Are financial statements ‘consolidated’ when an entity disposes of its last subsidiary?

When an entity obtains control over a subsidiary during a reporting period, it prepares consolidated financial statements in accordance with IFRS 10 Consolidated Financial Statements and the financial statements are identified as being ‘consolidated financial statements’. However, what happens when a parent entity sells its last subsidiary? Are the financial statements still referred to as ‘consolidated financial statements’?

Example

Entity ABC has a 30 June year-end. On 1 April 20X1, it acquires Subsidiary A and prepares consolidated financial statements under IFRS 10 for the year ended 30 June 20X1.

The comparatives will represent the financial performance, positions and cash flows for the year ended 20X0 for Entity ABC only. However:

The balance sheet as at 30 June 20X1 reflects the combined financial position of Entity ABC and Subsidiary A (as a consolidated group).
The (consolidated) statement of financial performance and the (consolidated) statement of cash flows relate to Entity ABC for the whole year, plus Subsidiary A for the three months from 1 April 20X1 to 30 June 20X1.

For the years ended 30 June 20X2 through to 30 June 20X4, Entity ABC prepared consolidated financial statements that incorporate the results of both Entity ABC and Subsidiary A.

Entity ABC then sells its investment in Subsidiary A on 1 February 20X5.

Entity ABC does not acquire any new subsidiaries in 20X5 and 20X6.

Two questions arise:

Does Entity ABC still need to prepare consolidated financial statements for the year ended 30 June 20X5?
If the answer to question 1 is ‘yes’, does Entity ABC have to prepare consolidated financial statements for the year ended 30 June 20X6?

Answer – Question 1 – Year ended 30 June 20X5

Yes. In the financial period during which Entity ABC disposes of its last subsidiary (Subsidiary A), it is required to prepare consolidated financial statements, which include the results of Subsidiary A up to the date on which it ceased to control Subsidiary A (1 February 20X5). This means that:

The balance sheet as at 30 June 20X5 reflects the financial position of Entity ABC only
The statement of financial performance and the statement of cash flows relate to Entity ABC for the whole year, plus Subsidiary A for the seven months from 1 July 20X4 to 31 January 20X5.

IFRS 10, paragraph 2(a) requires a parent to prepare consolidated financial statements unless one of the four scope exemptions in paragraph 4(a) is met. There is no scope exemption for an entity that disposes of its last subsidiary during the reporting period.

Also, IFRS 10, paragraph B88, requires a parent to consolidate a subsidiary up to the date the entity ceases to control it. This means that the results and cash flows of the subsidiary must be included in a parent’s financial statements up to the date on which the parent loses control of its subsidiary, regardless of whether the parent has any subsidiaries at its reporting date. The financial statements are labelled ‘consolidated financial statements’.

Answer – Question 2 – Year ended 30 June 20X6

Yes. Even though Entity ABC did not control Subsidiary A at all during the current reporting period, which ended 30 June 20X6, Entity ABC is still required to prepare consolidated financial statements, which include the results of Subsidiary A in the comparative period, up to the date on which it ceased to control Subsidiary A (1 February 20X5). This means that:

The balance sheets as at 30 June 20X5 and 30 June 20X6 reflect the financial position of Entity ABC only
The statement of financial performance and the statement of cash flows for the current period ending 30 June 20X6 relate to Entity ABC only for the whole year
The statement of financial performance and the statement of cash flows for the comparative period ending 30 June 20X5 relate to Entity ABC for the whole year, plus Subsidiary A for the seven months from 1 July 20X4 to 31 January 20X5.

Unless an entity qualifies for one of the scope exemptions in IFRS 10, paragraph 4(a), it must present consolidated financial statements that include its subsidiaries for all periods presented, including comparative periods. In addition, IFRS 10, paragraph B88, requires a parent to consolidate a subsidiary up to the date the entity ceases to control it.

Why not separate financial statements?

IAS 27 Separate Financial Statements, paragraph 6, notes that separate financial statements are financial statements that are presented in addition to:

The consolidated financial statements, or
The financial statements of an entity with no subsidiaries, but with investments in associates or joint ventures, that are accounted for using the equity method.

An entity can only present separate financial statements as its only financial statements if it is exempted from:

Consolidation in accordance with IFRS 10, paragraph 4(a), or
Applying the equity method in accordance with IAS 28 Investments in Associates and Joint Ventures, paragraph 17.

As Entity ABC is required to prepare consolidated financial statements for the years ending 30 June 20X5 and 30 June 20X6, it may not present ‘parent only’ (separate) financial statements as its only financial statements for these periods. It may, however, present separate financial statements, in addition to the consolidated financial statements for these two periods.

However, for the year ended 30 June 20X7, assuming Entity ABC had not acquired any subsidiaries during this period, it did not have control of any subsidiaries in either the 20X7 or 20X6 financial year, and is, therefore, not required to prepare consolidated financial statements for these periods. Entity ABC will prepare its own financial statements, which are neither consolidated financial statements nor separate financial statements. They are sometimes referred to as ‘individual financial statements’.

Be aware of jurisdictional requirements

In addition to the requirements noted above from IFRS® Accounting Standards, entities should be aware of any jurisdiction-specific requirements that may interact to override or vary their financial reporting responsibilities in this regard.

More information

Our publication contains in-depth guidance for assessing the control criteria in IFRS 10.

Need help?

Deciding whether one entity controls another may be straight forward in some circumstances, but can be complex and highly judgemental. Please contact our team of IFRS & Corporate Reporting experts if you need assistance.