The term “View to Resale” refers to the grounds on which a subsidiary undertaking may be excluded from the consolidated financial statements of a group. This exclusion occurs when the group’s interest in the subsidiary is held exclusively with a view to subsequent resale.
Historical Context
In the realm of financial reporting, the concept of “View to Resale” has evolved to provide flexibility and accuracy in financial statements. The aim is to offer clear representation of a group’s assets and liabilities, particularly when investments are not intended to be long-term.
Types and Categories
- Current Assets: A subsidiary held with a view to resale is classified as a current asset.
- Investment Categories: This can fall under either cost less impairment or fair value.
Key Events
- Introduction of IFRS 5: The International Financial Reporting Standard (IFRS) 5, Non-current Assets Held for Sale and Discontinued Operations, provides specific guidance on this matter.
- Financial Reporting Standard (FRS) Section 27: Applicable in the UK and the Republic of Ireland, this standard offers detailed rules for handling such subsidiaries.
Detailed Explanation
Financial Reporting Standards
- IFRS 5: Outlines the treatment of non-current assets held for sale and discontinued operations. Subsidiaries intended for resale must not have been previously consolidated in the group’s accounts.
- FRS Section 27: Specific to the UK and Republic of Ireland, this section stipulates how to treat subsidiaries held with a view to resale, emphasizing their categorization as current assets and the methods for valuation.
Mathematical Formulas and Models
- Cost Less Impairment:
$$ \text{Net Value} = \text{Cost} - \text{Accumulated Impairment Losses} $$
- Fair Value:
$$ \text{Fair Value} = \text{Market Value} - \text{Selling Costs} $$
Charts and Diagrams
Consolidation Exclusion Process
graph TD
A[Group Financial Statements] --> B[Evaluate Subsidiary]
B --> C{Held for Resale?}
C -- Yes --> D[Classify as Current Asset]
C -- No --> E[Consolidate in Group Accounts]
Importance and Applicability
Excluding a subsidiary from consolidated financial statements when held for resale ensures the parent company’s financial statements reflect the accurate financial position and performance. This approach offers transparency for investors and stakeholders by clarifying that the subsidiary is not a permanent part of the group’s operational assets.
Examples
- Example 1: A conglomerate decides to sell a non-core business subsidiary and excludes it from consolidation, categorizing it as a current asset at fair value.
- Example 2: A technology company acquires a start-up with the sole intention of reselling it to a competitor, valuing the subsidiary at cost less impairment until the sale is finalized.
Considerations
- Impairment Reviews: Regular assessments for impairment losses are crucial.
- Fair Value Fluctuations: The market value of the subsidiary might fluctuate, affecting financial statements.
- Regulatory Compliance: Ensure adherence to both local and international standards, such as FRS and IFRS.
Related Terms with Definitions
- Impairment Loss: A decrease in the recoverable amount of a non-current asset.
- Consolidation: The process of combining the financial statements of a parent company and its subsidiaries into a single set of statements.
- Current Asset: An asset that is expected to be sold or used within one year.
Comparisons
- View to Resale vs. Strategic Investment: Subsidiaries held with a view to resale are short-term and classified as current assets, whereas strategic investments are long-term and typically consolidated.
- IFRS vs. FRS: Both standards offer similar guidance but are applicable in different jurisdictions.
Interesting Facts
- IFRS 5 was developed to streamline the presentation and ensure comparability of financial statements worldwide.
- Companies often acquire subsidiaries with the sole intention of flipping them for a profit, leveraging market dynamics.
Inspirational Stories
Many successful corporations have built their fortunes by strategically acquiring and reselling businesses, showcasing the importance of financial acumen and market timing in achieving profitability.
Famous Quotes
- “The art of investment is the art of acquiring and reselling wisely.” — Paraphrased Financial Wisdom.
Proverbs and Clichés
- “Buy low, sell high” encapsulates the strategic approach behind viewing subsidiaries for resale.
Expressions, Jargon, and Slang
- Flip: Slang for buying an asset to resell it quickly for profit.
- Exit Strategy: The plan for selling an investment, often used in the context of viewing subsidiaries for resale.
FAQs
Q: Why might a company exclude a subsidiary from consolidated financial statements?
A: A company might exclude a subsidiary if it is held exclusively for resale, aligning with specific accounting standards that classify such subsidiaries as current assets.
Q: What is the difference between cost less impairment and fair value?
A: Cost less impairment accounts for the initial cost minus any impairment losses, while fair value reflects the market value minus selling costs.
References
- International Financial Reporting Standards (IFRS) 5: Non-current Assets Held for Sale and Discontinued Operations.
- Financial Reporting Standard (FRS) 102: Section 27 – UK and Ireland.
Summary
The concept of “View to Resale” is a critical aspect of financial reporting, ensuring subsidiaries intended for resale are accurately represented as current assets in financial statements. This practice provides transparency and clarity, vital for investor confidence and regulatory compliance. The standards set by IFRS and FRS are essential guidelines in achieving this.
By understanding and applying these principles, companies can effectively manage their financial statements, aligning with best practices and ensuring accurate representation of their financial health and strategic intentions.
