Uniform accounting principles and policies
Table of Contents
Uniform accounting principles – subsidiary’s accounting basis is not IFRS / US GAAP
It is common for individual companies within one group to prepare their separate financial statements using different generally accepted accounting principles (GAAP). E.g. subsidiaries in US and UK would apply US GAAP and UK GAAP, respectively, for their local reporting purposes, whereas group consolidated financial statements are prepared under the rules of IFRS. In such a case, subsidiaries financial statements must be adjusted to IFRS upon consolidation.
Under the rules of IFRS, the consolidated financial statements of a group must be prepared in accordance with the authoritative principles and standards set in the International Financial Reporting Standards in order for the parent to assert that the group’s financial statements are prepared in compliance with IFRS. Similar rules also apply under the US GAAP. The authoritative principles and standards in the Accounting Standards Codification (ASC) must be followed upon consolidation, so that the parent could assert compliance with the US GAAP.
In US, SEC registrants also must apply the rules and interpretive releases of the SEC, i.e. additional sources of authoritative GAAP for applicable entities (these are not dealt with in the current article).
Consistent accounting policies
Rules of IFRS
Like above, IFRS 10 Consolidated financial statements, requires the use of uniform accounting policies by the group in its consolidated financial statements prepared in accordance with IFRS. Consequently, if a subsidiary uses accounting policies which differ from those policies adopted by the group in the consolidated financial statements for like transaction and events in similar circumstances, consolidation adjustments must be made to the financial statements of that subsidiary in preparing the consolidated financial statements to ensure conformity with the group’s accounting policies. Thus, as stated in IFRS 10.19, a parent shall prepare consolidated financial statements using uniform accounting policies for like transactions and other events in similar circumstances.
For example, the need for adjustment arises in a situation where a subsidiary, preparing its financial statements in accordance with local GAAP, values land and buildings under revaluation model, as allowed by this local GAAP. The group, however, has chosen a cost model under IFRS (IAS 16 Property, Plant and Equipment) as an accounting policy for measuring land and buildings. In such case, the group’s consolidated financial statements prepared in accordance with IFRS must be adjusted to exclude any revaluation effects included in the separate financial statements of the subsidiary prepared in accordance with the local GAAP and take into account necessary adjustments to reflect the cost model applied by the group.
When a subsidiary has recently been acquired by the group and the parent and subsidiary have different accounting policies, the subsidiary has good enough reason to change the accounting policy for its separate financial statements (assuming both are reporting under IFRS, but different acceptable accounting policies are applied) and reflect that via prior year adjustment in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Alternatively, this subsidiary can elect to change nothing and continue using the original accounting policies it applied in its separate financial statements. In this case, group would need to make adjustments in consolidating this subsidiary in order to reflect it’s results and financial position in accordance with the groups accounting policies. These adjustments could also result in additional temporary differences in the consolidated financial statements, which require recognition of deferred tax.
Illustrative example – Different accounting policies adopted for the measurement of PPE by the Parent and Subsidiary
A Parent company preparing group consolidated financial statements in accordance with the IFRS has a Subsidiary who prepares its separate financial statements also under IFRS. The Subsidiary accounts for its PPE using the revaluation model, whereas the group’s accounting policy for measuring for PPE is the cost model.
The Subsidiary’s SOFP as at 31 December 2022 and SOCI for the period then ended are as follows:
|SOFP of Subsidiary as at 31 December 2022|
|Trade receivables||7 500|
|Property, plant and equipment 1||125 000|
|Total Assets||149 500|
|Trade payables||10 000|
|Non-current liabilities||65 000|
|Total Liabilities||75 000|
|Share capital||6 000|
|Reserves 2||45 600|
|Retained earnings||22 900|
|Total Equity||74 500|
|Total Liabilities and Equity||149 500|
|SOCI of Subsidiary for the year ended 31 December 2022|
|Cost of goods sold||-140 000|
|Administrative expenses||-43 000|
|Other operating expenses||-6 000|
|Operating profit / -loss||11 000|
|Finance cost||-1 500|
|Profit before tax||9 500|
|Income tax expense||-1 000|
|Profit for the year||8 500|
|Other comprehensive income|
|Revaluation of property, plant and equipment||45 000|
|Other comprehensive income for the year||45 000|
|Total comprehensive income for the year||53 500|
For the purpose of consolidating, the Subsidiary’s financials need to be adjusted to eliminate the revaluation results and account for the PPE using the cost model, as is applied by the parent entity.
