Now that we’ve eliminated the intercompany transactions, we can turn our attention to consolidation of investments.
Your corporation has many subsidiaries and you need to produce consolidated financial statements. Our goal is to combine the balance sheet and income statement for the parent and its subsidiaries into one corporate group as if they were liquidated. Consolidation of investments is referring to the accounting concepts and the accounting entries associated with the ownership eliminations and postings.
Consolidation of investments for the rule-based approach is run from the consolidation monitor via the Investments / Equity Elimination task.
In our course scenario, the corporate holding company (Germany) owns 100% of the Belgium subsidiary. The Belgium subsidiary owns 75% of the French subsidiary. Because Belgium owns more than 50% of the French subsidiary, Belgium is the controlling parent and the relevant accounting practice is referred to as the purchase method. In the purchase method, there are required adjusting entries for the investment, the goodwill, and the non-controlling interest to consolidate the French balance sheet and income statement into the corporate financial statements.
One of the first steps in the consolidation process is to define the structure of the group being consolidated, which includes the consolidation method assignments and ownership percentages. In the example above, you have the following relationships:
- Investment structure:
- DE00 is the parent holding company for the World. Therefore, its ownership percentage is 100% in the World group.
- DE00 owns 100% of US00.
- DE00 owns 100% of BE00.
- US00 is the parent holding company for America. Therefore, its ownership percentage is 100% in the America group.
- BE00 is the parent holding company for Europe. Therefore, its ownership percentage is 100% in the Europe group.
- US00 owns 35% of CA00.
- BE00 owns 75% of FR00.
- There are three consolidation groups because there's a business requirement to publish three sets of consolidated financial statements, one for each group:
In the America consolidation group, there are two consolidation units: CA00 and US00.
In the Europe consolidation group, there are two consolidation units: FR00 and BE00.
In the World consolidation group, there are five consolidation units: CA00, US00, FR00, BE00, and DE00.