The companies act provides that a subsidiary may be omitted from the consolidated accounts of a group if any of the following apply.
• In the opinion of the directors, its inclusion is not material for the purpose of giving a true and fair view; but two or more undertakings may be excluded only if they are not material taken together.
• There are severe long term restrictions in exercising the parent companies rights.
• The holding is exclusively for resale.
• The information cannot be obtained “without disproportionate expense or undue delay”.
If the opinion of the directors, a subsidiary undertakings consolidation is undesirable because the business of the holding company and subsidiary are so different that they cannot reasonably be treated as a single undertaking, then that undertaking must be excluded.
This does not apply merely because some of the undertakings are industrial, some commercial and some provide services, or because they carry on industrial or commercial activities involving different products or provide different services.
Financial reporting standards states that a subsidiary must be excluded from consolidation in the following circumstances.
• Serve long term restrictions are substantially hindering the exercise of the parents rights over the subsidiaries assets or management.
• The groups interest in the subsidiary undertaking is held exclusively with a view to subsequent resale and the subsidiary has not been consolidated previously.
• The subsidiary undertakings activities are so different from those of other undertakings to be included in the consolidation that its inclusion would be incompatible with the obligation to give a true and fair view.
The financial reporting standards require the circumstances in which subsidiary undertakings are to be excluded from consolidation to be interpreted strictly.
Where a subsidiary is excluded from group accounts, financial reporting standards lays down supplementary provisions on the disclosures and accounting treatment required.
Where a subsidiary is excluded on group accounts should include separate financial statements for that subsidiary including:
• A note of the holding companies interest
• Details of inter-group balances
• The nature of its transactions with the rest of the group
• A reconciliation of the subsidiaries results (as shown separately) with the value in the consolidated accounts for the groups investment in the subsidiary
In the consolidated accounts, the excluded subsidiary should be accounted for by the equity method of accounting (as though it were as associated company).
Subsidiary undertakings excluded from consolidation because of serve long-term restrictions are to be treated as fixed asset investments. They are to be included at their carrying amount when the restrictions came into force, and no further accruals are to be made for profits or losses of those subsidiary undertakings, unless the parent undertaking still exercises significant influence. In the latter case they are to be treated as associated undertakings.