In this article, we are bringing to you the latest implementation guidance which discusses the preparation of consolidated financial statements for a group that had disposed of its only subsidiary during the financial year. This implementation guidance, named as MFRS Application and Implementation Guide 3 (“MAIG 3”), is issued by the MFRS Application and Implementation Committee (“MAIC”), a committee established under the Malaysian Accounting Standards Board (“MASB”). One of the objectives of MAIC is to consider application and implementation issues and propose recommendations on appropriate guidance to be issued by the MASB.
Some of you may ask, what is the authority of MAIG? MAIG serves merely as one of the MAIC’s educational materials and as a source of reference for the identification of principles to resolve the issue. Also, nothing in the educational materials should be construed as amending or overriding the Malaysian Financial Reporting Standards (“MFRSs”). Note that MFRSs is equivalent or word-for-word International Financial Reporting Standards (“IFRSs”). We have covered this under Accounting 101 series in Financial Reporting Frameworks in Malaysia. More information on MAIC, including its due process, is available on the MASB’s website.
Let’s now go into the details of MAIG 3.
What are the general principles in MAIG 3 for the preparation of consolidated financial statements for a group?
MFRS 10 Consolidated Financial Statements provides the following requirements about the preparation of the consolidated financial statements for a group:
- An entity that is a parent shall present consolidated financial statements. Some exceptions are available for a parent not to present consolidated financial statements.
- Consolidation of an investee starts from the date the investor obtains control of the investee and cease when the investor loses control of the investee.
- If a parent loses control of a subsidiary, the parent:
- Derecognises the assets and liabilities of the former subsidiary from the consolidated statement of financial position.
- Recognises any investment retained in the former subsidiary at its fair value when control is lost and subsequently accounts for it and for any amounts owed by or to the former subsidiary in accordance with relevant MFRSs.
- Recognises the gain or loss associated with the loss of control attributable to the former controlling interest.
- An entity includes the income and expenses of a subsidiary in the consolidated financial statements from the date it gains control until the date when the entity ceases to control the subsidiary. The income and expenses of the subsidiary are based on the amounts of the assets and liabilities recognised in the consolidated financial statements at the acquisition date.
- If a parent loses control of a subsidiary, the parent shall account for all amounts previously recognised in other comprehensive income in relation to that subsidiary on the same basis as would be required if the parent had directly disposed of the related assets or liabilities. Therefore, if a gain or loss previously recognised in other comprehensive income would be reclassified to profit or loss on the disposal of the related assets or liabilities, the parent shall reclassify the gain or loss from equity to profit or loss (as a reclassification adjustment) when it loses control of the subsidiary. If a revaluation surplus previously recognised in other comprehensive income would be transferred directly to retained earnings on the disposal of the asset, the parent shall transfer the revaluation surplus directly to retained earnings when it loses control of the subsidiary.
What is the issue submitted on MAIG 3: presentation of consolidated financial statements for a group that disposed of its only subsidiary during the financial year?
The following are the fact pattern submitted to MAIC on the issue:
- An investor had a subsidiary for many years and had been preparing consolidated financial statements.
- During the financial year ended 31 December 2019, the investor disposed of its only subsidiary on 30 June 2019.
Based on the fact pattern, the submitter sought guidance from MAIC whether the investor would need to prepare consolidated financial statements for the year ended 31 December 2019.
What is MAIC’s view on MAIG 3: preparation of consolidated financial statements for a group that disposed of its only subsidiary?
MAIG 3 takes into consideration the requirements of the Companies Act 2016, in Malaysia. The paper noted that Section 249(2) of the Act states that the annual consolidated financial statements for a financial year shall:
- give a true and fair view of the financial position of the company and all its subsidiaries which are dealt with in the consolidated financial statements as a whole at the end of the financial year; and
- give a true and fair view of the financial performance of the company and all its subsidiaries which are dealt with in the consolidated financial statements as a whole for the financial year.
MAIC’s view covers the following area:
1. Consolidated financial statements
MAIC believes that consolidated financial statements must be prepared by the investor in the case submitted. This is because the investor was a parent of the subsidiary during the reporting period although the subsidiary had been disposed of at the end of the reporting period. Based on the requirements in MFRS 10 above, the investor also will need to include the income and expenses of the subsidiary until the time when the investor ceases to control it.
MAIC also observed the requirements in MFRS 101 Presentation of Financial Statements which state that a complete set of financial statements comprise a statement of financial position, a statement of profit or loss and other comprehensive income, a statement of changes in equity for the period, a statement of cash flows, notes, and comparative information. Accordingly, the consolidated financial statements prepared by the investors for 31 December 2019 must be a complete set of financial statements including comparative information (i.e. 31 December 2018).
We have discussed the complete set of financial statements in The structure, content and other disclosures in the financial statements.
2. Consolidated statement of financial position
MAIC believes that the consolidated statement of financial position will still need to be prepared by the investor to comply with the requirements of MFRS 101 relating to the complete set of financial statements. This is regardless of the fact that the investor has de-recognised the assets and liabilities of the subsidiary on 30 June 2019 and hence, the consolidated statement of financial position as at 31 December 2019 will not reflect the assets and liabilities of the subsidiary. Less issue noted for the comparative period because, in the prior year (i.e. 31 December 2018), the investor was still in control of the subsidiary.
3. Consolidated statement of profit or loss and other comprehensive income
As noted in the general principles of the preparation of consolidated financial statements of a group, MAIG 3 observed that the investor will need to prepare the consolidated statement of profit or loss and other comprehensive income which include income and expenses of the subsidiary until 30 June 2019 – the date when the investor lost its control on the subsidiary. The investor should also observe and perform the necessary re-classification of gain or loss and revaluation surplus previously recognised in other comprehensive income on the disposal of related assets and liabilities as noted in MFRS 10 general requirements above.
4. Consolidated statement of changes in equity
MAIG 3 states that the investor should also present the consolidated statement of changes in equity as at 31 December 2019.
5. Consolidated statement of cash flows
MAIG 3 also states that in the consolidated statement of cash flows, the investor has to present cash flows arising from the loss of control in the subsidiary separately and classified as investing activities. In addition, the investor also has to disclose the following information:
- the total consideration received;
- the portion of the consideration consisting of cash and cash equivalents;
- the amount of cash and cash equivalents in the subsidiary over which control is lost; and
- the amount of the assets and liabilities other than cash or cash equivalents in the subsidiary over which control is lost, summarised by each major category.
The full details of MAIC 3 – Preparation of consolidated financial statements for a group which had disposed of its only subsidiary during the financial year is available on the MASB’s website for your reference. We will continue to update you on the new issuance of other guidance. Meantime, please enjoy other related articles in the Financial Accounting section.