Today, it is very common businesses are organised in a group. The ultimate benefits of managing businesses in a group are for the ultimate shareholders to be able to see the consolidated results of the group as a whole and advantagerous of setting off losses made by one company against profit made by another companies within the group during the financial year to improve the overall corporation taxes for the group as a whole.
How to apply FRS2?
A parent undertaking should prepare consolidated financial statements in accordance with accounting practice set out in Financial Reporting Standards (FRS) to provide financial information about the economic activities of a group.
Exemption from consolidation
FRS2 exempts a parent undertaking from preparing consolidated financial statements if:
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Its group is small or medium-sized and not an ineligible group as defined in section 248. A group is ineligible if any of its members is a public company, a banking institution, an insurance company or an authorized person under the Financial Services Act 1986.
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It is a wholly owned or majority-owned subsidiary undertaking and its immediate parent undertaking is established under the law of a member state of the European Community. Exemption is conditional on compliance with certain further conditions in section 228. A parent undertaking is not exempt if any of its securities is listed on a stock exchange in any European Community Country.
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All of its subsidiary undertakings are permitted or required to be excluded from consolidation by section 229. For example, interest held exclusively with a view to subsequent resale within one year.
Exclusion from consolidation
The consolidated financial statements should be prepared by consolidating financial information for the parent undertaking and all its subsidiary undertakings, except for any subsidiary undertakings that are to be excluded from consolidation by virtue of the requirements of the Companies Act and the FRS. A subsidiary undertaking is to be excluded from consolidation if:
Severe long-term restrictions substantially hinder the exercise of the parent undertaking's rights over the subsidiary undertaking's assets or management; in this case it should be treated as a fixed assets investment.
The group's interest in the subsidiary undertaking is held exclusively with a view to subsequent resale and the subsidiary undertaking has not previously been consolidated. This should be treated as current assets at lower of cost or net realizable value.
The subsidiary undertaking's activities are so different from those of other undertakings to be included in the consolidation that its inclusion would be incompatible with the obligation to give a true and fair view. This is to be accounted for using equity method.
