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The requirement related to preparation of consolidated financial statements shall not apply to a company if it meets the following conditions: (i) it is a wholly-owned subsidiary, or is a partially-owned subsidiary of another company and all its other members, including those not otherwise entitled to vote, having been intimated in writing and for which the proof of delivery of such intimation is available with the company, do not object to the company not presenting consolidated financial statements; (ii) it is a company whose securities are not listed or are not in the process of listing on any stock exchange, whether in India or outside India; and (iii) its ultimate or any intermediate holding company files consolidated financial statements with the Registrar which are in compliance with the applicable Accounting Standards.
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(a) Refer Para 2 (b) Refer Para 6.1
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Consolidation of Financial Statement: As per Ind AS 110, there is no such exemption for ‘temporary control’, or “for operation under severe long-term funds transfer restrictions” and consolidation is mandatory for Ind AS compliant financial statement in this case. Paragraph 20 of Ind AS 110 states that “Consolidation of an investee shall begin from the date the investor obtains control of the investee and cease when the investor loses control of the investee”. However, as per Section 129(3) of the Companies Act, 2013 read with rule 6 of the Companies (Accounts) Rules, 2014, where a company having subsidiary, which is not required to prepare consolidated financial statements under the Accounting standards, it shall be sufficient if the company complies with the provisions on consolidated financial statements provided in Schedule III to the Act. In the given case, R Ltd’s intention is to dispose off the shares in the near future as shares are being held as stock in trade and it is quite clear that the control is temporary, Therefore, R Ltd. is required to prepare Consolidated Financial Statements in accordance with Ind AS 110 as exemption for ‘temporary control’ is not available under Ind AS 110.
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10% Voting Power and Control over the composition of Board of Directors: In this case, A Ltd. holds only 10 percent of the voting power but has control over the composition of the Board of Directors of B Ltd. In such a case, A Ltd. shall be considered as a parent of B Ltd and, therefore, it would consolidate B Ltd. in its consolidated financial statements as a subsidiary. The auditor should verify A Ltd.’s management’s assessment of having control in B Ltd. despite having only 10% voting power as per the requirements of Ind AS 110. Auditor would need to verify as to how A Ltd. controls the composition of the Board of Directors or corresponding governing body of B Ltd. There can be various means by which such kind of control can be established. In this regard, the auditor may verify the minutes of Board meetings, shareholder agreement entered into by the parent, agreements with B Ltd. to which the parent might have provided any technology or know how, enforcement of statute, etc. Further, the auditor should verify that the adjustments warranted by Ind AS 110 have been made wherever required and have been properly authorised by the management of the parent. The preparation of consolidated financial statements gives rise to permanent consolidation adjustments and current period consolidation adjustments. The auditor should make plan, among other things, for the understanding of accounting policies of the A Ltd. and B Ltd. and determining and programming the nature, timing, and extent of the audit procedures to be performed etc. Further, the duties of an auditor with regard to reporting of transactions with any other related parties are given in SA 550 on Related Parties. As per SA 550 on, “Related Parties”, the auditor should review information provided by the management of the entity identifying the names of all known related parties. A person or other entity that has control or significant influence, directly or indirectly through one or more intermediaries, over the reporting entity are considered as Related Party. GROUP AUDITS In forming an opinion on the financial statements, the auditor shall evaluate whether the identified related party relationships and transactions have been appropriately accounted for and disclosed in accordance with Ind AS 110 and Schedule III and whether the effects of the related party relationships and transactions prevent the financial statements from achieving true and fair presentation (for fair presentation frameworks) or cause the financial statements to be misleading (for compliance frameworks).
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Consolidation of Financial Statement: As per Ind AS 110, there is no such exemption for ‘temporary control’, or “for operating under severe long-term funds transfer restrictions” and consolidation is mandatory for Ind AS compliant financial statement in this case. Ind AS 110 states that “Consolidation of an investee shall begin from the date the investor obtains control of the investee and cease when the investor loses control of the investee”. In the given case, M Ltd. acquired 51% shares of S Ltd. on 01.04.2023 and sold 25% shares during the year ended 2023-24. M Ltd. did not consolidate the financial statements of S Ltd. for the year ended 31.03.2024 on the plea that control was only temporary. The intention of M Ltd. is quite clear that the control in S Ltd. is temporary as the former company disposed off the acquired shares in the same year of its purchase. However, even though the intention of M Ltd. is for temporary holding of shares in S Ltd. as per Ind AS, M Ltd. is required to prepare Consolidated Financial Statements in accordance with Ind AS 110 as exemption for ‘temporary control’ is not available under Ind AS 110. However, “Consolidation of an investee shall begin from the date the investor obtains control of the investee and cease when the investor loses control of the investee”. Here, due to sale of investment in S Ltd. up to 25%, M Ltd. loses control of S Ltd. Accordingly, M Ltd. is required to prepare a consolidated statement till the date of disposal of the 25% shares to comply with the same.
