Define the Scope of Group’s Entities 🌍


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.