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Uniform accounting principles and policies
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- Rephop
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- @RephopHQ
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Uniform accounting policies are a core part of the group’s consolidation procedures. The same adjustments may be needed when consolidating foreign subsidiaries, and newly acquired entities may also require policy alignment after business combinations under common control.
Uniform accounting principles – subsidiary’s accounting basis is not IFRS / US GAAP
Individual companies within a group commonly prepare their separate financial statements using different generally accepted accounting principles (GAAP). For example, subsidiaries in the US and UK may apply US GAAP and UK GAAP, respectively, for local reporting while the group prepares its consolidated financial statements under IFRS. In that case, the subsidiaries’ financial statements must be adjusted to IFRS on consolidation.
For a parent to state that its group financial statements comply with IFRS, the consolidated financial statements must follow the applicable International Financial Reporting Standards. Similarly, a parent asserting compliance with US GAAP must apply the authoritative guidance in the Accounting Standards Codification (ASC) on consolidation.
In the US, SEC registrants must also apply the SEC’s rules and interpretive releases. Those additional sources of authoritative guidance are outside the scope of this article.
Consistent accounting policies
Rules of IFRS
IFRS 10 Consolidated Financial Statements requires a group to use uniform accounting policies in consolidated financial statements prepared under IFRS. If a subsidiary applies policies that differ from the group’s policies for like transactions and events in similar circumstances, consolidation adjustments must be made to align the subsidiary’s financial statements. IFRS 10.19 therefore requires a parent to 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 and applies different accounting policies from its parent, it may change the policies in its separate financial statements if the requirements of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors are met. Alternatively, it may continue using its existing policies in those statements. The group would then make consolidation adjustments so the subsidiary’s results and financial position follow the group’s accounting policies. Those adjustments may create additional temporary differences in the consolidated financial statements and require deferred-tax recognition.
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 | |
|---|---|
| EUR | |
| Cash | 9 000 |
| Trade receivables | 7 500 |
| Inventory | 8 000 |
| 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 | |
|---|---|
| EUR | |
| Revenue | 200 000 |
| 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 | |||
|---|---|---|---|
| EUR | Adjustment | Adjusted | |
| 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 | |||
|---|---|---|---|
| EUR | Adjustment | Adjusted | |
| 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.
Footnotes
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PPE consists of a building measured at revaluation method ↩
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Includes revaluation reserve amounting to 45 000 EUR ↩
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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. ↩
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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). ↩
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Administrative expenses are adjusted with PPE depreciation expense relating to year 2022. ↩
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Revaluation gain of 45 000 EUR is eliminated from Other comprehensive income. ↩