Definition
Disproportionate expense and undue delay refer to a concept in traditional UK accounting where individual subsidiary undertakings could potentially be excluded from consolidated financial statements of a group. The rationale behind this was that the costs and time required to gather the necessary information for consolidation might be excessively high or delayed significantly.
However, the Financial Reporting Standard Applicable in the UK and Republic of Ireland (Section 9) clarifies that such reasons cannot justify the exclusion of subsidiary undertakings from consolidation if they are individually or collectively material to the group.
Detailed Explanation
In the landscape of accounting, the consolidation of financial statements is important for presenting a complete financial picture of a group of companies as a single entity. Traditionally in UK accounting, certain practical difficulties such as disproportionate expense and undue delay were considered legitimate reasons for excluding a subsidiary from the parent company’s consolidated financial statements.
Key Points:
-
Disproportionate Expense:
- This refers to a scenario where the costs involved in procuring the necessary information for consolidation are excessively high relative to the benefits.
- For instance, a subsidiary in another country might incur high costs to comply with the parent company’s reporting standards.
-
Undue Delay:
- Refers to significant time delays in obtaining the required information, which can render the consolidation process impractical.
- Delays may arise due to differences in financial reporting timelines or logistical challenges.
-
Regulatory Update:
- According to the Financial Reporting Standard (Section 9), excessive costs and delays are not valid grounds for excluding subsidiaries from consolidated accounts if they hold material significance.
Examples
Example 1:
A parent company based in the UK has a subsidiary in a developing country where financial reporting systems are less advanced. The cost of harmonizing the subsidiary’s records with the parent company’s standards might have previously been considered too high. However, under current standards, if the subsidiary is materially significant, it must be included, regardless of cost and time constraints.
Example 2:
Consider a multinational group with subsidiaries in various countries, each with its financial reporting periods. Previously, logistical challenges and misalignment in timelines could have justified further delay. Present standards, however, mandate inclusion if the subsidiary’s financial data materially impacts the group.
Frequently Asked Questions (FAQs)
1. Can disproportionate expense and undue delay exclude any subsidiary from consolidation?
No, under current UK accounting standards, disproportionate expense and undue delay cannot justify excluding a subsidiary if it holds material significance to the group.
2. When did the change in standards come into effect?
This change is part of the Financial Reporting Standard Applicable in the UK and the Republic of Ireland, with Section 9 providing clarification.
3. Does this apply to small subsidiaries too?
Yes, provided that the subsidiaries are materially significant to the group, regardless of their size.
4. How are disproportionate expenses measured?
They are measured relative to the benefits they bring in providing a complete financial picture of the group.
5. What is meant by a subsidiary being ‘materially significant’?
This means its financial data is significant enough to influence the total financial statements of the group.
Related Terms
- Consolidated Financial Statements: Financial statements that present the assets, liabilities, equity, income, expenses, and cash flows of a group of companies as one entity.
- Financial Reporting Standard Applicable in the UK and Republic of Ireland: A set of accounting standards followed by entities in the UK and Republic of Ireland for financial reporting.
- Exclusion of Subsidiaries from Consolidation: Situations or rules under which subsidiaries might be excluded from consolidated financial statements.
Online Resources
- Financial Reporting Council
- Chartered Institute of Management Accountants
- International Financial Reporting Standards (IFRS)
Suggested Books for Further Studies
- “UK GAAP 2019” by Ernst & Young LLP
- “Wiley IFRS 2023: Interpretation and Application of IFRS Standards” by Wiley
- “Financial Reporting and Analysis” by Revsine, Collins, Johnson, Mittelstaedt, and Soffer
Accounting Basics: Disproportionate Expense and Undue Delay Fundamentals Quiz
Thank you for engaging with our comprehensive overview of the term “Disproportionate Expense and Undue Delay” and for tackling our associated quiz questions. Keep striving for excellence in your financial and accounting knowledge!