Consolidated and separate financial statements-Case study of Scicom (MSC) Berhad

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Consolidated and separate financial statements…………………………………………………… 2

  1. Review of the history of the standard of “FRS 127 Consolidated and separate financial statements” 2

1.1      Definitions………………………………………………………………………………………. 2

1.2      History of development…………………………………………………………………….. 2

1.2.1     FRS 127(amended in 2011), Effective date: 1 January 2013………… 2

1.2.2     FRS 127 (revised), Effective date: 1st January 2010……………………. 3

1.2.3     FRS 127 (amended in 2005), Effective date: 1st January 2006……… 4

1.2.4     FRS 127 (2004), effective date: 1st January 2005……………………….. 5

  1. Literature review on the standard of “FRS 127” Consolidated and separate financial statements 6

2.1      Concepts…………………………………………………………………………………………. 6

2.2      Scope of consolidated and separate financial statements………………………. 6

2.3      Similarities with IAS 27 (10)……………………………………………………………… 7

  1. Purpose, scope and content of the standard (amended in 2011)………………………. 7

3.1      Purpose…………………………………………………………………………………………… 8

3.2      Scope……………………………………………………………………………………………… 9

3.3      Content…………………………………………………………………………………………… 9

  1. Case analysis…………………………………………………………………………………………… 10

4.1      Accounting policy………………………………………………………………………….. 10

4.1.1     The concepts of subsidiaries and jointly controlled entities………… 10

4.1.2     Intra-group transactions…………………………………………………………. 11

4.1.3     Income taxes policy………………………………………………………………. 12

4.2      Presentations………………………………………………………………………………….. 12

Bibliographies……………………………………………………………………………………………….. 16

Consolidated and separate financial statements

-Case study of Scicom (MSC) Berhad

 

1.        Review of the history of the standard of “FRS 127 Consolidated and separate financial statements”

1.1    Definitions

 

First, let us review the definitions of two different and important concepts in this accounting standard: consolidated financial statement and separate financial statement. Consolidated financial statements are financial statements that factor the holding company’s subsidiaries into its aggregated accounting figure (Needles, Powers & Crosson 2008). And the separate financial statements are those presented by a parent or group in which the investments are accounted based on the direct equity interest rather than on the basis of the reported accounting figure and net assets of the investees (masb.org.my 2010). From these two definitions we can see the application scope of the standard: it is applied for the presentation of the separate financial statements in a consolidated manner for the business companies under controlled by a parent entity.

 

1.2    History of development

 

Below let us review the history of the standard of “FRS 127 Consolidated and separate financial statements”.

 

1.2.1            FRS 127(amended in 2011), Effective date: 1 January 2013

 

The basis for the amendments made in last year 2011 to FRS 127 was based on the changes made to IAS 27 on 12 May 2011. The amendments to IAS 27 resulted mainly from the development of IFRS 10 Consolidated Financial Statements. And all the requirements relevant to the consolidated financial statements are all removed and in addition changes are to be implemented to standardize the terminology (efrag.org 2011). The new revised FRS 127 regulates that when a company prepares its financial statements, it should report the investments that it has made to the subsidiaries, joint ventures or associates in two major ways: (1) at cost; or either (2) in consistency with the requirements by FRS 9 (rather than the FRS 139 in the previous version). Another key change identified is that the new FRS 127 requires including the report of the dividend (profit or negative) that it obtains from the subsidiaries, joint venture or associate holding (masb.org.my 2011). Coming together with the revised FRS 127 is the requirement of disclosure of the relevant information in the consolidated financial statements for the parent company which we will further discuss in the later case study.

 

1.2.2            FRS 127 (revised), Effective date: 1st January 2010

 

FRS 127 effective on 1st January 2010 was considered as having significant effect over how business combinations are to be accounted and how minority interests are to be measured. In the area of presentation and disclosure in the financial statement, the FRS 127 (revised) regulates that if a company use the deemed cost in the opening FRS balance sheet for its joint venture investment, shareholding in its subsidiary or investment made in the associates, the first separate financial statements should include the following:

(1) the total deemed cost of these investments for which the deemed cost is the previous GAAP carrying digit;

(2) the total deemed cost of these investments should be fair value;

(3) the aggregate changes to the carrying amounts reported based on the previous GAAP (masb.org.my 2010).

 

1.2.3            FRS 127 (amended in 2005), Effective date: 1st January 2006

 

The FRS 127 (amended in 2005) implemented a number of key changes to the previous FRS 127 (2004) version:

 

1.2.3.1      Scope

 

In term of scope, the amended scope covers the investments in the relevant subsidiary, joint ventures and various forms of associates in the form of the parent company’s separate financial statements.

