judgment. This choice affects the amount of goodwill recognised and the resulting financial ratios.

The Elimination of Intra-Group Transactions

When preparing consolidated financial statements, intra-group balances and transactions must be eliminated in full. This includes intra-group sales, purchases, dividends, and unrealised profits arising from intra-group transactions. The process requires careful tracking of all transactions between group entities.

The Equity Method Complexity

Under IAS 28, investments in associates are accounted for using the equity method. This requires adjusting the carrying amount of the investment for the investor’s share of the associate’s profits or losses and dividends received. Where the associate uses different accounting policies, adjustments must be made to ensure uniformity.

The Building Blocks: A Simple Group Structure

A simple group consists of a parent company and one or more subsidiary companies. The diagram below shows a typical group structure where a parent company has acquired 80% of the shares of a subsidiary:

Parent Company (80% ownership) → Subsidiary Company

In this scenario, the parent has control over the subsidiary because it holds more than 50% of the ordinary shares, giving it more than 50% of the voting rights. The non-controlling interest (NCI) holds the remaining 20%.

IFRS 10: Consolidated Financial Statements

The Principle of Control

IFRS 10 establishes the principle of control as the basis for consolidation. An investor controls an investee when it has all three of the following elements:

Power over the investee: The investor has existing rights that give it the ability to direct the relevant activities of the investee—the activities that significantly affect the investee’s returns.
Exposure, or rights, to variable returns: The investor has exposure or rights to variable returns from its involvement with the investee. These variable returns are defined broadly and include dividends, remuneration from services, fees, interest, and tax benefits.
The ability to use power to affect returns: The investor has the ability to use its power over the investee to affect the amount of the investor’s returns.

Assessing Control

Control is typically achieved when the parent owns more than 50% of the voting shares of the subsidiary. However, control may also exist in other circumstances:

The ability to exercise more than 50% of the voting rights through an agreement with other investors
The power to govern the financial and operating policies of the entity under a statute or an agreement
The power to appoint or remove the majority of the members of the board of directors
The power to cast the majority of votes at meetings of the board of directors

Example: If Green Co owns 45% of the ordinary shares of Black Co but has appointed five out of seven directors of Black Co, Green Co has control over Black Co even though it owns less than 50% of the shares.

Consolidation Requirements

Under IFRS 10, a parent company must consolidate all subsidiaries, both domestic and foreign. The following key principles apply:

Line-by-line combination: The assets, liabilities, income, and expenses of the parent and subsidiary are combined on a line-by-line basis. This is done for 100% of the parent and 100% of the subsidiary, irrespective of how much the parent actually owns.
Elimination of intra-group transactions: All intra-group balances, transactions, income, and expenses are eliminated in full.
Uniform accounting policies: Uniform accounting policies should be used for all entities included in the consolidation for like transactions and other events in similar circumstances.
Non-controlling interests: Non-controlling interests should be shown in equity separately from liabilities and the parent’s equity.

IAS 27: Separate Financial Statements

The Purpose of IAS 27

IAS 27 prescribes the accounting and disclosure requirements for investments in subsidiaries, joint ventures, and associates when an entity prepares separate financial statements. Separate financial statements are those presented by a parent, an investor in an associate, or a venturer in a jointly controlled entity, where the investments are accounted for based on the direct equity interest rather than on the reported results and net assets of the investees.

Accounting for Investments in Separate Financial Statements

When an entity prepares separate financial statements, it shall account for investments in subsidiaries, jointly controlled entities, and associates either:

At cost, or
In accordance with IFRS 9 (at fair value through profit or loss)

The entity shall apply the same accounting for each category of investments. Investments accounted for at cost shall be accounted for in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations when they are classified as held for sale.

Dividend Recognition

When an entity’s right to receive a dividend is established, the dividend is recognised in profit or loss in its separate financial statements unless the entity elects to use the equity method, in which case the dividend is recognised as a reduction from the carrying amount of the investment.

Group Reorganisations

When a parent reorganises the structure of its group by establishing a new entity as its parent, and certain criteria are met, the new parent shall measure the cost of its investment in the original parent at the carrying amount of its share of the equity items shown in the separate financial statements of the original parent at the date of the reorganisation.

IAS 28: Investments in Associates

What Is an Associate?

An associate is an entity over which the investor has significant influence but not control or joint control. Significant influence is the power to participate in the financial and operating policy decisions of the investee but not to control those policies.

The 20% Presumption

IAS 28 presumes that significant influence exists when the investor holds 20% or more of the voting power of the investee, unless it can be clearly demonstrated that this is not the case. Similarly, significant influence can generally be assumed not to exist if the investor owns less than 20% of the voting power, unless proven otherwise.

Note: This is a rebuttable presumption. A holding below 20% may still qualify as an associate if the investor can demonstrate significant influence—for example, through board representation or participation in policy-making processes.

