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HMRC internal manual

Corporate Finance Manual

Debt cap: group accounts: consolidated financial statements

This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.

‘Financial statements of the worldwide group’

TIOPA10/S346 defines ‘financial statements of the worldwide group’ as meaning the consolidated financial statements of the ultimate parent (CFM90270) and its subsidiaries. References in TIOPA10/PT 7 to the period of account of the worldwide group are to the period for which these consolidated accounts are drawn up.

In many cases, the ultimate parent will prepare consolidated accounts that are publicly available. For example, in the straightforward case of a UK group headed by a quoted company, S399 Companies Act 2006 (CA06) will impose a duty on the parent company to prepare group accounts, and S430 requires the quoted company to publish annual accounts (which includes group accounts) and reports on a website. It must, of course, also file accounts with Companies House.

Investments in a subsidiary measured at fair value

It is possible that a parent company that prepares financial statements in accordance with IFRS will not prepare consolidated financial statements in which subsidiaries are consolidated on a line by line basis. This could be the case where a company is an “investment entity” and all of its subsidiaries are viewed as investments managed on a fair value basis. In the financial statements the investment entity measures an investment in a subsidiary at fair value through profit or loss in accordance with IFRS 9 (see IFRS 10.31 and 10.27). In this case, the financial statements of the parent will be treated as the financial statements of the worldwide group (TIOPA10 S348(5A) and 346(2A)) and the computation of the “available amount” is modified – see CFM92457.

If the investment entity also has subsidiaries, for instance a service company, a holding company or a financing company, which are not held as investments managed on a fair value basis, then, under IAS, the investment entity may prepare consolidated financial statements, but the investments managed on a fair value basis will not be consolidated on a line basis. The subsidiaries that are viewed as investments managed on a fair value basis will be measured at fair value through profit or loss in accordance with IFRS 9.  Again, the computation of the “available amount” is modified – see CFM92457.

Availability of consolidated accounts

Cases may arise, however, where - under the law of the territory concerned - there is no statutory requirement for the consolidated accounts prepared by the ultimate parent to be made available to anyone other than the shareholders or members of that entity. Generally it is likely that UK members of the group, which need to apply the debt cap rules, will nevertheless have access to such accounts.

Exceptionally, an ultimate parent company may prepare consolidated accounts but refuse to make them available even to UK companies within the group.

Example

A Ltd is a UK resident company with a number of direct and indirect subsidiaries, carrying on business mainly in the UK but also elsewhere in Europe. It prepares consolidated accounts for the group which it heads. Similarly B Inc is the parent company of a mainly US resident group, which also prepares consolidated accounts. The accounts for both A Ltd and B Inc however disclose Z Ltd, a company resident in the British Virgin Islands, as the ultimate controlling entity. Z Ltd is the ‘ultimate parent’ for debt cap purposes and is believed to prepare consolidated accounts. But the directors of A Ltd (none of whom are shareholders in Z) do not see these accounts, and indeed do not know whether Z Ltd has direct subsidiaries other than A Ltd and B Inc.

CRMs and other HMRC staff should be prepared to discuss a pragmatic solution with any UK group or sub-group that genuinely finds itself in such a situation. In the above example, it might be reasonable to treat the group for debt cap purposes as headed by A Ltd if the ‘A group’ in practice operates independently of Z Ltd or of the ‘B group’.