Company Valuation Under IFRS : Interpreting and Forecasting ...

Company valuation under IFRS
Exhibit 7.6: Consolidating income from a subsidiary
Home purchased 75% of Time SA many years ago
Individual and consolidated income statements
Home SA Time SA Adjustment Consolidated
Revenues 49,000 31,200 80,200
Cost of goods sold -28,000 -20,000 -48,000
Operating income 21,000 11,200 32,200
Dividend income 3000 - -3,000 0
Pre-tax profit 24,000 11,200 32,200
Taxes -10,000 -3,200 -13,200
Post tax profit 14,,000 8,000 19,000
Minorities -2,000 -2,000
17,000
Points to note
1. 100% of the results of the subsidiary are consolidated from Revenue to
Profit after tax.
2. Dividend income from Time SA (all intercompany) is not reflected in the
consolidated income statement. Dividend income has been replaced by
earnings. To include dividend income would be to double count.
3. The group tax figure is just an amalgamation of the individual company
tax expenses. Group accounts are tax neutral, i.e. have no impact on tax. Tax
is levied at the individual company level.
4. Minority interest is the share of earnings after tax of the subsidiary.
5. Accounting for associates and joint ventures
We saw in the introductory parts of this chapter that investments fall into three
categories. Those that afford the investor no influence are fair valued and accounted
for in accordance with IAS 39. The next category we looked at was those
shareholdings that afford the investor control and result in the consolidation of
subsidiaries. Lastly, there are those investments which fall somewhere in the middle
– they offer neither passive investment nor control. We call this level of influence
‘significant’ and there is a completely different set of rules that govern how these
type of investments are reflected in the financials as we shall describe below.
5.1 Essential terminology
IAS 27 and 28 includes various definitions and terms. We have reproduced
paraphrased versions of these in Exhibit 7.7 so that analysts working with these
numbers can understand the nature of the investments more fully.
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