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Group accounts - Essay Example

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There are a lot of separate entities that provide goods and services which produce accounting and financial statements which are subsidiaries of group companies. Unless a consolidated group accounts are prepared and presented the accounts will not presenting a fair view of the activities of the group as a whole (Catherine Hernandez)…
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Group accounts
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Group accounts

FRS 2 'Accounting for Subsidiary Undertakings' details the conditions under which a parent company of subsidiaries should prepare and present consolidated financial statements. The FRS also spells out the manner in which the consolidated accounts need to be prepared. As per the FRS the purpose of the consolidated financial statements is to provide detailed information about the activities of the whole group of undertakings including the subsidiaries (ASB). The FRS adopts the definition of a group as provided by the Companies Act 1985 as amended by the Companies Act 1989.
In the preparation of group accounts the primary consideration should be the effect on the users of the financial statements with respect to their ability to see the complete economic activities of the group and to ascertain the exposure of the parent company to risk through its interests in the subsidiaries and participation in their activities. Hence it becomes necessary that the qualitative aspects of materiality are given full consideration in respect of preparation of the group accounts.
The accounts of the subsidiaries are to be consolidated in accordance with the procedure laid down in FRS 2. This requires consolidation on a line-by-line basis and also the removal of the all transactions within the group companies. Goodwill on acquisition is to be calculated on the basis of FRS 2 and FRS 7.
In order to ensure that the parent company group accounts comply with the UK Generally Accepted Accounting Principles (GAAP) adjustments to the data from the subsidiary companies' accounts need to be made as the first step in the consolidation process. These adjustments managements may related to the profits or losses on disposal of assets and the notional interest and any directly controlled assets and liabilities that have been excluded from the subsidiary accounts.
The effect of consolidating the parent and the subsidiary companies may be that the aggregation being undertaken in the process of consolidation may obscure the useful information about the different companies whose accounts are being consolidated and by inclusion of the activities in the consolidated financial statements. Hence the parent companies usually provide a segment-wise analysis of the activities and their results in the financial statements with useful information on the various risks and rewards, as well as the growth and potential for profitability for different member companies of the group.
It is also mandatory that the financial statements of all subsidiary companies to be consolidated should have the same financial year end and must represent the financial results for the same accounting period as that of the parent company. When the parent company acquires a subsidiary company according to the FRS the identifiable assets and liabilities shall have to be brought in to the consolidation at fair values on the date the company became the subsidiary. This is so even when the acquisition is made in different stages.
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