Dissimilar Activities

Dissimilar Activities Exclusion of Subsidiaries Consolidated Financial Statements True and Fair View Financial Reporting Standard International Accounting Standard 27
In traditional UK accounting practice, 'Dissimilar Activities' served as a reason for excluding a subsidiary undertaking from the consolidated financial statements of a group. It applied to situations where the activities of one undertaking differed significantly from others in the group, potentially compromising the obligation to present a true and fair view. However, current standards under both the Financial Reporting Standard (FRS) applicable in the UK and Ireland and International Accounting Standards (IAS 27) no longer allow exclusions on these grounds.
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Definition

In accounting, “Dissimilar Activities” traditionally referred to a rationale for excluding a subsidiary from a group’s consolidated financial statements in the UK. This exclusion occurred when the subsidiary’s activities were significantly different from those of the other group members, making it challenging to provide a true and fair view through consolidated statements.

However, under contemporary guidelines, particularly the Financial Reporting Standard applicable in the UK and Republic of Ireland and International Accounting Standard 27 (IAS 27), such exclusions are no longer permitted.

Examples

  1. Tech Company and Retail Subsidiary: A parent tech company has operations in software development, while its subsidiary is a retail chain. If applying the traditional rule, the retail subsidiary might have been excluded due to significant operational differences.

  2. Manufacturing and Financial Services: A conglomerate with diverse interests, where the parent operates in manufacturing and the subsidiary in financial services. The traditional rule might have considered the differing nature of these sectors as grounds for excluding the subsidiary.

Frequently Asked Questions (FAQs)

Q1: Why were dissimilar activities considered a valid reason for exclusion?
A1: The argument was that vastly different activities could impede the ability to prepare consolidated accounts that give a true and fair view of the group’s overall performance and position.

Q2: Are there any exceptions to excluding subsidiaries today?
A2: Current standards under IAS 27 and FRS do not permit exclusions based solely on activity differences. Exclusions may occur only under very specific circumstances such as severe long-term restrictions that impair control.

Q3: What is the alternative approach for presenting diverse activities?
A3: Contemporary frameworks require consolidation but allow for segment reporting, where different segments’ financial performance and position are disclosed separately within the consolidated financial statements.

  • Consolidated Financial Statements: Financial statements that represent the assets, liabilities, equity, income, and cash flows of a parent company and its subsidiaries as a single entity.

  • True and Fair View: A principle requiring that financial statements accurately and justifiably represent the financial status and performance of an entity.

  • Financial Reporting Standard (FRS): Regulations and standards for financial reporting in the UK and the Republic of Ireland.

  • International Accounting Standard (IAS) 27: A standard that prescribes the accounting and disclosure requirements for investments in subsidiaries, joint ventures, and associates in consolidated financial statements and separate financial statements.

Online References

Suggested Books for Further Studies

  1. “International Financial Reporting Standards (IFRS): A Practical Guide” by Hennie van Greuning
  2. “Financial Accounting: An Introduction” by Pauline Weetman
  3. “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield

Accounting Basics: “Dissimilar Activities” Fundamentals Quiz

### What is meant by 'dissimilar activities' in traditional UK accounting practice? - [x] Activities so different that including them in consolidated statements could compromise a true and fair view - [ ] Activities within the same industry sector - [ ] Activities related to direct competitors - [ ] Activities aimed at different market segments > **Explanation:** In traditional UK accounting practice, 'dissimilar activities' referred to cases where the activities of a subsidiary differed significantly from those of the parent group, potentially compromising the ability to provide a true and fair view through consolidated financial statements. ### Which standard currently disallows exclusion based on dissimilar activities? - [ ] Only IFRS - [ ] Only UK GAAP - [x] Both FRS applicable in UK and Ireland and IAS 27 - [ ] None of the accounting standards > **Explanation:** Both the Financial Reporting Standard (FRS) applicable in the UK and the Republic of Ireland and International Accounting Standard IAS 27 do not permit exclusions of subsidiaries based on the dissimilarity of activities. ### What alternative provides a detailed view of diverse activities within a group? - [ ] Full exclusion from reports - [ ] Ignoring the differences - [x] Segment reporting - [ ] Combining unrelated revenue > **Explanation:** Segment reporting is used to disclose different segments' financial performance and position separately within the consolidated financial statements, offering detailed insights into the diverse activities within a group. ### When might exclusions from consolidation occur under current standards? - [ ] When operations are in different countries - [ ] When the subsidiary is a start-up - [x] When long-term restrictions impair control - [ ] When the subsidiary operates in a different industry > **Explanation:** Exclusions under current standards like IAS 27 can only occur under specific situations such as long-term restrictions that severely impair the parent’s control over the subsidiary. ### Why is providing a true and fair view important in financial reporting? - [ ] To increase profit margins - [ ] To avoid taxes - [ ] To fulfill ethical reporting standards - [x] To accurately reflect the financial status and performance of an entity > **Explanation:** Providing a true and fair view ensures that the financial statements accurately reflect the financial status and performance of an entity, which is crucial for stakeholders' trust and decision-making. ### What is a key requirement for a subsidiary to be excluded from consolidation under older UK standards? - [ ] Financial instability - [ ] No profit contribution - [x] Significant difference in activities from the parent company - [ ] High operational costs > **Explanation:** Under older UK standards, a subsidiary could be excluded from consolidation if its activities were significantly different from the other entities in the group. ### How does IAS 27 define control over a subsidiary? - [ ] Shareholding above 30% - [ ] Exclusive provision of capital - [x] Power to govern financial and operating policies - [ ] Geographical proximity > **Explanation:** According to IAS 27, control over a subsidiary is defined by the power to govern the financial and operating policies of the entity to obtain benefits from its activities. ### Why were traditional exclusions based on dissimilar activities eliminated in modern standards? - [ ] To streamline administrative efforts - [x] To ensure comprehensive and accurate consolidated financial statements - [ ] To enhance profitability - [ ] To simplify audit processes > **Explanation:** Exclusions based on dissimilar activities were eliminated to ensure that consolidated financial statements provide a comprehensive and accurate view of the entire group's financial status and performance. ### What does the term 'segment reporting' refer to? - [x] Reporting financial information based on different segments of an entity - [ ] Reporting only related party transactions - [ ] Excluding non-essential activities - [ ] Auditing specific business units only > **Explanation:** Segment reporting refers to the practice of reporting financial information separately for different segments of an entity, providing detailed insights into diverse business activities within the larger consolidated entity. ### Which of the following entities has a role in establishing International Financial Reporting Standards (IFRS)? - [ ] Federal Reserve - [ ] Basel Committee - [x] IFRS Foundation - [ ] World Bank > **Explanation:** The IFRS Foundation plays a key role in establishing International Financial Reporting Standards (IFRS), ensuring standardized financial reporting across different jurisdictions.
Tuesday, August 6, 2024
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Consolidated Financial Statements January 1, 1
Disproportionate Expense and Undue Delay in Accounting January 1, 1
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