Discussing Consolidation of Investments

Objectives

After completing this lesson, you will be able to:

  • Describe the consolidation of investment concept and key terms
  • Explain the key points of activity-based versus rule-based consolidation of investments
  • Outline the purchase method and the log for first consolidation using the rule-based approach as well as the activity-based approach

Consolidation of Investments

Consolidation of Investment Concepts

Your corporation has many subsidiaries and you need to produce consolidated financial statements. As the elimination process is very complex, you want to automate this process as much as possible.

Consolidation of investments (C/I) deals with:

  • The elimination of investment on investors and equity of their subsidiaries (investee units).

  • It calculates the non-controlling interests (NCI) of the eliminated investment and equity and the differential (goodwill) amounts.

  • It reclassifies the minority portion of the equities reported by the subsidiaries.

  • The system performs these calculations and postings based on reported data for investment and equity and group-dependent investment share percentages.

Consolidation of Investments – Key Terms

  • Parent (holding):The consolidating entity.

  • Purchase method: Generally used if ownership is greater than 50%. This is used when the parent unit of a consolidation group exercises a dominating influence over an investee. Under the purchase method, the subsidiary’s trial balance is included in the group’s financial statements.
  • Equity method:Generally used when ownership is less than 50% and higher than 20%. Financial data of an equity unit is not taken into account in the consolidated financial statements.

    Only changes in the equity of the company are taken into consideration; this affects the investment value stated in the consolidated balance sheet.

  • Direct share:The percentage (%) ownership between the investor and the investee.
  • Group share: The total percentage (%) ownership between the higher level holding and the investee. This includes indirect ownership like:
    • Company A owns 80% of company B.

    • Company B owns 90% of company C.

    • The group share for the company C in this case is 72% (80% x 90%).

    • Group share data can be entered manually or can be uploaded.

  • Non-controlling interest: The percentage (%) portion of the investee not owned by the group.
  • Goodwill: The difference between the purchase price and the fair market value of the investee's equity.

Rule-Based Versus Activity-Based Consolidation of Investments (COI)

Either rule-based or activity-based consolidation of investments can be used by customers. But, not both at the same time in the same consolidation monitor in the same consolidation version.

Activity-Based COI – Key Points

  • Supported COI logic:

    • Purchase and equity method

    • First consolidation

    • Subsequent consolidation

    • Step acquisition

    • Capital increase and decrease

    • Partial and total divestiture

    • Partial and total transfer

    • Horizontal and vertical merger

  • Built-in elimination posting logic

Note
If you use the activity-based consolidation of investments, FS Items are determined via predefined system setup.

Rule-Based COI – Key Points

  • Supported COI logic:

    • Purchase and equity method

    • First consolidation

    • Subsequent consolidation

    • Capital increase (without group share change)

    • Total divestiture

  • Posting logic defined by reclassification rules:

    • Pre-delivered methods are available.

    • Customers can create their own rules.

Purchase Method – First Consolidation: Example

The following figure gives a calculation example of the first consolidation using the purchase method.

Using the activity-based approach the consolidation logic is automatically executed. No set up is necessary.

Using the rule-based approach you have to set up a reclassification rule with several sequences in order to define the consolidation logic by yourself or use the content reclassification rules and sequences.

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