Consolidation methods

In the application, you can:

Consolidate subsidiaries using the acquisition method.
Account for shares in associated companies and joint ventures using the equity method.

You can organize the consolidation perimeter to consolidate statements on several subholding companies within one holding company.

Accounting for the acquisition of equity shares in other companies is based on parallel accounting. This allows you to store information on receipts, withdrawals, partial withdrawals, and acquisitions.

Effective equity shares are calculated automatically for companies that have indirect participation in other companies.

Goodwill (including negative goodwill) and non-controlling share are calculated automatically as well. Investments in subsidiaries and their net assets are eliminated. The effect of partial share withdrawals/acquisitions and share in the financial result of associated companies and joint ventures are calculated. The corresponding entries are recorded.

Terms and definitions

For the terms and definitions of this section, see chapter "Glossary".

Subsidiary consolidation: acquisition method

In the standard solution, consolidation adjustments are calculated according to a different algorithm on the date of acquisition of control over the company and on subsequent reporting dates.

On the date of acquisition of control, the parent company recognizes goodwill as an asset for the first time, recognizes non-controlling equity share, eliminates investments in subsidiaries, and recognizes adjustments at fair value of consolidated assets if these adjustments were not made in the individual financial statements of the subsidiary, deferred taxes are calculated at the consolidation level, and so on.

On subsequent reporting dates, goodwill is tested for impairment, fair value revaluation is reclassified to retained profit, changes in the deferred corporate profit tax are recognized, and non-controlling equity share in the subsidiary's retained profit is recognized.

Also, entries made on the date of acquisition of control are repeated on subsequent reporting dates.

Below you can read about consolidation procedures on the date of acquisition of control and subsequent reporting dates.

Consolidation on the date of acquisition of control

Subsidiary's financial statements are consolidated from the date of acquisition of control over an investment object.

To consolidate a subsidiary on the date of acquisition of control, follow the steps:

Revalue acquired assets and assumed liabilities to their fair value, which is net assets of a subsidiary. Net assets are measured at fair value outside the system by appraisers or specialists of a subsidiary.

The application uses the following method to record the measurement of net assets of a subsidiary at fair value.

On the date when control is acquired, individual (separate) financial statements of the subsidiary are prepared in accordance with IFRS and the parent company's accounting policy, or a package of IFRS report forms is prepared in accordance with the group's accounting policy.

The report form package records the revaluation of assets and liabilities of a subsidiary at fair value for consolidation.

Either option uses the "Revaluation of net assets of a subsidiary at fair value" account in the "Capital" section as a correspondent account for revaluation entries.

This account will be eliminated along with the other capital accounts of the subsidiary during acquisition consolidation procedures.

Create investment flow documents: Investment inflow and Investment outflow. In these documents, enter information on your direct share in investment objects, in particular, the direct equity share to acquire (withdraw). You can evaluate only on voting shares.
Calculate non-controlling share in equity.

Under IFRS, non-controlling share in equity can be measured either at full fair value or in proportion to the value of the company's net assets.

The group selects one of these methods in its accounting policy and applies it to all subsidiaries in the group.

Non-controlling share in equity is calculated in proportion to the fair value of the net assets of a subsidiary using the formula:

Effective (or direct) equity share, % * Net assets of a subsidiary at fair value.

If the method of recording the non-controlling share in equity at fair value is selected, it is determined outside the system and manually entered into the infobase for further calculations.

Calculate goodwill or income from a bargain. The system uses the following formula for calculation:

Investment in a subsidiary: effective (or direct) equity share, % * Net assets of a subsidiary at fair value.

Eliminate equity items of a subsidiary, invest in a subsidiary, and record goodwill and non-controlling share in equity.

For an example of a consolidation algorithm when purchasing 80% of shares in an company from a third party, see the figure:

The application excludes 80% of the equity of this company against the investment in this company during consolidation. The equity is the company's net assets on the date of acquisition and may be registered capital, a reserve fund, retained profit, or other items. In this case, the application excludes 80% in each of the equity items against the investment.

So, there is a partial write-off of the investment to the acquired company. The unwritten-off balance of the investment is transferred to the "goodwill" account (if positive) or "company acquisition profit" account (if negative).

