MTT09520 - Miscellaneous pages: Accounting terms: Consolidated financial statements
The consolidated financial statements of a group are the financial statements prepared by the ultimate parent which present, as a single economic unit, the assets, liabilities, income, expenses and cash flows of the ultimate parent and all other entities in which the ultimate parent has a controlling interest.
The consolidated financial statements must be prepared in accordance with an acceptable accounting standard (see MTT09510).
This is set out in Section 249 of Finance (No.2) Act 2023.
Group consisting of a main entity and its permanent establishments
Where a multinational group consists solely of a single main entity and any number of permanent establishments, the consolidated financial statements are the financial statements of the ultimate parent, which is the main entity.
The statements must be prepared in accordance with an acceptable accounting standard.
Deemed consolidation where no consolidated financial statements are prepared
In some cases, no consolidated financial statements will be produced by an entity that may have controlling interests in other entities, and is not controlled by any other entity. The entity must then select an accounting standard and its consolidated financial statements will be the statements that would have been produced, had the entity produced consolidated financial statements under that standard.
The performance of this requirement is sometimes referred to as ‘deemed consolidation’, and the hypothetical set of consolidated financial statements the ‘deemed consolidated financial statements’.
The accounting standard chosen by the entity must be an authorised accounting standard that is either:
- an acceptable financial accounting standard, or
- an accounting standard applied with adjustments to prevent material competitive distortions.
The questions of whether an ownership interest is a controlling interest, and then in turn whether the entity holding that interest is an ultimate parent, are dependent on the accounting standard used to prepare the consolidated financial statements. It is therefore necessary for any entity in which no other entity has a controlling interest to hypothesise a set of consolidated financial statements, in order to determine whether it has controlling interests and is consequently an ultimate parent.
Note that the deemed consolidation requirement is not a requirement for consolidated financial statements to actually be prepared. When complying with MTT, the group must use the figures that would have been in the consolidated financial statements had they been prepared. If the ultimate parent decides to actually prepare such statements, these will meet one of the other definitions of consolidated financial statements and there will no longer be any deemed consolidation requirement.
Deemed consolidation – accounting standard does not require or permit consolidation of an entity
If the accounting standard does not require or permit the ultimate parent to consolidate a given entity, the consolidation of that entity is not required under deemed consolidation. For example, the decision to consolidate a non-material entity may be elective under the accounting standard, in which case the deemed consolidation requirement does not impose a requirement to consolidate that entity. If there is no entity to be consolidated after applying the permitted and required exclusions, the outcome of the deemed consolidation exercise would be that the entity does not have consolidated financial statements and would not be the ultimate parent of a group. This may occur in cases where the accounting standard does not permit a certain type of entity to consolidate other entities. For example, an investment entity (as defined by the accounting standard) may not be permitted to consolidate other entities under the accounting standard, and is instead required to reflect its investments at fair value.
However, it is not relevant whether the accounting standard does not require the ultimate parent to prepare consolidated financial statements at all. The deemed consolidation exercise does not require the actual preparation of consolidated financial statements, it requires the hypothecation of those statements. Therefore, the absence of a requirement under the accounting standard to prepare consolidated financial statements does not mean that an entity avoids the statutory requirement to hypothecate consolidated financial statements. Section 249(1)(d) of the Act, which provides that requirement, specifically applies "whether or not the entity was required to prepare [consolidated financial statements]".
Authorised accounting standard
An ‘authorised accounting standard’ is an accounting standard that is permitted by the body responsible for prescribing, establishing or acceptingaccounting standards in the territory where the entity is located (see MTT18010).
Domestic Top-up Tax – single entities
Single entities that are subject to DTT will not have consolidated financial statements. For single entities subject to DTT, references to consolidated financial statements should be considered as referring to the qualifying financial statements, which are the entity’s statements prepared in accordance with an acceptable accounting standard.
Where there are no such accounts, the entity must choose an accounting standard to determine a set of deemed financial statements.
The accounting standard chosen by the entity must be an authorised accounting standard that is either:
- an acceptable financial accounting standard, or
- an accounting standard applied with adjustments to prevent material competitive distortions.