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  Financial Results of Groups of Companies

Introduction to Reporting the Financial Results of Groups of Companies

Group of companies

It is fairly common for one company to be capable to exercise control over the activities of another. Control generally occurs because the first company (the parent company) owns more than 50% of the ordinary (voting) shares of the second company (the subsidiary company). This directs to the directors of the parent company being capable to select the directors of the subsidiary company and, so being able to dictate its policies. In which this relationship occurs, a 'group' (of companies) is said to present. In which there is a group, the relevant International Financial Reporting Standards (IAS 27 Consolidated and Separate Financial Statements and IFRS 3 Business Combinations) generally need that a set of financial statements is drawn up yearly not only for each individual company, but also for the group taken like a whole. Before we carry on to refer how the group financial statements (i.e., the financial statements of a group of companies) are ready, we shall look at the reasons why groups present at all and at the types of group relationships that can presented.      

Why do groups exist?

Companies contain subsidiaries where:

1. The parent company forms a new company to operate some part of its business, may be a new activity.

2. The parent company buys a majority, may be all, of the shares of some other existing company - i.e., a 'takeover'.

Several companies contain subsidiaries as a result of both of these reasons.

Newly created companies

It is extremely common for large businesses to be made up of some individual companies. These companies are controlled through a parent company, occasionally termed as the 'holding' company. In a number of cases, the only assets of the parent company are the shares which it owns in the subsidiary companies. Even though the subsidiary companies own the land, buildings, machinery, inventories and so on, because the parent owns the subsidiaries, it efficiently controls the productive assets of those companies.                                            

An evident question to ask is: why do businesses operate by subsidiaries?

To put it other way, why do the parent companies not own all of the assets of the business directly, in its place of them being owned through the subsidiaries? The answers to these questions are possibly:

  • Limited liability

Every individual company has limited liability. The meaning of this is that if there is a financial failure of one subsidiary, neither the assets of another subsidiaries nor those of the parent could be legally demanded through any unsatisfied claimants (lenders, trade payables and so on) against the failed company. So the group can 'ring-fence' each part of the business through having separate companies, every along with its own limited liability.

  • Individual identity

A sense of autonomy and independence might be created that could, in turn, raise levels of commitment between staff. It might also assist to develop, or perpetuate, a market image of a smaller, independent business. Customers, and staff, might prefer to deal along with what they see as a smaller, specialist business than along with a division of a large diversified business.

To make a subsidiary, the would-be parent might simply create a new company in the general way. The new company would after that issue shares to the parent, in exchange for a number of asset or assets of the parent. In which the new subsidiary has been created to undertake an entirely new activity, the asset might well be cash. If the subsidiary is to continue some activity that the parent had undertaken directly up to that point, the assets are probable to be such things as the non-current and current assets related with the specific activity.

Takeovers

A would-be parent company might also form a subsidiary through taking over an existing company. Now it buys more than 50% the shares of a hitherto, not connected target company to able it to exercise control, so making the target a subsidiary company. Certainly the shares are bought from the existing shareholders of the target company.

In several takeovers, the parent presents its own shares as all, or part of, the bid consideration. The meaning of this is that target company shareholders who accept the offer will exchange their existing shares for shares in the parent. So, they cease to be shareholders of the target company and become shareholders in the parent.

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