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Principles of consolidated financial statements

Concept of group accounts

1.1 Definitions (IFRS 10, Appendix A)

Parent – ‘an entity that controls one or more entities’

Subsidiary – ‘an entity that is controlled by another entity’

1.2 Control

IFRS 10 states that an investor’s control comprises three elements:

(a) power over the investee

(b) exposure, or rights to, variable returns from its involvement with the
investee and

(c) the ability to use its power over the investee to affect the amount of the
investor’s returns’ (IFRS 10, para 7)

1.3 Single entity concept

Although both the parent and subsidiary are separate legal entities, the economic
substance of the relationship is that they are a single economic unit due to the fact
that the parent controls the subsidiary. Within F7 the single economic unit is
presented as below:

P

S

In treating the two companies as a single entity it becomes necessary to remove any
intra-group transactions or balances in order to present consolidated financial
statements.

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