ACCA Strategic Business Reporting (SBR) Practice Exam

What is one reason for the exclusion of a subsidiary from consolidation?

1. Severe long-term restrictions on subsidiary management

2. The subsidiary has always been included in consolidation

3. Subsidiary ownership changes every fiscal year

4. Parent company has no voting rights

The correct answer is: Severe long-term restrictions on subsidiary management

The correct reason for the exclusion of a subsidiary from consolidation is based on severe long-term restrictions on subsidiary management. When a parent company holds a controlling interest in a subsidiary but faces significant constraints that limit its ability to govern or influence the subsidiary's financial and operational policies, consolidation may be deemed inappropriate. Such restrictions can stem from legal, regulatory, or contractual conditions imposed upon the subsidiary, which effectively neutralize the parent's control. Under International Financial Reporting Standards (IFRS), particularly IFRS 10, a parent must consolidate its subsidiaries unless it does not have control. Control is defined not solely by ownership percentages but also by the ability to direct relevant activities and extract benefits from the investment. Therefore, severe restrictions on the management of a subsidiary would indicate a lack of control, resulting in exclusion from the consolidated financial statements. The other options do not adequately explain valid reasons for exclusion from consolidation. For instance, if the subsidiary has always been included in consolidation, it indicates a historical precedent of control rather than a reason to exclude it. Ownership changes every fiscal year could complicate matters but does not in itself justify exclusion unless it leads to the loss of control. Similarly, having no voting rights would suggest a lack of control, but this situation is more nuanced than outright