The remaining part (20%) in each of the equity items is transferred to the GL account of "non-controlling share" in equity. As a result, the equity of the acquired company on the date of acquisition is completely excluded from the consolidation.

Based on the above calculations, the following entries are generated, which are then transferred (repeated) to the next reporting periods:

Reclassification of an investment in a subsidiary to a goodwill GL account that is used as a balancing account for elimination.
This entry also eliminates the investment in the subsidiary, which is not recorded in the consolidated financial statements under IFRS:

Dr 2.4.01.04.01 "Goodwill" or 6.4.00.91.05 "Income from a bargain (negative goodwill)".

Cr 2.1.03.58.01 "Investments in subsidiaries".

The entry amount is equal to the value of the investment in the subsidiary at the time of its acquisition. The investment value is a transferred compensation upon business merging, which includes:

□ Fair value of the assets transferred to the seller.
□ Fair value of the liabilities undertaken by the customer to the previous owners of the company to acquire.
□ Fair value of any share in the customer equity acquired before the acquisition of control over a subsidiary by the customer.
□ Fair value of all other compensation forms: other assets, contingent consideration, common or preferred equity instruments, options, and warrants. All compensations deferred for a long-term period must be included in the measurement of the compensation at discounted value and recognized as liabilities with interest charged on them later.

All listed compensation kinds upon acquisition of a subsidiary are measured and recorded in the same way as net assets at fair value at the level of the subsidiary. They are handed over to the consolidation step under the required measurement. The investment amount required for elimination is recorded in account 2.1.03.58.1 "Investments in subsidiaries" upon consolidation.

All subsequent entries correspond to the goodwill account directly and generate its net book value on the date of acquisition of control.
Elimination of subsidiary equity items. This entry also corresponds to account 2.4.01.04.1 "Goodwill":

Dr "Subsidiary equity items", including the "Revaluation of net assets of a subsidiary at fair value" account.

Cr 2.4.01.04.01 "Goodwill" or 6.4.00.91.05 "Income from a bargain (negative goodwill)".

Record of non-controlling share in equity:

Dr 2.4.01.04.01 "Goodwill" or 6.4.00.91.05 "Income from a bargain (negative goodwill)".

Cr 5.8.00.84.02 "Non-controlling equity share of the reporting period".

Consolidation on the date of preparation of financial statements under IFRS

Take the following steps to consolidate a subsidiary on the reporting date or on the date of change in the equity share without loss of control:

Repeat the entries to record goodwill, non-controlling share in equity, elimination of investments with accounts in the "Equity" section of the subsidiary's statement of financial position in the previous reporting period.

WARNING.

This repetition of entries does not follow the regular algorithm for repeating adjustments of previous periods since these entries do not correspond to the P&L accounts. They are automatically repeated by the Consolidation adjustments document so that the input amounts on the goodwill accounts and accounts for non-controlling share in equity are recorded in the consolidated financial statements of the current reporting period, and to eliminate the investment received after the NAS data translation and equity items of the subsidiary on the balance sheet. The same document records the non-controlling share in equity, goodwill impairment, change in the equity share, and so on when making entries of the current period. If, for example, income from a bargain was recognized during the acquisition of an company, this entry will be repeated when generating the Posting of previous period adjustments document for the eliminating company.

Calculate the exchange rate difference when repeating an investment elimination entry: when an investment is in a currency that differs from the functional currency of the group accounting, a part of it remains unwritten-off due to the exchange rate difference on the revaluation of the investment after repeating consolidation adjustments of previous years. This part of the investment is excluded against the "translational reserve" account in the "Capital" section. As a result, the investment is completely excluded.

(Exchange rate as of the current reporting date - Exchange rate as of the previous reporting date) * Received/transferred remuneration in the functional currency.

The entry for the elimination of the investment made in the previous step is repeated in the same amount that was made in the previous period. The revaluation at the exchange rate as of the report date is performed for a foreign currency investment in NAS as of the reporting date. The investment amount after the translation differs from that recorded in the previous period. Use this entry for the complete elimination of the investment.

