what are the limitations of group accounts? (8 marks)
what are the limitations of group accounts? (8 marks)
Homework Answers
Limitations of group account are as follows:---
1. Liabilities are owed by individual entities not by the group. Only individual company assets are available to settle debts unless cross guaranteed.
2. Information and detail is lost through aggregation process.
3. The group is not a separate legal entity. For eg---shareholders have legal status only in the entities in which they hold shares.
4. Hides the poor performance or profitability issue with one or more companies by combining income statements in which revenues, expenses and net profits are presented as combined figure.
5. All inter company transactions are removed in consolidation. Therefore transfer pricing and profit shifting between groups can't be assessed.
6. Misleading Ratio comparison in financial statements due to consolidated figure. Investor won't able to judge the leverage of company correctly.
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