PSAK 65:

Consolidated Financial
Statements

Accounting Requirements

Tjoa Tjek Nien

IAI - PSAK Implementation Team
Consolidation Procedure
In preparing consolidated financial
statements, an entity:
• combines the financial statements of
the parent and its subsidiaries line by
line by adding together like items of
assets, liabilities, equity, income and
expenses and cash flows
• offset (eliminate) the carrying
amount of the parent's investment
in each subsidiary and the parent's
portion of equity of each subsidiary
• eliminate in full intragroup assets
and liabilities, equity, income,
expenses and cash flows relating to
transactions between entities of the
group
Elimination of intragroup transactions
General rules
• The effects of transactions between group
entities should be eliminated in full:
• intragroup transactions (including sales,
expenses and dividends) and the resulting
unrealised profits and losses should be
eliminated in full;
• liabilities due to one group entity by another
will be set off against the corresponding asset
in the other group entity's financial
statements.
 Elimination of intragroup transactions
Unrealised profit in inventories
Consolidation (as group)

Entity A (parent)
Entity B (susbsidiary, 80%)

Sell goods with cost of $20,000 to

At year end, still hold half of the goods
Entity B for $30,000 and recognize
as inventory.
profit on sales $10,000.

When the goods are sold by a parent to a subsidiary, all of the profit on the transaction is
eliminated, irrespective of the percentage of the shares held by the parent.

DR/CR Accounts Debit Credit

DR Consolidated Sales 30,000
CR Consolidated COGS 30,000
DR Consolidated COGS 5,000
CR Inventory 5,000
 Elimination of intragroup transactions
Unrealised profit on transfer of non-current asset
• Assume that Entity F holds 80% of the issued share capital of Entity G.
• Entity G purchased a machine on 1 January 20X1 at a cost of $4,000. The machine has a life of
10 years. On 1 January 20X3, Entity G sells the machine to Entity F at $3,600.
• In preparing the consolidated financial statements of Entity F at 31 December 20X3, the effects
of the sale from Entity G to Entity F have to be eliminated.
• At 31 December 20X3, the carrying amount of the maachine in the books of Entity F will be
$3,150, after depreciation of $450. (i.e. Assuming that the asset’s remaining life of 8 years).
• Entity G will have recognized a profit on transfer of the asset of $400.
• If there had been no transfer., the asset would have been reported at 31 December 20X3 at
$2,800 and depreciation of $400 would have been recognized

DR/CR Accounts Debit Credit

DR Machine (restore to original cost) 400
DR Consolidated P/L (gain on sale of machine) 400
CR Accumulated depreciation 800
DR Accumulated depreciation 50
CR Consolidate P/L (depreciation expense) 50
 Measurement of non-controlling
interest
• The amount of non-controlling interests in the net assets of
• consolidated subsidiaries is calculated as:
• the amount of non-controlling interests arising at the date
of the original combination.
• the non-controlling interests' share of changes in equity
since the date of the combination.

• When potential voting rights exist, the proportions of profit

or loss and changes in equity allocated to the parent and
non-controlling interests are determined on the basis of
present ownership interests and DO NOT reflect the
possible exercise or conversion of potential voting rights.
 Profits or losses attributable to non-
controlling interests
• Profit or loss and each component of other
comprehensive income are attributed to the
owners of the parent and to the non-controlling
interests.

• Total comprehensive income is attributed to the

owners of the parent and to the non-controlling
interests even if this results in the non-controlling
interests having a deficit balance.
Potential Voting Rights – General Rule
• The proportion of profit or loss and changes
in equity allocated to the parent and non-
controlling interests in preparing consolidated
financial statements is determined solely on
the basis of existing ownership interests and
does not reflect the possible exercise or
conversion of potential voting rights and other
derivatives.
 Reporting period of subsidiaries
 The financial statements of all subsidiaries should,
wherever practicable, be prepared:
• as of the same date; and
• for the same reporting period as the parent.