Calculate non-controlling share in equity in the financial result of a subsidiary (the financial result is calculated for the period after the acquisition):

Non-controlling share in equity, % * Financial result of a subsidiary for the period.

The financial result for the period after the subsidiary acquisition is allocated between the group and minority shareholders.

Calculate non-controlling share in equity in other comprehensive income of a subsidiary (other comprehensive income is calculated for the period after the acquisition):

Non-controlling share in equity, % * Change in the net asset item of a subsidiary for the period.

Other comprehensive income for the period after the subsidiary acquisition is allocated between the group and minority shareholders.

Consolidation upon acquisition of additional share in a subsidiary

Consolidation entries when acquiring additional share in the subsidiary equity:

Goodwill (profit from acquisition) = Transferred remuneration for the acquired share - Effective (or direct) acquired equity share, % * Net asset of the subsidiary as of the transaction date.

Perform this operation if a share in a subsidiary is fully (partially) repurchased from minority shareholders after the acquisition of an company. For example, if the share in a subsidiary is increased from 80% to 90%.

Perform the operation as an entry to exclude a part of the share to be repurchased from the "Non-controlling share" account against the "Investments" account, which accounts for the investment amount paid for this share. The remaining non-excluded part of the investment is transferred to the "goodwill" or "company acquisition profit" account.

Consolidation upon withdrawal of share without loss of control over a subsidiary

There is another option when the group sells a share in a previously acquired company, while retaining control over a subsidiary.

In this case, generate an entry in the consolidated financial statements of the group as of the transaction date:

Dr "Financial result of share withdrawal" Cr "Non-controlling equity share in the amount".

Effective (or direct) sold equity share, % * Net assets of the subsidiary as of the transaction date – the amount of investment in the sold share.

The cost of the sold share is generated in the consolidated financial statements.

The statements record entries for the write-off of the investment and the receipt of remuneration for the sold share:

Dr "Financial result of share withdrawal" Cr "Investment".

Dr "Compensation (cash)" Cr "Financial result from share withdrawal".

Consolidation upon withdrawal of controlling share in subsidiary equity

Consolidation entries upon withdrawal of controlling share in the subsidiary equity:

Profit (loss) from the transaction = Received remuneration for the sold share – Effective (or direct) sold equity share, % * Net assets of the subsidiary as of the transaction date.

On a subsidiary withdrawal, the financial result of the subsidiary in the reporting period up to the transaction date must be included in the consolidated profit and loss statement of the group for the relevant income and expense items. This financial result must be accounted for in the group's financial statements in correspondence with the group's retained profit account.

As of the transaction date, the whole group equity related to the company under withdrawal is eliminated (written off to the profit and loss statement in the "financial result from the subsidiary withdrawal" item). This equity also includes the above retained profit for the reporting period up to the transaction date.

Income from withdrawal is cash and other compensation received from the investment outflow. It is recognized in the profit and loss statement under the "financial result from the subsidiary withdrawal" item.

This results in the following entries:

Dr "Equity" Cr "Financial result of withdrawal (P&L)". Writes off the entry that eliminates equity of a subsidiary at the date of its acquisition.
Dr "Non-controlling share" Cr "Financial result of withdrawal (P&L)". Writes off the entry that generates non-controlling share in a subsidiary at the date of its acquisition.
Dr "Financial result of withdrawal (P&L)" Cr "Equity". Restores opening balance of retained profit as of the transaction date once the subsidiary's group under withdrawal is excluded from the perimeter.
Dr "Financial result of withdrawal (P&L)" Cr "Investment". Writes off investments in a subsidiary under withdrawal.
Dr "Compensation (cash)" Cr "Financial result of withdrawal (P&L)". Receives income from the sale of share in a subsidiary.

WARNING.

The non-controlling share in a subsidiary under withdrawal generated after its acquisition by the group is not written off to a loss but remains on the group's balance sheet. The non-controlling share includes a share of minority shareholders in the financial result as a result of the subsidiary under withdrawal for the reporting period. This part of the non-controlling share in the subsidiary under withdrawal is repaid if dividends are paid to the minority shareholders. If this part of the non-controlling share is negative, it is written off to the group's retained profit in equity at the time of the subsidiary withdrawal transaction.

