Introduction Ind AS 110 stands for Indian Accounting Standard 110. It deals with principles of preparation and presentation of consolidated financial statements when an entity controls one or more other entities. It is often seen that an entity owns and controls one or more entities. Like a parent cRead more
Introduction
Ind AS 110 stands for Indian Accounting Standard 110. It deals with principles of preparation and presentation of consolidated financial statements when an entity controls one or more other entities.
It is often seen that an entity owns and controls one or more entities. Like a parent company have many subsidiaries. For example, Alphabet is the parent company of Google. The parent and its subsidiaries prepare their financial statements separately to present to the true and fair view of their business.
Consolidated financial statements are the financial statements of the whole group i.e. taking the parent and its subsidiaries together. It reports the assets, liabilities, equity, income and expenses of the whole group as a single economic entity.
It helps the stakeholders to know the overall performance and positions of assets and liabilities of the whole group.
When to prepare Consolidated Financial Statements(CFS)
The requirement for the preparation of CFS depends on the control model provided by Ind AS 110. As per this model, an investor controls an investee when:
- the investor is exposed to or has rights to, variable returns from its involvement with the investee and
- it has the ability to affect those returns through its power over the investee.
If both the conditions are fulfilled, then it can be said that the investor controls the investee and the investor has to prepare the consolidated financial statements with its investee. Every type of investor-investee relationship is judged as per Ind AS 110.
Exposure or right to variable returns
Variable returns mean no fixed returns and can vary as per the performance of the investee. Such returns can be both positive and negative. These returns include not only return on investment but also the benefits or expenses to which the investor is entitled to or has to bear respectively. Such returns are:
- Dividends
- Changes in the value of the investee.
- Fee for servicing investee’s assets and liabilities
- Tax benefits
- Access to proprietary knowledge
- Sourcing scare products
- Goodwill generation
It is not required by Ind AS 110 for an investor to be exposed or have the right to all such variable returns, but there should be significant exposure or right.
Power to affect the variable returns from investee
An investor has power over an investee if it has existing rights that give it direct ability to affect the relevant activities of the investee
An investor generally has many rights over the investee. These rights are of two types:
- Protective Rights: These are the rights to protect the self-interest of the investor from any risk arising from investment in the investee. Such right only protects the investor but it does not give him power over the investee. Hence, with protective rights, an investor cannot control the investee.
- Substantive Rights: These are rights with which an investor can have power over the investee. Such rights are generally the voting rights that are derived from the holding equity shares. Also having potential voting rights which are significant enough to control the investee qualify as substantive rights.
However, the investor may other substantive rights like power to appoint or remove the board of directors etc.
These rights should not only exist with investors but the investor should also have the ability to exercise such rights.
Scope of Ind AS 110
The investee can be any type of entity, the structure of the investee does not matter whether it is a partnership firm, LLP, company or any Special Purpose Entity (SPE).
If any investor control one or more other entities it will be called parent entity and it will present the consolidated financial statements.
Exemptions
If any parent entity fulfils any of these conditions, then the presentation of consolidated financial statements is not necessary:
- It is an investment entity.
- Its debt or equity securities are not listed on any recognized stock exchange or any other public market.
- It is a wholly-owned or partially owned subsidiary of another entity and all of its owners have been informed about and do not have any objections to the parent not preparing the consolidated financial statements.
- Its ultimate or any intermediate parent entity has prepared consolidated financial statements for the whole group.
- It did not file or is in process of filing its financial statement with the concerned securities commission or any other regulatory body for issuing its securities in the public market.
Before answering the question let’s understand what a government grant is. Meaning of government grants Government grants are the assistance provided by the government in cash or kind to any enterprise for any past or future compliance. This assistance can be subsidies, cash incentives, duty drawbacRead more
Before answering the question let’s understand what a government grant is.
Meaning of government grants
Government grants are the assistance provided by the government in cash or kind to any enterprise for any past or future compliance. This assistance can be subsidies, cash incentives, duty drawback, or assets provided at concessional rate or at no cost etc.
These grants when provided have some rules and conditions attached to them. If such conditions are not fulfilled or rules are violated, the grant becomes refundable to the government.
Treatment
AS-12 ‘Government Grant’ provides two approaches for the treatment of government grants in the books of accounts of an enterprise:
For example, X Ltd purchase an asset for ₹ 10,00,000 and the government provided a grant of ₹2,00,000 to X Ltd. The useful life of the asset is 4 years and the residual value is nil.
Now there are two methods to treat this grant as income.
Method – 1: The grant amount will be deducted from the asset’s value. This will result in a decreased amount of depreciation. This is an indirect way to recognize government grants as income.
The journal entries are as follows: (Method-1)
The journal entries for the 3rd and the 4th years will be the same as of 2nd year.
In absence of a government grant, the annual depreciation would have been ₹2,50,000 (₹10,00,000 / 4). Hence, due to the grant, the profit will be 50,000 more for the 4 consecutive accounting years.
Method – 2: The grant amount is credited to a special account called the ‘deferred government grant’ account. Over the useful life of the asset, the grant will be credited to the profit and loss account in equal instalments. This is a direct way to recognize government grants as income.
The journal entries are as follows: (Method-2)
The journal entries for the 3rd and the 4th years will be the same as of 2nd year.
When any grant is given is in nature of promoter’s contribution i.e. as a percentage of total investment to be done by an enterprise, and then such grant received from government will be treated as part of shareholder’s funds.
The grant amount will be transferred to the capital reserve account and it will be treated neither as deferred income nor to be distributed as a dividend.
Example: ABC Ltd has set up its business in a designated backward area which entitles the company to receive from the government a subsidy of 20% of total investment. ABC Ltd fulfilled all the conditions associated with the scheme and received ₹20 crores toward its total investment of ₹100 crores.
This ₹20 crore will be transferred to the capital reserve account.
Special case: If the grant is received in relation to a non-depreciable asset like land, then the entire amount of the grant will be recognized in the profit and loss account in the same year.
Treatment of non-monetary government grant
When a government grant is in the form of non-monetary assets like land or other resources at a concessional rate, then the assets are to be recognised at their acquisition cost.
If the assets are acquired at no cost, then they are to be recorded at their nominal value.
For example, if an enterprise receives land for free as a government grant, then it has to record the land at cost based on prevailing market rates.
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