Lecture 1: The Big Picture - What is a Group?
Right guys; let’s have a look at The Big Picture - What is a Group?
In order to have a group you only need three very basic ingredients, and those ingredients are firstly two or more separate legal entities. Here we've got H Limited and S Limited, as our two separate legal entities. The second ingredient we need is control. In our example here we've got H Limited that controls S Limited. Control is depicted by this 100% shareholding that H Limited has in S Limited. And we are going to be discussing control a lot more, a little bit later in the course, so let's just assume that 100% is control - H Limited does control S Limited. The third ingredient is; we then need to look at what would be the title of each of these separate companies in the group context.
Now, the company that has control is usually the company that is called the parent, or the holding company, or the investor. The company that is controlled is the company that is called the subsidiary, or the investee.
Now, if you get confused between investor and investee, don't stress about it. I also had to figure it out a little before I got used to the terms. Now, because we have all of the ingredients, basically we have ourselves a group.
So what is a group? Is a group a separate legal entity like H Limited and S Limited? No. It is definitely not a legal entity. What it is, is it is a reporting entity. Until now you've looked at how to prepare financial statements for a single company, for example, H Limited or S Limited - separate legal entities.
What we are going to be looking at now, is looking at how to prepare group financial statements using the same requirements that you've used to prepare H Limited and S Limited being IFRS. Okay, so IFRS says that a group is a separate reporting entity. You have to report separate financial statements on them, and you've got to use the requirements of IFRS to prepare these financial statements.
In terms of this group of ours, a group is always prepared under the holding company's umbrella. So this group of ours will be called the H Limited Group (Always under the holding company umbrella). Now how do we prepare financial statements? When you're preparing group financial statements, you've got to consolidate the results of the holding company and the subsidiary. Now if we think about the word consolidate and if we use this word in our normal everyday life, it means to bring things together. And that's exactly what it means in the group context as well.
So it basically means that we’re going to bring together the financial statements of H Limited and S Limited, and this is going to create the consolidated set of financial statements. So how do we do that? We basically take every single item that's in H Limited and in S Limited on a line-by-line basis, and we combine it. So all our liabilities, assets, income and expenses, we take H+S. Anything that's in other comprehensive income we take H+S. And that, in a nutshell, is group or consolidated financial statements.