 

1.2.3.2      Exemptions

 

The FRS 127(amended in 2005) also includes changes regarding the exemptions from the consolidating investments in the relevant subsidiaries. The exemptions could happen in four kinds of scenarios in which the parent company may not need to prepare the consolidated financial statements: (1) the parent company is itself a wholly owned subsidiary or it is a partially owned another company and other owners and also the not preparing the consolidated financial statements are agreed by the owners or other shareholding companies; (2) the company is not a listed company in any public market (national or regional markets); (3) the company does not file its financial statements to any regulatory departments; (4) any middle or final parent company of this parent entity is established in Malaysia and provides consolidated financial statements to the investors and public in consistence with the Financial Reporting Standards (FRS) (masb.org.my 2006).

 

1.2.3.3      Consolidation Procedures

 

In term of the consolidation procedures, the FRS 127(amended in 2005) in contrast to FRS 127 (2004)’s provision of an exception regarding the application of the uniform accounting policies for reporting if it is not practicable to use the uniform accounting policies banned this exception clause and required all the companies to adopt the policies. Also regarding the minority interests the standard requests the company to demonstrate the minorities’ interest in the form of separate reports regarding the minorities’ equity holding from the parent’s shareholder equity reports which was not a must in the 2004 version. And in the field of debts, the requirement of presentation is still the same as in the previous version. Finally, regarding the separate financial statements, the FRS 127(amended in 2005) requires the company to provide the accounting treatment for the investments in the joint ventures, various forms of associates or its subsidiaries when an entity elect or there is a request from the relevant regulatory departments to provide separate financial statements and such provision of these investments should be done (1) at cost; or (2) it is done in consistence with the FRS 139 regulations (masb.org.my 2006).

 

1.2.4            FRS 127 (2004), effective date: 1st January 2005

 

The FRS 127 (2004) was renamed from the “MASB 11 Consolidated Financial Statements and Investments in Subsidiaries” which was again originated from the approved IAS 27. In the “MASB 11 Consolidated Financial Statements and Investments in Subsidiaries” there are some differences that that we can identify compared to the later appeared versions under the name of FRS 127. The standard does not cover the following scenarios: (1) accounting methods to business combinations and also the relevant effects to the consolidations; (2) the company’s investment in the various forms of associates; (3) investments in the shareholding of joint venture entities.

 

 

 

2.        Literature review on the standard of “FRS 127” Consolidated and separate financial statements

 

Since the FRS 127 Consolidated and separate financial statements as an accounting standard has closed relationship and effect of synchronization with the international financial reporting standards (IFRS) issued by the International Accounting Standards Board (IASB). We will provide literature review on both accounting standards.

 

2.1    Concepts

 

The term of consolidation in the accounting practices refers to the replacement in the parent’s account of the cost of its investment in the subsidiary by what it actually represent which is the parent’s share of the net assets in the subsidiary as well as the goodwill as a cost in the time of acquisition (Hussey 2011, p. 237). Many norms regarding the business entities that have been mentioned such as corporation, joint venture and associates could be summarized as the special purpose entities (SPEs). The special purpose entities (SPEs) or sometimes known as the special purpose vehicles, could be referred as the entities created to carry out a specific or limited purpose and the creator is called as the sponsor, the special purpose entities (SPEs) could take the form of a corporation, partnership, trust or joint ventures (Ketz 2003, p. 126).

 

2.2    Scope of consolidated and separate financial statements

 

According to Abbas A. Mirza, Graham Holt and Magnus Orrell (2010), consolidated and separate financial statements shall cover all the subsidiaries of the parent. And one key assumption here is regarding the control over the subsidiaries which differentiates the subsidiaries or non subsidiary firms. The authors claim that control is presume to exist as when the parent directly or indirect posses more than 50 per cent of the total voting power of the subsidiary company. In this book, four major scenarios in which the parent may not posses more than half of the voting power but also control by the parent company would still exist: (1) power over more than 50% of the voting power by virtue of an agreement with other investors; (2) the parent is entitled to obtain the power to control and influence the financial and operational activities and decision making through a contract; (3) through any form the parent company is entitled to have the power to remove or replace the majority of the board of directors positions; (4) the parent company has the major voting power in the meeting of the board of directors.

