In this article we shall be discussing group account in the light of two important standards: IFRS 3 Business Combination and IFRS 10 Consolidated Financial Statements. I am sure that by the end of this series of expository teaching, we will have a proper grasp of group account and how they are applied in practice. Note, IFRS is an acronym for the International Financial Reporting Standards and they are the set of global standards that guids the preparation of financial reports. However, before we take a deep dive into discussing group account, it is crucial to lay a certain background that we can build upon to have a proper understanding of the concept: 

1. We must know what inter-corporate investment is about and why a company invests in another company.
2. We need to understand the term “business” and the criteria that must be met to be regarded as a business.
3. We need to understand the various forms of business combinations and how to account for them from an IFRS perspective.
4. We need to understand the term “control” and what gives rise to control in a business combination. 

What is Inter-corporate Investment?

In the current business landscape, to be an accountant of repute that adds value to an organisation, it is pertinent to have holistic background knowledge of the motive and strategy for the transactions and events we are accounting for. Gone are the days when accountants only record historical transactions. To be an accountant of repute, you are also expected to be a business advisor to the company or investor and be able to support the financial and investment decision of your company. Therefore, there is a need to understand the various forms of intercorporate investments and the reasons or rationales why companies do this. 

Ordinarily, an entity is expected to plunge back its profit (or cash flow as the case may be) into the business for expansion or distribute the profit to its shareholders in the form of dividends. However, sometimes, a company invest this available cash asset into another company through various financial instruments such as common stocks, corporate bonds, debenture stock, redeemable preferred stocks, Commercial papers and other forms of structured financing arrangements. Therefore, the arrangement whereby a company invests in another company, other than an individual’s investment, is known as inter-corporate investment. When this is an equity investment in another company, the investor is said to have a voting right in the investee based on the proportion of its shareholding. This can be categorised as follows: minority passive, minority active, controlling interest and joint venture. We will discuss these in details later. 

Inter-corporate investment is a strategic decision of an organisation, and the following are motives why the management of a company might opt for inter-corporate investment: 

• Diversification into a new market: For instance, if a French company wants to introduce its product into the Chinese market, it is certain that it will meet many difficulties ranging from legal barriers to cultural barriers. However, the French company can look for an existing Chinese company through which it can unveil itself into the new market. This way, the French company takes advantage of the investee’s customers and knowledge of the business environment.  
• Forward and backward integration: Forward integration is when a company acquires its distribution channel or supply network to gain an advantage that allows it to push more of its goods to the market than its competitors. In contrast, backward integration is when a company can acquire its manufacture to have an exclusive advantage of material supply over its competitors. Whichever the case, both involve making a significant investment to acquire the equity share capital of another company. 
• To prevent competition: Another reason why companies invest in another company, especially by way of acquisition, is to guard against threats. Today, it is not uncommon to see big companies taking over start-ups that they adjudge to be a threat either now on in the future. For instance, Facebook acquisition of WhatsApp and Instagram was strategic and was to prevent possible competition from them. Another example is the $200 million acquisition of Paystack, a Nigerian payment start-up, by Stripe.   
• To participate in the investees’ returns: While some companies make an inter-corporate investment to gain control or have significant influence over the investee activities, others invest for the purpose of participating in its returns. In this scenario, the investor invests in the debt or equity instrument of the investee to receive interest payment or share from variable returns (and loss) of the investee. 

These above-listed reasons and many more are motives why companies invest in another company’s equity (or debt) instrument and it is to enhancing its bottom-line and generating more returns to the shareholders. We will leave it here today. I hope this gives us a comprehensive understanding of inter-corporate investment, the means of investment (both debt and equity) and the various motives for inter-corporate investment.

In the subsequent editions, we will look at the forms of a business combination and what constitutes a business looking from the perspective of IFRS 3. We will also discuss the concept of control and how it gives rise to consolidated financial statements. We will explain the concept of goodwill and gain on bargain purchase and the various forms of parent and subsidiary relationship.