Indicators of Significant Influence

The existence of significant influence is usually evidenced by one or more of the following:

Representation on the board of directors or equivalent governing body of the investee
Participation in policy-making processes, including decisions about dividends or other distributions
Material transactions between the investor and the investee
Interchange of managerial personnel
Provision of essential technical information

Equity Method Accounting

Investments in associates are accounted for using the equity method:

Initial recognition: The investment is initially recorded at cost as a non-current asset.
Subsequent measurement: The carrying amount is increased for the investor’s share of the associate’s profits and decreased for its share of the associate’s losses.
Dividends: Dividends received from the associate are not recorded as income. Instead, they reduce the carrying value of the investment because they represent a return of capital already recognised through prior profit recognition.
BASE analysis:

Ending Balance = Beginning Balance + Share of Equity Income − Dividends Received
Uniform accounting policies: If an associate uses different accounting policies, adjustments shall be made to conform them to those of the investor.

Key Difference from Subsidiary Consolidation

When accounting for a subsidiary, the group combines 100% of the subsidiary’s revenue, costs, assets, and liabilities. When using the equity method for an associate, only the group share of the associate’s post-tax profit is added to the group profit—the associate’s individual line items (revenue, cost of sales, etc.) are not combined with those of the group.

IFRS 3: Business Combinations

Definition of a Business Combination

A business combination is the bringing together of separate entities into one reporting entity. IFRS 3 deals with accounting for business combinations and the ongoing treatment of goodwill.

The Acquisition Method

IFRS 3 requires the use of the acquisition method for all business combinations. The following steps are undertaken:

Identify the acquirer
Determine the acquisition date
Recognise and measure the identifiable net assets acquired
Recognise and measure goodwill or a gain from a bargain purchase

Recognising and Measuring Identifiable Assets and Liabilities

The acquirer recognises the acquiree’s identifiable assets, liabilities, and contingent liabilities at their fair values at the acquisition date. This applies to all identifiable assets acquired and liabilities assumed, including contingent liabilities.

Goodwill Calculation

Under the syllabus for simple group accounts, the non-controlling interest is recorded at its fair value. Goodwill is calculated as follows:

Goodwill = Consideration transferred + Fair value of NCI − Fair value of net assets at acquisition

Example:

Red Co acquired 80% of Blue Co’s 40,000 $1 ordinary share capital on 1 January 20X2 for a consideration of $3.50 cash per share. The fair value of the non-controlling interest was $30,000, and the fair value of the net assets acquired was $125,000.

Calculation:

Consideration transferred: 80% × 40,000 × $3.50 = $112,000
Fair value of NCI: $30,000
Less: Fair value of net assets: ($125,000)
Goodwill: $17,000

Non-Controlling Interest (NCI)

Definition

Non-controlling interest is the equity in a subsidiary not attributable, directly or indirectly, to a parent. In the example above, the NCI holds the remaining 20% of Blue Co’s shares.

Measurement of NCI

IFRS 3 allows two measurement options for NCI at the acquisition date:

Fair value method: The NCI is measured at its fair value (the “full goodwill” method). This results in the recognition of goodwill attributable to the NCI as well as the parent’s goodwill.
Proportionate share method: The NCI is measured at its proportionate share of the acquiree’s identifiable net assets. Under this method, only the parent’s share of goodwill is recognised.

Key Insight: The fair value method brings the full 100% of the goodwill onto the consolidated statement of financial position. This is consistent with the treatment of other assets and the concept of control.

The Fair Value Option

While both methods are permitted, the syllabus for simple group accounts requires the use of fair value for NCI. This approach recognises not only the purchased goodwill attributable to the acquirer but also the goodwill attributable to the NCI in the acquiree—often referred to as the “full goodwill” method.

Note: The choice of measuring NCI at fair value vs proportionate share can significantly affect the consolidated financial statements. The full goodwill method generally results in higher goodwill and higher NCI, affecting key financial ratios.

Consolidation Mechanics

The Consolidation Process

When preparing consolidated financial statements, the following basic steps are followed:

Cancellation of intra-group items: Items that appear as an asset in one company and a liability in another should be cancelled out.
Line-by-line combination: The assets, liabilities, income, and expenses of the parent and subsidiary are combined.
Recognition of goodwill: Goodwill is calculated and recognised as an asset.
Recognition of NCI: The non-controlling interest is shown in equity, separately from the parent’s equity.

Elimination of Intra-Group Transactions

Intra-group sales, purchases, and balances must be eliminated in full. For example, if the parent sells goods to the subsidiary, the intra-group sale and corresponding purchase must be eliminated from the consolidated income statement.

Provision for Unrealised Profit (PUP)

When goods are sold between group companies and remain in inventory at the year-end, the unrealised profit must be eliminated. This is done by reducing inventory (in the statement of financial position) and increasing cost of sales (in the statement of profit or loss).