 When a subsidiary and its parent have differing reporting

periods, the subsidiary prepares additional financial
statements corresponding to the group's reporting period
for consolidation purposes, unless it is impracticable to do
so.
• If not, adjustments should be made for the effects of
significant transactions or events that occur between the
end of the subsidiary's reporting period and the end of
the parent's reporting period  not more than 3 months
 Uniform accounting policies
 Consolidated financial statements are prepared
using uniform accounting policies for:
• like transactions and
• other events in similar circumstances

 If a subsidiary uses different accounting policies

for like transactions and events in similar
circumstances, adjustments are made to its
financial statements in preparing the
consolidated financial statements.
 Case Example
• The parent entity uses a revaluation method to
value its property, but its subsidiary uses the cost
basis for valuation. The directors feel that it is not
practical to keep revaluing the property of the
subsidiary and wish to discontinue revaluing the
property on consolidation.

• Must uniform accounting policies be used under

IAS 27?
 Change in ownership without loss of
control
• Change in ownership that does not cause loss of
control is treated as equity transaction, i.e. a
transaction with owners in their capacity as owners.
• no adjustment is made to goodwill or any other
assets or liabilities, and no gain or loss is reported.
• the carrying amounts of the controlling and non-
controlling interests are adjusted to reflect the
changes in their relative interests in the subsidiary.
• Any difference between (i) the amount by which the
non-controlling interests are adjusted and (ii) the fair
value of the consideration paid or received is
recognised directly in equity and attributed to the
owners of the parent.
 Loss of Control
• A parent can lose control of a subsidiary with
or without a change in absolute or relative
ownership levels.
• Example when a subsidiary becomes subject to the control
of a government, court, administrator or regulator.
 Loss of control
•Derecognized

Subsidiary assets and Any non-controlling

liabilities (carrying interest in subsidiary
amount) (carrying amount)

Difference is
Recognized
recognized as a gain or
Consideration Any investment loss in profit or loss
received, if any (fair retained in subsidiary
attributable to the
value) (fair value)
parent.

Other comprehensive income related to

former subsidiary is reclassified into P/L or R/E
 Cases Study

Problem 1
• PT X has control over the composition of PT Y’s board of directors.
PT X owns 49% of PT Y and is the largest shareholder. PT X has an
agreement with PT Z, which owns 10% of PT Y, whereby PT Z will
always vote in the same way as PT X. Can PT X exercise control over
PT Y?
Problem 2
• PT X owns 50% of PT Y’s voting shares. The board of directors
consist of 6 members, PT X appoints 3 of them and PT Y appoints
the other three. The casting vote at meetings always lies with the
directors appointed by PT X. Does PT X have control over PT Y?
 Cases Study

Problem 3
• PT Z has sold all of its shares to the public. The company was formerly a
state-owned entity. The Ministry of State-owned Entities has retained the
power to appoint the board of directors. An overseas entity acquires 55%
of the voting shares, but the Ministry still retains its power to appoint the
board of directors. Who has control of the entity?
Problem 4
• PT A acquired an investment in a subsidiary, PT B with the view to dispose
of this investment within six months. The investment in the subsidiary has
been classified as held for sale and is to be accounted for in accordance
with PSAK. The subsidiary has never been consolidated. How should the
investment in the subsidiary be treated in the financial statements?
 Cases Study 6 (cont.)
Problem 5
• A manufacturing group acquired a controlling interest in a golf club that is
listed on a stock exchange. The management of the manufacturing group
plans to exclude the golf club from the consolidated financial statements
on the grounds that its activities are dissimilar. How should the golf club
be accounted for?
Problem 6
• Co. X controls an overseas entity Co. Y. Because of exchange controls, it is
difficult to transfer funds out of the country to the parent entity. Co. X
owns 100% of the voting power of Co. Y. How should Co. Y be accounted
for?
Problem 7
• Where should non-controlling interests be presented in the consolidated
balance sheet?
Questions & Answers
Thank You