 

2.3    Similarities with IAS 27 (10)

 

According to Steven M. Bragg (2010), the FRS 127 Consolidated and separate financial statements share the same requirements for the companies to be exempted to prepare the consolidated financial statement if they meet all the following requirements: firstly, the parent is itself a wholly owned subsidiary or all the shareholding entities of the company have not gone against such a decision to be exempted from preparing the consolidated financial statements; secondly, all of the company’s equity or debts are not traded in any of the well defined public market (regional or national wide trading market); thirdly, the company does not get involved in any process to apply for any class of instruments in any forms of public trading market; and finally, any of the middle or final parent of this parent firm will issue the consolidated financial statement accessible to the public which is in accordance with the international financial reporting standards (IFRS). Many other similarities could be found between the IFRS 27 and FRS 127.

 

3.        Purpose, scope and content of the standard (amended in 2011)

 

Since as mentioned above, we have identified a number of versions with time passes, here we will talk about the purpose, scope and major contents of the standard with reference to the most recent version which is the “FRS 127 Consolidated and separate financial statements” effective since 1st Jan 2013.

 

3.1    Purpose

 

The major purpose of the FRS 127 Consolidated and separate financial statements (2011) is to enhance the relativity, reliability and comparability of the business and financial information exhibited in the financial reports by demonstrated the investments and control over the subsidiaries, joint venture companies and relevant associates through the separate financial statements in the parent company’s consolidated financial reports. The objective of relativity or relevance under such conditions refers to the timely update of the financial information from the relevant investments in the said entities will make a difference to the decision maker; the objective of reliability is obvious because it shows the company financial report users the company investment activities in term of the share of investment, profitability or any loss incurred in the investment activities which will certainly enhance the reliability of the financial reports because it reminds the investors that the company has investments outside the company by controlling the subsidiaries, influencing the joint venture or associates; the objective of comparability is even more meaningful and of greater significance in the perspective of the investors. Since as we know in the stock markets, investors especially the small and individual investors who usually have less access to the company’s financial and business information, therefore the addition of the investment information under the regulation of the standard of Consolidated and separate financial statements will increase the financial information available to the investors. In addition, the requirement that all the public listed companies need to apply this accounting standard actually makes it more convenient for the investors to make comparing analysis between any two companies in the stock market before making up the decision to by any of their stocks.

 

3.2    Scope

 

In term of the scope of the standard, it does not change too much from the previous version. The standard regulates that the standard should be practiced and adhered in the enacting and demonstration of the consolidated financial statements for all the business entities under the control of the parent company. Though as mentioned above, it is a must for the subsidiaries, joint venture entities and various forms of associates to adopt the standard according to the exemption treaties, it shall be adopted in accounting for these investments when an entity elects or it is demanded by the relevant departments to demonstrate the separate financial reports.

 

3.3    Content

 

In term of the content of the standard, let us first look into the consolidation procedure of the standard. The standard offers a three-step guideline to the parent company that is going to issue the consolidated financial reports which aggregate the financial statements of both the parent company’s and the subsidiaries’ accounting digits in different account such as the current assets, long term borrowing and equity, income and so on. First of all, the carrying amount of the parent company’s investment in every subsidiary and also the parent’s part of equity in each subsidiary should be eliminated; the second step is the listing out of the non controlling profit or loss for the consolidated subsidiaries during the specified accounting period; and the last step in the guideline is the identification of the non controlling interest in term of net assets in the consolidated companies by excluding the holding interest of the controlling parent company.

 

In term of the internal transaction between the group entities, the standard clearly states that the intergroup balances, income or expenditures and any other similar interactions should be reduce to the maximum. For instance, inventory is usually considered as part of the total asset in the account of current asset. But in the scenario of intergroup transactions, such inventory should be reduced to zero.

 

To resolve the potential differences between the parent company and the subsidiaries, associates and joint venture companies in the reporting periods, the standard regulates that the financial statements should be made based on the same accounting period, in case there should be differences, the subsidiaries should additional version of financial reports based on the parent company’s accounting period to make resolve the problem of reporting period inconsistencies.

 

4.        Case analysis

 

The standard of “FRS 127 (2010) Consolidated and separate financial statements” as a revised standard was adopted in the company’s financial reports since 1st July 2010, in the following we will discuss how the standard was applied in the company’s most recent financial statements.

 

4.1    Accounting policy

 

4.1.1            The concepts of subsidiaries and jointly controlled entities

 

The company identifies two major entities relevant to the standard of “FRS 127 (2010) Consolidated and separate financial statements”: the concept of subsidiaries and jointly controlled entities. In the financial statement, the company clearly defines the subsidiaries as those companies that the parent company has the ability to exert control over their business decision making in order to obtain interest and benefits from their operations. On the other hand, the concept of jointly controlled entities is referred as the contractual relationship between two parties in which the two parties have shared the control over the related economic and business activities and each venturer will have interest over the joint venture.

