Free Custom «Separate Financial Statements» Essay Paper

A Consolidated and Separate Financial Statement, according to the International Accounting Standards 27 is defined as the financial statement of a group presented as those of a single economic entity (Hattingh, 1998). A group is comprised of a parent and a subsidiary (s) and the parent has the power to govern the financial and operating policies of an entity with an aim of making a profit. A subsidiary is an entity such as a partnership or a company that is completely or partly owned and it is usually controlled by a parent company. The control of the parent company only exists if the parent is entitled to more than half of the voting power of the entity and if the parent can control the financial and operating policies of the subsidiary (Koen, & Vorster, 2000).

In our case here we have two companies, Singapore Ltd and Peru Ltd. Peru Ltd is not a subsidiary of Singapore Ltd because of several reasons concerning power. First of all, Peru Ltd has a managing director, Mr. Smith. A managing director is the highest ranked officer who is in charge of all the managerial activities of an organization. The powers and responsibilities of a managing director are set by a company’s board of directors, who are usually the elected members of an organization to oversee the activities of that organization. This forms an independent structure which Peru Ltd has. This disqualifies it as a subsidiary of Singapore Ltd. If it were, then all the management would come from Singapore Ltd.

 

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Secondly, Mr. Smith is entitled to a salary that he is paid by Peru Ltd, not Singapore Ltd. Also Mr. Smith invests $ 10 000 in the project of establishing Peru Ltd and he receives all the Peru Ltd initial issue of ten shares of voting ordinary shares. This makes him in control of the company’s shares at its establishment thus Singapore Ltd has no control over the shares at the moment. $500 convertible debentures into shares any time are transferred by Singapore Ltd to Peru Ltd. These debentures can be converted any time into 500 ordinary shares. Peru Ltd attains enough shares to fulfill its entire obligation if Singapore Ltd coverts its debentures into voting ordinary shares. This is not subsidiary according to the International Accounting Standards 27 which requires, for a subsidiary to occur, that the parent company to have more control on the voting ordinary shares but here it seems that Peru Ltd, being the expected subsidiary, has more of these rights.

The other thing is that Peru Ltd has a constitution of its own which provides certain powers to the holders of voting common shares and the holders of securities convertible to voting ordinary shares. These powers are the power to amend the corporate purpose of Peru Ltd and the power to authorize and issue shares of securities convertible into voting shares. According to International Accounting Standards 27; for one company to meet the requirements of being a subsidiary of another in accordance with international accounting standards 27, the parent should posses the authority to choose or remove the majority of the board of directors’ members. It also must exercise or be in a position to govern policies regarding operations and/or finances in the institutions and also possess half of the voting rights. In this case, Peru Ltd has the above rights and therefore it is not a subsidiary of Singapore Ltd.

Finally, at the time Peru Ltd was established, there were no known economic legal interactions between Singapore Ltd and Peru Ltd. According to International Accounting Standards 27, a parent must be accountable for and consider all the terms and conditions of agreement and the economic effects they bring between it and the subsidiary. Since Peru Ltd does not have an economic interaction with Singapore Ltd, it’s not qualified as a subsidiary of Singapore Ltd.