Consolidation on goodwill impairment

Calculate goodwill impairment based on the recorded recoverable amount of the subsidiary:

Subsidiary's recoverable amount as of the measurement date - (net assets as of the measurement date + Goodwill as of the measurement date).

This transactions writes off goodwill or its part to a loss of the current period (financial result).

Consolidation accounts

All consolidation entries are made using Standard GL accounts of DB. You can specify them in the IFRS settings.

Below you can see standard consolidation entries with "Standard GL accounts of DB":

Goodwill generation and investment elimination:

Dr 2.4.01.04.01 "Goodwill".

Cr 2.1.03.58.01 "Investments in subsidiaries".

Goodwill generation and equity elimination:

Dr "Subsidiary equity items", including the "Revaluation of net assets of a subsidiary at fair value" account.

Cr 2.4.01.04.01 "Goodwill".

Calculation of non-controlling share in equity:

Dr 2.4.01.04.01 "Goodwill".

Cr 5.8.00.84.02 "Non-controlling share in equity of the reporting period".

Automatic calculation of the exchange rate difference arising from recurring entries of previous periods for elimination of investments in a subsidiary:

Dr 5.6.00.00.01 "Currency translation reserve when converted to a presentation currency for the group".

Cr 2.1.03.58.01 "Investments in subsidiaries".

If the exchange rate difference is negative, it is also recorded in the entry with a minus.

Record of non-controlling share in equity in the financial result for the period:

Dr/Cr 5.5.00.84.01 "Retained profit/unrecovered loss of the reporting period".

Dr/Cr 5.8.00.84.02 "Non-controlling share of the reporting period".

Record of non-controlling share in equity in other comprehensive income for the period:

Dr/Cr "Changed net asset account of a subsidiary".

Dr/Cr 5.8.00.84.03 "Non-controlling share of the reporting period – other comprehensive income".

Record of equity transactions when additionally purchasing share in case of loss under the transaction:

Dr 5.1.00.80.04 "Result of additional purchase/sale of subsidiary share".

Cr 2.1.03.58.01 "Investments in subsidiaries".

Record of equity transactions when additionally purchasing share in case of profit under the transaction:

Dr 2.1.03.58.01 "Investments in subsidiaries".

Cr 5.1.00.80.04 "Result of additional purchase/sale of subsidiary shares".

Record of change in non-controlling share in equity upon additional purchase of share in the subsidiary equity:

Dr 5.8.00.84.02 "Non-controlling share in equity of the reporting period".

Cr 2.1.03.58.01 "Investments in subsidiaries".

COMMENT

Once entries are recorded, when you purchase share in a subsidiary, the value of the purchased share is automatically eliminated from account 2.1.03.58.01 “Investments in subsidiaries”.

Record of equity transactions when selling share in case of loss under the transaction:

Dr 5.1.00.80.04 "Result of additional purchase/sale of subsidiary shares".

Cr 2.1.03.58.01 "Investments in subsidiaries".

Record of equity transactions when selling share in case of profit under the transaction:

Dr 2.1.03.58.01 "Investments in subsidiaries".

Cr 5.1.00.80.04 "Result of additional purchase/sale of subsidiary shares".

Record of change in non-controlling share in equity when selling share in the subsidiary equity:

Dr 2.1.03.58.01 "Investments in subsidiaries".

Cr 5.8.00.84.02 "Non-controlling share in equity of the reporting period".

Reversal of the financial result recognized in profit/loss when selling share in a subsidiary:

Dr 6.4.00.91.01 "Financial income"/extra dimension "Result of subsidiary share withdrawal".

Cr 2.1.03.58.01 "Investments in subsidiaries".

COMMENT

Once entries are recorded upon subsidiary share withdrawal, the net book value of the withdrawn share is automatically restored on account 2.1.03.58.01"Investments in subsidiaries". So, when entries of previous periods for the elimination of investments are repeated, the amount of the entry is correct.

Impairment of goodwill:

Dr 6.5.00.91.06 "Goodwill impairment loss".

Cr 2.4.01.04.01 "Goodwill".