A Simple Group Example

Scenario

Pink Co acquired 80% of the ordinary shares of Scarlett Co on 1 January 20X2. The fair value of the NCI was $30,000, and the fair value of the net assets of Scarlett Co at acquisition was $125,000.

Consolidation Steps

Determine control: Pink Co owns 80% of Scarlett Co, giving it control.
Calculate goodwill:
- Consideration transferred: 80% × shares × price per share
- Fair value of NCI: $30,000
- Less: Fair value of net assets: ($125,000)
- Goodwill on acquisition
Combine assets and liabilities: Combine 100% of Pink Co and 100% of Scarlett Co’s assets and liabilities on a line-by-line basis.
Eliminate intra-group balances: Eliminate any intra-group receivables/payables.
Recognise NCI: Show the NCI in equity, calculated as the NCI’s share of the subsidiary’s net assets at the reporting date.
Present the consolidated statement of financial position: Show the group’s assets, liabilities, and equity as a single economic entity.

How Qeeva Advisory Helps with Group Financial Statements

At Qeeva Advisory, we understand that preparing consolidated financial statements can be complex. Our team of experienced professionals helps Nigerian and international businesses prepare group financial statements in compliance with IAS 27, IAS 28, IFRS 3 and IFRS 10.

Our Core Services

Advisory Services Nigeria – Our advisory professionals help you understand group accounting requirements, classify investments correctly, and prepare consolidated financial statements.

Regulatory Compliance – We ensure your financial statements meet all regulatory requirements and comply with IFRS.

Bookkeeping Services – Accurate financial records are essential for preparing group accounts. Our bookkeeping services ensure your data is accurate, complete, and compliant.

Frequently Asked Questions

Q: What is the difference between a subsidiary and an associate?
A: A subsidiary is an entity controlled by the parent (control = power, variable returns, ability to use power). An associate is an entity over which the investor has significant influence but not control (typically 20%–50% ownership).

Q: When should an entity be classified as a subsidiary?
A: When the investor has control over the investee. Control exists when the investor has power over the investee, is exposed to variable returns, and has the ability to use its power to affect returns.

Q: What is the presumption for significant influence?
A: IAS 28 presumes significant influence when the investor holds 20% or more of the voting power of the investee, unless proven otherwise.

Q: How is goodwill calculated under the fair value method for NCI?
A: Goodwill = Consideration transferred + Fair value of NCI − Fair value of net assets at acquisition.

Q: What is the difference between the equity method and full consolidation?
A: Under full consolidation, the group combines 100% of the subsidiary’s revenue, costs, assets, and liabilities. Under the equity method, only the group share of the associate’s post-tax profit is added to the group profit—the associate’s individual line items are not combined.

Q: What is the non-controlling interest?
A: The equity in a subsidiary not attributable, directly or indirectly, to a parent. The NCI is shown in equity, separately from the parent’s equity.

Q: What are the two methods for measuring NCI?
A: The fair value method (the “full goodwill” method) and the proportionate share method. The simple group syllabus requires the use of fair value for NCI.

The Bottom Line

The preparation and presentation of simple group financial statements requires a thorough understanding of IAS 27, IAS 28, IFRS 3 and IFRS 10.

Key Takeaways:

Understand Control: Control is the basis for consolidation. Control exists when the investor has power over the investee, is exposed to variable returns, and has the ability to use its power to affect returns.

Know the Presumption for Associates: Significant influence is presumed when the investor holds 20% or more of the voting power, but this is a rebuttable presumption.

Apply the Acquisition Method: IFRS 3 requires the use of the acquisition method, recognising identifiable assets and liabilities at fair value at the acquisition date.

Calculate Goodwill Correctly: Under the simple group syllabus, use the fair value method for NCI: Goodwill = Consideration transferred + Fair value of NCI − Fair value of net assets at acquisition.

Eliminate Intra-Group Transactions: All intra-group balances and transactions must be eliminated in full.

Your job is to be prepared. Understand the principles of group accounting. Classify investments correctly. Prepare consolidated financial statements accurately. Seek professional guidance.

With the right approach and the right partner, you can turn group financial reporting from a compliance burden into a strategic advantage.

Reference Links / Sources

IFRS 10 – Consolidated Financial Statements – The primary source for control, consolidation requirements, and the definition of a group

IFRS 3 – Business Combinations – The acquisition method, goodwill calculation, and fair value measurement of identifiable assets and liabilities

IAS 27 – Separate Financial Statements – Accounting for investments in subsidiaries, associates, and joint ventures in separate financial statements

IAS 28 – Investments in Associates and Joint Ventures – Significant influence, equity method, and 20% presumption

ACCA Global – Preparing simple consolidated financial statements – Goodwill calculation formula and fair value for NCI

Let’s Talk About Your Group Financial Reporting Needs

Preparing consolidated financial statements can be complex. At Qeeva Advisory, we understand the challenges faced by Nigerian businesses in preparing group accounts in compliance with IFRS.

Whether you need help with consolidation, classification, or compliance support, we are here to support you.

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