Relevant information about the PPE of the Subsidiary:
|PPE acquisition date||1 July 2021|
|Acquisition cost (EUR)||80 000|
|Revaluation gain 31.12.21 (EUR)||0|
|Revaluation gain 31.12.22 (EUR)||45 000|
|Expected useful life (years)||20|
|Annual depreciation (EUR)||4 000|
Adjusted SOFP as at 31 December 2022 and SOCI for the period then ended of the Subsidiary are as follows:
|SOFP of the Subsidiary as at 31 December 2022|
|Cash||9 000||9 000|
|Trade receivables||7 500||7 500|
|Inventory||8 000||8 000|
|Property, plant and equipment 3||125 000||-51 000||74 000|
|Total Assets||149 500||-51 000||98 500|
|Trade payables||10 000||10 000|
|Non-current liabilities||65 000||65 000|
|Total Liabilities||75 000||0||75 000|
|Share capital||6 000||6 000|
|Reserves 4||45 600||-45 000||600|
|Retained earnings 5||22 900||-6 000||16 900|
|Total Equity||74 500||-51 000||23 500|
|Total Liabilities and Equity||149 500||-51 000||98 500|
|SOCI of the Subsidiary for the year ended 31 December 2022|
|Revenue||200 000||200 000|
|Cost of goods sold||-140 000||-140 000|
|Administrative expenses 6||-43 000||-4 000||-47 000|
|Other operating expenses||-6 000||-6 000|
|Operating profit / -loss||11 000||-4 000||7 000|
|Finance cost||-1 500||-1 500|
|Profit before tax||9 500||-4 000||5 500|
|Income tax expense||-1 000||-1 000|
|Profit for the year||8 500||-4 000||4 500|
|Other comprehensive income|
|Revaluation of Property, Plant and Equipment 7||45 000||-45 000||0|
|Other comprehensive income for the year||45 000||-45 000||0|
|Total comprehensive income for the year||53 500||-49 000||4 500|
Rules of US GAAP
As opposed to IFRS, ASC 810 Consolidation does not require for a parent and its subsidiaries to conform their accounting policies in preparing the consolidated financial statements. A parent could conclude that it is appropriate to use the same accounting policies for parent and its subsidiaries, however, when for example, a subsidiary is a public company, has recently been acquired, or has some specialized industry accounting principles, there may be reasons for maintaining different accounting policies between the companies.
If the subsidiary’s financial statements were prepared in accordance with US GAAP and the accounting policy applied by the subsidiary for similar items in its financial statements is an acceptable alternative available in US GAAP, the financial statements of the subsidiary are generally not adjusted upon consolidation.
For example, a US parent applies the last-in, last-out (LIFO) method for inventory accounting and its US subsidiary applies the first-in, first-out (FIFO) method instead. When preparing the consolidated financial statements, no adjustments to conform the inventory policies are required under the US GAAP. However, a parent would still need to determine proper elimination of intercompany balances and transactions.
Rephop helps companies reconcile and adjust subsidiary financial statements to comply with IFRS or US GAAP for consolidated financial statements. It ensures uniformity in accounting policies and helps eliminate manual adjustments, leading to accurate and reliable consolidated financial statements. Rephop also helps companies stay compliant with accounting standards and regulations, reducing the risk of financial reporting errors.
PPE consists of a building measured at revaluation method ↩
Includes revaluation reserve amounting to 45 000 EUR ↩
Workings for PPE:
Revalued balance of PPE 125 000 less Revaluation gain -45 000 less accumulated depreciation -6 000 PPE NBV at 31.12.2022 per cost model 74 000 Check: PPE at cost (from a separate table above) 80 000 less accumulated depreciation (1,5 years) -6 000 PPE NBV at 31.12.2022 per cost model 74 000
Revaluation gain of 45 000 EUR is eliminated from Revaluation reserve. ↩
Retained earnings are adjusted for accumulated depreciation (2 000 EUR relating to half year 2021 + 4 000 EUR relating to year 2022 = 6 000 EUR in total from the date of acquisition). ↩
Administrative expenses are adjusted with PPE depreciation expense relating to year 2022. ↩
Revaluation gain of 45 000 EUR is eliminated from Other comprehensive income. ↩