Control-based consolidation : FRS 37 and its effect on the value relevance of consolidated financial statements in New Zealand : a thesis presented in partial fulfillment of the requirement for the Master of Business Studies (Accountancy) at Massey University, Albany, Auckland
Purpose: The purpose of this thesis is to determine whether the requirement for New
Zealand organisations to switch from the ownership-based method of consolidation
to the control-based method of consolidation increased the value relevance of
consolidated financial statements in New Zealand. It takes advantage of the unique
situation whereby all listed entities in New Zealand were required to comply with
FRS 37: Consolidating Investments in Subsidiaries (FRS 37) in a year relatively free
from changes to other financial standards.
Motivation: The study was motivated by research undertaken by Hsu et al. (2012).
Their research focused on the movement from the ownership-based method to the
control-based method of consolidation of financial statements and whether this better
reflected market value. They took advantage of the situation in Taiwan which
similarly required all public firms to adopt Taiwan’s SFAS 7: Consolidated
Financial Statements (TSFAS 7) at a set time.
Research question: Did the change from the ownership-based method of
consolidation under SSAP 8 to the control-based method of consolidation under FRS
37 increase the value relevance of consolidated financial statements in New
Sample selection and design: A sample of 54 entities listed on the New Zealand
Stock Exchange (NZX) was used. The sample, although small, represented all of the
final available population. Analysis of common accounting ratios was carried out
and accounting variables affected by the switch to FRS 37 were analysed to
determine changes in the value relevance of the consolidated financial statements.
Findings: The adoption of FRS 37 led to an increase in value relevance of financial
statements in New Zealand. However the ability to apply judgement to the
application of control highlighted entities holding a larger number of subsidiaries
and associates had a more complex structure than anticipated. Therefore holdings
indirectly controlled may not have been captured with a lower instance of
consolidation being achieved than was anticipated.