For IFRS, the parent company and its subsidiaries must have and apply uniform (i.e. the same) accounting policies. If not, appropriate adjustments are made when preparing the consolidated financial statements to ensure conformity. The extent and complexity of this exercise depend on the nature of the group’s activities and the basis of preparation of individual group entities’ financial statements. Uniform accounting policies for consolidation
Many times overlooked is that not only subsidiaries need to apply the same accounting policies as the parent that consolidates those subsidiaries. Also (other) unconsolidated investments accounted for at the equity method should determine the amount of equity applying those same accounting policies.
In carrying out this exercise a distinction should be made between accounting policies and:
- accounting estimates, Uniform accounting policies for consolidation
- designations permitted or required in IFRSs on a transactional or item-by-item basis (for example, hedge accounting and use of the fair value option in financial instruments accounting). Uniform accounting policies for consolidation
Accounting policy alignment
Parent company P heads a property investment group that includes subsidiaries S1 and S2. P’s group accounting policy for investment property is to apply the fair value model in accordance with IAS 40 ‘Investment Property’. In their individual financial statements S1 also applies the fair value model but S2 uses the cost model.
Both S1 and S2 use interest rate swaps to manage interest rate risk on floating rate borrowings. However, S1 applies hedge accounting and S2 does not.
On consolidation adjustments should be made to reflect S2’s investment property at fair value (unless, in exceptional circumstances, it is impractical to reliably measure the fair value of the properties).
There is no need to make adjustments to remove the effects of hedge accounting for S1, or to apply hedge accounting for S2. IFRS 9 permits but does not require hedge accounting, on a case by case basis, if the applicable conditions are met.
Globalization remains a potent economic and political force, and drives the demand for globalization in accounting and financial reporting. Nevertheless, most political and commercial activity remains local, so adoption of uniform rules does not by itself lead to uniform reporting behavior around the world. Uniform accounting policies for consolidation