By MIA Digital Economy, Reporting and Risk (DERR) Team
Since the Malaysian Private Entities Reporting Standard (MPERS) became effective in Malaysia in 2015, we have received various accounting queries on consolidation through our technical queries facility. In this article, we will be sharing a few common questions received on consolidation and the suggested guidance for reference.
When to present consolidated financial statements?
Paragraph 9.2 of MPERS Section 9 Consolidated and Separate Financial Statements requires a parent entity to present consolidated financial statements in which it consolidates its investments in subsidiaries. A subsidiary is an entity, including an unincorporated entity such as partnership, that is controlled by another entity¹. Control is the power to govern the financial and operating policies of an entity to obtain benefits from its activities².
Therefore, Company A needs to firstly assess whether control exists to establish a parent-subsidiary relationship. In carrying out such assessment, it is necessary to analyse all relevant facts and circumstances as provided in paragraphs 9.4 to 9.12 of MPERS. Once control has been established, the parent will need to present consolidated financial statements.
What is an acquisition date?
Company A should consolidate Company B at an acquisition date. Paragraph 9.3A of MPERS provides that an acquisition date is the date on which the acquirer obtains control of the acquiree.
When is consolidation not required?
A subsidiary is not required to be consolidated if it is acquired and is held with the intention of selling or disposing of it within one year from its acquisition date. Such a subsidiary is accounted for in accordance with the requirements in Section 11 Basic Financial Instruments³.
In addition to the above, consolidated financial statements are not required when an entity ceases to be a subsidiary of the parent. If the former parent investor continues to hold an investment in the former subsidiary, such investment is accounted for as a financial asset in accordance with Section 11 or Section 12 Other Financial Instrument Issues from the date the entity ceases to be a subsidiary. However, if it becomes an associate or a jointly controlled entity, it is accounted for under Section 14 Investments in Associates or Section 15 Investments in Joint Ventures respectively⁴.
Please refer to Illustrative Example 5 for better understanding on the paragraph above.
Could parent and subsidiaries use different accounting policies for the purpose of consolidation?
As a private entity, Company A should comply with either:
- Malaysian Private Entities Reporting Standard (MPERS) in their entirety for financial statements with annual periods beginning on or after 1 January 2016; or
- Malaysian Financial Reporting Standards (MFRS) in their entirety.
If Company A applies MPERS, paragraph 9.17 of MPERS states that “consolidated financial statements shall be prepared using uniform accounting policies for like transactions and other events and conditions in similar circumstances. If a member of the group uses accounting policies other than those adopted in the consolidated financial statements for like transactions and events in similar circumstances, appropriate adjustments are made to its financial statements in preparing the consolidated financial statements”.
However, where a subsidiary applies MFRS or the International Financial Reporting Standards (IFRS), Company A may wish to consider applying MFRS in order to facilitate the preparation of the consolidated financial statements, provided Company A applies MFRS in its entirety. Please refer to MASB Frequently-Asked Questions.
Paragraph 9.18 of MPERS Section 9 Consolidated and Separate Financial statements states that “the income and expenses of a subsidiary are included in the consolidated financial statements from the acquisition date until the date on which the parent ceases to control the subsidiary. When a parent ceases to control a subsidiary, the difference between the proceeds from the disposal of the subsidiary and its carrying amount at the date that control is lost is recognised in profit or loss in the consolidated statement of comprehensive income (or the income statement, if presented) as the gain or loss on the disposal of the subsidiary”.
As Company A ceases to control Company E and Company E becomes an associate, paragraph 9.19 requires Company E to be accounted for under Section 14. Section 14 applies to accounting for associates in consolidated financial statements and in the financial statements of an investor that is not a parent but that has an investment in one or more associates.
¹ MPERS, Appendix B, Glossary of terms
² Paragraph 9.4 of MPERS
³ Paragraph 9.3A of MPERS
⁴ Paragraph 9.19 of MPERS
The views expressed are not the official opinion of MIA, its Council or any of its Boards or Committees. Neither the MIA, its Council or any of its Boards or Committees nor its staff shall be responsible or liable for any claims, losses, damages, costs or expenses arising in any way out of or in connection with any persons relying upon this article.