Understanding Group Accounting

Analyzing Group Accounts

What does it mean to have ``The Group’’ and ``The Parent’’ in the same financial statement? Do parent company accounts have any relevance to investors and analysts?

Many financial statements users still struggle with the question of the difference between group accounting and parent company accounting. Even when they do understand the main differences, it is still not clear what performance metrics to use in understanding the performance of the company. In this edition, I look at the concept of group accounts and provide a rather simple methodology in fully grasping the concept in order to interpret group accounts.

In their annual reports, companies generally disclose two types of financial statement: a consolidated financial statement (for the group) and a parent company financial statement (separate financial statement). IFRS has mandated the preparation of consolidated financial statements but does not require the presentation of parent company financial statements. However, if an entity elects, or is required by local regulation, to prepare a separate financial statement, then this should be in accordance with IFRS. First let us look at some terminology.

§  Consolidated financial statements: The financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity.

§  Separate financial statements: Those presented by a parent (i.e. an investor with control of a subsidiary) or an investor with joint control of, or significant influence over, an investee, in which the investments are accounted for at cost.

To illustrate clearly, assume company A holds 90% of company B and reports both consolidated (group) and parent company financial results. The consolidated financial statement will include the operations of both A and B ie financial results of (A+B). The income statement and statement of financial position will reflect the combined results of both the operations, with 10% reflecting the non-controlling interest as part of equity. In the case of the parent’s financial statement, the income statement and statement of financial position will only reflect the financial results from A’s operations. That is A parent’s financial statement only includes the financial results of the operations carried out by the parent company with its holding in subsidiaries represented as investments. Under the cost method, the proportion of A’s holding in B will be measured at the lower of their carrying amount and fair value, less costs to sell. When opting for fair value, the parent company would measure the investments in accordance with IAS 39Financial Instruments.

Hitherto Consolidated Financial Statements were prepared using IAS 27 Consolidated and Separate Financial Statements. However, in May 2011, the IASB issued IFRS 10 Consolidated Financial Statements, and a revised version of IAS 27 applicable to Separate Financial Statements, though not mandatory under IFRS. The main objective of issuing the revised IAS 27 was to prescribe the accounting and disclosure requirements for investment in subsidiaries, joint ventures and associates when an entity prepares separate financial statements.

Consolidated and parent financial statements- Unilever Ghana

To illustrate the concept of group and parent company accounting, I look at the financial statements of Unilever Ghana. In its annual report, the Ghanaian consumer manufacturer Unilever presents both consolidated and parent financial statements. As explained above, parent company accounting involves the financial statements of parent company mainly consisting of investments in financial subsidiaries rather than operating assets such as non-current assets and inventories as is the case of the consolidated accounts. This differs from the group financial statements as the group financial statements are prepared by combining the operations of the subsidiaries with those of the parent, the financial results of the group.

Financial assets comprises of investments in subsidiaries, joint ventures and associates. The parent company accounts for its investments in subsidiaries, joint ventures and associates using the acquisition cost method. Dividends received by the parent company from such investments are transferred to the income statement and an annual impairment to these investments is made. The investments in joint ventures and associates for the group are however, accounted for in accordance with the equity method.

Accounting metrics below show some of the key differences between group and parent financial statements for Unilever. Note that revenue as disclosed in the group financial statement is higher than the parent’s revenue

Key Metrics Unilever Ghana Financial Statements
All in thousand Gh¢	Group  (a)	Parent (b)	Difference (a-b)
Net Sales	181,153	179,257	1,896
Operating Profit	27,431	25,543	1,888
Net Profit	22,814	17,947	4,867
Total Assets	139,624	101,464	38,160
Total Equity	76,631	41,340	35,291
Equity over Total Assets	55%	41%	14%
Gross margin (%)	28%	26%	2%
Sources: Company Annual Report 2010, Own Calculations

A closer look at the income statements highlights the main difference between group and parent company accounts. Whereas the operating metrics of the subsidiaries are recognized in a group statement, they are viewed as financial investments in parent company accounts. 

Income Statement Items Unilever Ghana
All in thousand Gh¢	Group (a)	Parent (b)	Difference (a-b)
Revenue	181,153	179,257	1,896
Gross Profit	51,216	46,541	4,675
Operating Profit	27,431	25,843	1,588
Financial income	1,445	831	614
Financial expense	-263	-260	-3
Net finance income	1,182	571	611
Net income	22,814	17,947	4,867
Net finance income as % of net income	5%	3%	2%
Source: Company Annual Report 2010, Own Calculations

The same pattern is evident when looking at the statement of financial position. Whereas the parent has investments in subsidiary up to Gh¢ c13 million, the group has no investments in subsidiaries.

Statement of Financial Position Items Unilever Ghana
All in thousand Gh¢	Group (a)	Parent (b)	Difference (a-b)
Non-Current Assets	21,139	17,794	3,345
Intangible assets	19	19	0
Goodwill	4,210	0	4,210
Biological Assets	10,131	0	10,131
Investment in subsidiaries	0	12,909	-12,909
Total Current Assets	92,803	59,420	33,383
Total Assets	139,624	101,464	38,160
Total Assets less current liabilities	81,899	46,636	35,263
Total Non-Current Liabilities	5,268	5,296	-28
Total Current Liabilities	57,725	54,828	2,897
Shareholders’ Equity	54,136	41,340	12,796
Non-Controlling interest	22,495	0	22,495
Source: Company Annual Report 2010, Own Calculations

In my view, investors and analysts mainly focus on the group financial statements rather than parent’s financial statement, as the latter only provides detail on the operations carried out by the parent company. As all subsidiaries are treated as investments, there is limited information on their operating performance. Even if analysts and investors would like to review parent financial statements, the information is not always available as these are not mandatory under IFRS. Note however that, the terminology ‘Group Financial statements’ is often interchangeable with ‘Consolidated financial statements’