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Consolidated Financial Statements: According to Section 129(3) of the Companies Act, 2013, where a company has one or more subsidiaries, including associate company and joint venture, it shall, in addition to its own financial statements prepare a consolidated financial statement of the company and of all the subsidiaries in the same form and manner as that of its own. Further, as per Companies (Accounts) Rules, 2014, the consolidation of financial statements of the company shall be made in accordance with the provisions of Schedule III to the Act and the applicable accounting standards. However, a company which is not required to prepare consolidated financial statements under the Accounting Standards, it shall be sufficient if the company complies with provisions on consolidated financial statements provided in Schedule III of the Act. However, an investment entity need not present consolidated financial statements if it is required, in accordance with Ind AS 110‘Consolidated Financial Statements’, to measure all of its subsidiaries at fair value through profit or loss. A parent shall determine whether it is an investment entity. (An investment entity is an entity that(a) obtains funds from one or more investors for the purpose of providing those investor(s) with investment management services; (b) commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both; and (c) measures and evaluates the performance of substantially all of its investments on a fair value basis.) In the given case, H Limited is an investment company preparing its financial statements in accordance with Ind AS and the company had invested 25% in S1 Ltd., 50% in S2 Ltd. and 60% in S3 Ltd. of the respective share capitals of the investee companies. In view of provisions discussed in Ind AS 110, the Company is not required to prepare consolidated financial statements however, for the compliance of Companies (Accounts) Rules, 2014, it shall be sufficient if the company complies with provisions on consolidated financial statements provided in Schedule III of the Act. Thus, it can be concluded that ultimate authority on consolidation is AS / Ind AS as prescribed by law and if they give some exemption it should be followed. If out of exemption some subsidiaries are not consolidated, then list should be disclosed in notes to accounts with reason.
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Acceptance as Principal Auditor :The principal auditor, Manglam & Assocaites, should consider whether their own participation is sufficient to be able to act as the principal auditor. For this purpose, the auditor would consider: (a) the materiality of the portion of the financial information which the principal auditor audits; (b) the principal auditor's degree of knowledge regarding the business of the components; (c) the risk of material misstatements in the financial information of the components audited by the other auditor; and GROUP AUDITS (d) the performance of additional procedures as set out in this SA regarding the components audited by other auditor resulting in the principal auditor having significant participation in such audit.
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Refer Para 5 point (b) in table In the given situation, R Limited is, a listed company having investment in the (i) 2 Subsidiary Companies, (ii) 1 Joint Venture Company, (iii) 2 Associate Companies, (iv) 3 Business entities under common control, (v) Interest in assets, liabilities, revenues, and expenses in a joint operation with 1 Company. R Limited and all its components are required to present their accounts as per Ind AS. In view of above, R Limited consolidated its components on a line-by-line basis by adding together like items of assets, liabilities, income, expenses, and cash flows while preparing its consolidated financial statements which is correct for the subsidiaries, however the treatment is not correct for other components as per abovementioned Companies (Indian Accounting Standards) Rules, 2015.
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CA H should consider the requirement of SA 600, “Using the Work of Another Auditor”, if he decides to use the work of another auditor in relation to the audit of consolidated financial statements and he should comply with the requirements of SA 600. In carrying out the audit of the standalone financial statements, the computation of materiality for the purpose of issuing an opinion on the standalone financial statements of each component would be done component-wise on a standalone basis. However, with regard to determination of materiality during the audit of consolidated financial statements (CFS), the auditor should consider the following: (i) The auditor is required to compute the materiality for the group as a whole. This materiality should be used to assess the appropriateness of the consolidation adjustments (i.e. permanent consolidation adjustments and current period consolidation adjustments) that are made by the management in the preparation of CFS. (ii) The parent auditor can also use the materiality computed on the group level to determine whether the component's financial statements are material to the group to determine whether they should scope in additional components, and consider using the work of other auditors as applicable. (iii) The principal auditor also computes materiality for each component and communicates to the component auditor, if he believes is required for true and fair view on CFS. (iv) The principal auditor also obtains certain confirmations from component auditors like independence, code of ethics, certain information required for consolidation and disclosure requirements etc. However, while considering the observations (for instance modification and /or emphasis of matter in accordance with SA 705/706) of the component auditor in his report on the standalone financial statements, the principles of SA 600 need to be considered i.e. CA H (the parent auditor) should comply with the requirements of SA 600, “Using the Work of Another Auditor”.