Simona Catuogno » 3.Consolidation and its scope

Scope of consolidation

Article 28 of Legislative Decree 127/1991, Companies exempt from consolidation, states explicitly when companies do not need to present a consolidated financial statement but does not specify the circumstances in which they should.
The law stipulates 1 case where there is compulsory exclusion from presenting consolidated financial statements and 4 cases where exemption is optional.
The only case for mandatory exclusion has since been abolished: exemption for non-similar business activities whereby similar entries on the financial statement would have such a different economic significance that they would distort overall consolidated information.
Exemption for dissimilar business activities was abolished with the legislative decree 32/2007 which abrogated comma 1 of art. 28 of legislative decree 127/1991.

IAS 27

From 1990 onwards, subsidiaries can no longer be excluded from consolidation on the basis of dissimilar business activity.
Relevant information may be gleaned from consolidating these companies and from clarifying the different types of activity the subsidiaries are involved in.

Optional exclusion

Exemption for non-significant subsidiaries

The law permits groups not to consolidate one or more subsidiaries should they be irrelevant to a true and correct picture of the group’s overall financial situation.
A subsidiary’s relevance will be evaluated individually, by comparing the financial data of the subsidiary to be excluded with its impact on the consolidated financial statement.

IAS 27

IAS 27 does not make explicit reference to this, but the 1989 Framework states that IAS 1 covers the principle of what constitutes relevant information.
There is, therefore, a suggestion that international accounting principles indirectly take care of issues of relevance. On the other hand, specific accounting standards, as set out in the Framework, often tend to override general principles.

Cases for optional exemption

Exemption because of serious and lasting restrictions preventing parent company from effectively exercising control:

currency restrictions on repatriation of invested capital or dividends;
nationalisation or expropriation is under way;
bankruptcy, controlled administration or liquidation procedures are under way.

IAS 27

The presence of “serious and lasting restrictions” making transfer of funds to the parent company so difficult that control would be lost is considered cause for mandatory exclusion.

Optional exclusion

Exclusion because it is impossible to get the necessary information in time or without spending excessive amounts of money:

companies that acquire control during the preparation of the financial statement;
companies working in under-developed countries or those at war;
practical difficulties like ICT problems;
unaudited financial statements or those with negative assurance or those where no assurance can be issued.

IAS 27

Hypothesis not explicitly covered by international accounting principles.

Optional exemption

Assets and shares owned solely for purposes of short-term alienation: non-strategic control.

IAS 27

If control is only temporary and acquired with a view to imminent alienation, then exclusion from consolidation is mandatory.
Furthermore, if the asset is acquired and held exclusively with a view to its subsequent disposal in the near future then IFRS 5 may need to be applied i.e. non-current assets held for sale.

IFRS 5, Non Current Assets Held for Sale

If the asset is to be sold within twelve months of being classified as a NCAHFS, it should be valued at the lower of cost and fair value (direct realisable value).

A period in excess of 12 months is accepted if it is for reasons beyond the vendor’s control.

If there is a change of destination, the asset is classified at the lower of cost and indirect realisable value.