Accounting for associates and joint ventures: equity method

The Equity method is an accounting method under which investments are initially recognized at actual cost. Then their cost is adjusted for changes in the investor's share in net assets of the investment object after acquisition. The investor's profit or loss includes the investor's share in profit or loss of the investment object. Other comprehensive income includes the investor's share in other comprehensive income of the investment object.

Take the following steps to account for investments in associates and joint ventures under the equity method as of the reporting date or the date of change in equity share without acquisition of control:

Calculate the investor's share in the financial result of associates and joint ventures considering their declared dividends and tax paid by the investor:

Equity share, % * (Financial result of associates and joint ventures for the period - Declared dividends + Dividend tax).

Calculate the investor's share in other comprehensive income of associates and joint ventures:

Equity share, % * Change in the net asset item of associates and joint ventures for the period.

Calculate the amount of impairment of investment under the equity method based on the recorded recoverable amount of associates and joint ventures:

Recoverable amount of associates and joint ventures as of the measurement date – Investment under the equity method as of the measurement date.

WARNING.

Entries that record investments under the equity method follow the regular algorithm for repeating adjustments of previous periods. To make the entries, use a document of the same name. If an entry does not correspond to the P&L accounts, for example, it does not record the investor's share in other comprehensive income of associated companies and joint ventures, add this entry to recurring entries using the settings.

Based on the calculations made in the above steps and the consolidation entries made in previous periods, make the following entries:

Record of the investor's share in the financial result of associates and joint ventures:

Dr/Cr 2.1.03.58.03 "Investments in joint ventures"/2.1.03.58.02 "Investments in associates".

Cr/Dr 6.8.00.99.01 "Share in profit/loss from investments in joint ventures"/6.8.00.99.02 "Share in profit/loss from investments in associates".

Record of the investor's share in other comprehensive income of associated companies and joint ventures:

Dr/Cr 2.1.03.58.03 "Investments in joint ventures"/2.1.03.58.02 "Investments in associates".

Cr/Dr Group account subaccount 5.2.00.83.00 "Share in other comprehensive income from investments accounted for under the equity method" corresponding to the changed net asset account of associated companies and joint ventures.

Impairment of investment under the equity method:

Dr 6.8.00.99.03 "Loss from impairment of investments in associates" / 6.8.00.99.04 "Loss of impairment of investments in joint ventures".

Cr 2.1.03.58.03 "Investments in joint ventures"/2.1.03.58.02 "Investments in associates".

Consolidation upon acquisition of control over associates

If control over associates or joint ventures is acquired when you prepare consolidated financial statements of the group, consolidate as follows.

Exclude investments and calculate goodwill and non-controlling share of the company to acquire based on the investment cost, considering its revaluation in previous periods and the accounting year under the equity method. Exclude the revalued investment against the equity of the company to acquire, and calculate the goodwill. In other cases, the consolidation algorithm is identical to the classical purchase of control over a subsidiary.

IMPORTANT.

The income from the revaluation of an investment in an associate generated during the reporting period from the beginning of the period until the date of acquisition of control over the associate remains in the profit and loss statement under the "Income from investments in associates" line.

Consolidation upon partial loss of control over subsidiaries and their transition to associates

A special case of the withdrawal of controlling share in subsidiary equity is the situation when, as a result of this transaction, the subsidiary becomes an associated company.

In this case, in addition to the consolidation steps described in section "Consolidation upon withdrawal of controlling share in subsidiary equity", adjust the financial result from the subsidiary withdrawal in the profit and loss statement.

This adjustment is made by the entry:

Dr "Investments in subsidiaries and affiliates” Cr “Financial result from the subsidiary withdrawal".

As a result of this entry, the investment in the remaining subsidiary share must be measured at fair value of this share in subsidiary net assets as of the date of withdrawal in accordance with IAS 28 Investments in Associates and Joint Ventures. Recognize the revaluation result in profit/loss from the sale of the controlling share in the subsidiary equity.

Then, account for the remaining investment in the equity of this company under the equity method in accordance with IAS 28 Investments in Associates and Joint Ventures.

<< Prev Next >>