Define scope of group's entities

Define the Scope of Group’s Entities 🌍

Overview:

Defining the scope of your group’s entities is a crucial step in ensuring accurate consolidation and reporting. This process involves identifying all relevant entities within the group, understanding their relationships, and gathering necessary legal and financial information to establish a comprehensive view of the group’s structure.

Steps to Define the Scope:

1. Identification of Entities:

   • Parent Company: Identify the main parent company that controls other entities.
   • Subsidiaries: List all subsidiaries, including both wholly-owned and partially-owned entities.
   • Associates and Joint Ventures: Recognize entities where the group holds significant influence but not full control.
   • Special Purpose Entities: Include entities created for specific tasks such as financing or asset management.

2. Control and Ownership Analysis:

   • Voting Rights: Assess voting rights to determine the extent of control over each subsidiary.
   • Ownership Percentage: Calculate the ownership percentage in each entity.
   • Agreements and Contracts: Review shareholder agreements and other contracts affecting control.

3. Geographical Distribution:

   • Location Mapping: Map the geographical locations of all entities.
   • Regulatory Jurisdictions: Identify the regulatory environments for each entity.

4. Functional Analysis:

   • Core Activities: Define the primary activities of each entity within the group.
   • Intercompany Transactions: Map significant intercompany transactions and their financial impact.

Legal Data Collection 📑:

1. Corporate Documents:

   • Certificates of Incorporation: Collect incorporation documents for all entities.
   • Articles of Association: Gather the articles of association and bylaws.
   • Shareholder Agreements: Review agreements detailing ownership and control.

2. Regulatory Filings:

   • Annual Reports: Obtain annual financial and operational reports.
   • Tax Filings: Collect recent tax returns and related documents.
   • Licenses and Permits: Ensure all operating licenses and permits are current.

3. Contracts and Agreements:

   • Intercompany Agreements: Review agreements governing intercompany loans, services, and transactions.
   • External Contracts: Collect key contracts with suppliers, customers, and third parties.

4. Legal Proceedings:

   • Litigation Records: Compile records of ongoing or past legal proceedings.
   • Compliance Documentation: Ensure all regulatory compliance documents are up to date.

Determine the Method of Consolidation 🔍

1. Full Consolidation Method:

   • Applicability: For subsidiaries where the parent has control (>50% ownership).
   • Process: Combine 100% of the subsidiary’s financials with the parent’s.
   • Non-Controlling Interests: Present separately in the financial statements.

2. Equity Method:

   • Applicability: For associates where the parent has significant influence (20%-50% ownership).
   • Process: Recognize the parent’s share of the associate’s net income.
   • Adjustments: Account for dividends and intercompany transactions.

3. Proportionate Consolidation Method:

   • Applicability: For joint ventures with shared control.
   • Process: Combine the parent’s share of the joint venture’s financials proportionately.
   • Joint Control: Document joint control agreements thoroughly.

4. Cost Method:

   • Applicability: For investments with no significant influence (<20% ownership).
   • Process: Recognize the investment at cost, adjusted for dividends.
   • Impairment Testing: Perform regular testing to ensure investment value accuracy.

Implementation Steps 🚀:

1. Data Collection:

   • Financial Data: Collect the latest financial statements from all entities.
   • Legal Documentation: Assemble all necessary legal documents and agreements.
   • Management Reports: Obtain internal reports for detailed analysis.

2. Consolidation Adjustments:

   • Intercompany Eliminations: Remove intercompany transactions and balances.
   • Uniform Accounting Policies: Ensure all entities follow the same accounting policies as required by IFRS or other standards.

3. Reporting:

   • Prepare Consolidated Financial Statements: Compile financial statements in compliance with IFRS or other standards.
   • Disclosures: Include necessary disclosures on consolidation process and intercompany transactions.

4. Review and Audit:

   • Internal Review: Conduct thorough internal reviews of consolidated statements.
   • External Audit: Engage external auditors to verify accuracy and compliance.