 

4.1.2            Intra-group transactions

 

According to the related requirements in the standard of “FRS 127 (2010) Consolidated and separate financial statements”, the company has reduced all the intra-group transactions, profits and balances to zero and while there should be any loss that can not be realized the company will also remove it and reflects such losses as the impairment indicator of the asset transferred. For example, in the company’s financial statement regarding the profit or loss of the subsidiaries, the company clearly states that profit or loss of the subsidiaries is the differences between the net disposal amount and the parent company’s proportion of the

 

And when there is a need, the company will also make necessary adjustments to the financial statement of the subsidiaries to ensure the consistence between their financial statements and the parent company’s financial statement. This accounting policy could be understood with an example stated in the standard: if there should be any differences between the group’s accounting period and the those of the subsidiaries’ financial statements, the subsidiaries should prepare an additional financial statement according to the parent’s accounting period to secure the consistency of financial statements and consolidation of the relevant accounts. In addition, the financial statement recognizes the changes in the equity percentage held by the parent company as equity transactions if such changes would not lead to the loss of control over the subsidiary’s business practices since the subsidiaries would be wholly consolidated sine the date of obtaining of the control to the release date of the control.

 

 

4.1.3            Income taxes policy

 

To adhere to the standard of “FRS 127 (2010) Consolidated and separate financial statements”, in term of the income taxes policy, the company has made the withholding tax payable by a foreign subsidiary on the distribution of the retained earnings to companies in the group to be inclusive in its taxable profits. This income taxes policy has helped to ensure that the subsidiaries taxable incomes and profits will be fully consolidated into the parent’s financial statements.

Contingent liabilities policy: recognition of the fair value

 

In accordance with the standard of “FRS 127 (2010) Consolidated and separate financial statements”, in the process in which a company becomes a subsidiary of the parent company through any M&A (merger and acquisition) activities, the contingent liabilities would be calculated based on the faire value measured at the time of the acquisition excluding other interest factors.

 

4.2    Presentations

 

Below let us look at the consolidated financial statements as obvious evidence to support the company’s adherence to the standard of “FRS 127 (2010) Consolidated and separate financial statements”.

 

Figure 1 Consolidated income statement of Scicom in 2011 financial year

 

Figure 2 Consolidated income statement of Scicom in 2011 financial year (continued)

Figure 3 Statement of financial position of Scicom in 2011 financial year

Figure 4 Statement of financial position of Scicom in 2011 financial year (continued)

Bibliographies

 

Bragg, S. M. 2010. The Vest Pocket Guide to IFRS. New Jersey: John Wiley & Sons.

 

efrag.org 2011. IAS 27 Separate Financial Statements (amended 2011). Accessed on 13 May 2012 [online] http://www.efrag.org/Front/p242-5-272/IAS-27-Separate-Financial-Statements–amended-2011-.aspx

 

Hussey, R. 2011, Fundamentals of International Financial Accounting And Reporting. London: World Scientific. p. 237

 

Ketz, J. E. 2003, Hidden Financial Risk: Understanding Off-Balance Sheet Accounting. New Jersey: John Wiley & Sons. p. 126

 

masb.org.my 2010. Amendments to FRS 1 and FRS 127. Accessed on 13 May 2012 [online] http://www.masb.org.my/images/stories/%5B3%5D%20MASB_Amend_FRS1.pdf

 

masb.org.my 2010. MASB Approved Accounting Standards for Private Entities. Accessed on 13 May 2012 [online] http://masb.org.my/index.php?option=com_content&view=article&id=378%3Afrs127-pg3&catid=6%3Amasb-exclude-private&Itemid=15

 

masb.org.my 2006. MASB Approved Accounting Standards for Private Entities. Accessed on 13 May 2012 [online] http://masb.org.my/index.php?option=com_content&view=article&id=378%3Afrs127-pg3&catid=6%3Amasb-exclude-private&Itemid=15

 

Mirza, A. A., Holt, G. & Orrell, M. 2010. International Financial Reporting Standards (Ifrs) Workbook and Guide. New Jersey: John Wiley & Sons.

 

Needles, B. E., Powers, M. & Crosson, S. V. 2008. Financial and Managerial Accounting. Mason: South Western Cengage Learning.