Consolidation of Investment Concepts

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Questions and Answers

What is a key characteristic of the activity-based consolidation method?

Requires user-defined posting logic

Automatically executes consolidation logic (correct)

Relies heavily on manual calculations

Demands a total divestiture for effectiveness

Which method requires the establishment of reclassification rules for consolidation?

Purchase method

Activity-based method

Rule-based method (correct)

Equity method

In the first consolidation using the purchase method, what is calculated along with the elimination postings?

Tax liabilities and operational efficiencies

Assets and liabilities valuation

Dividends and shareholder equity

Goodwill and non-controlling interests (correct)

What is a scenario where the purchase method is applicable?

When consolidating with a 60% ownership percentage Signup and view all the answers

What does the term 'goodwill' refer to in consolidation?

The excess of the purchase price over the fair value of net identifiable assets Signup and view all the answers

What is indicated by the ownership percentage in the context of consolidation?

The relevance of the purchase method for consolidation Signup and view all the answers

How is elimination logic set up in the rule-based approach?

In several sequences of a reclassification rule Signup and view all the answers

Which of the following is NOT supported by the activity-based COI?

Total divestiture Signup and view all the answers

What is the primary purpose of consolidation of investments?

To eliminate investments and equity of subsidiaries. Signup and view all the answers

When should the purchase method of consolidation be applied?

When ownership is greater than 50%. Signup and view all the answers

What does 'goodwill' represent in the context of consolidation?

The difference between the purchase price and the fair market value of equity. Signup and view all the answers

What percentage ownership qualifies a company to use the equity method?

Between 20% and 50%. Signup and view all the answers

How is the non-controlling interest (NCI) defined?

The percentage portion not owned by the group. Signup and view all the answers

In a case where Company A owns 80% of Company B, and Company B owns 90% of Company C, what is the group share for Company C?

72%. Signup and view all the answers

What is a key characteristic of activity-based consolidation?

It allows only rule-based or activity-based model in one consolidation version. Signup and view all the answers

Which of the following statements about group share is correct?

Group share can be calculated by including indirect ownership. Signup and view all the answers

Study Notes

Consolidation of Investment Concepts

Consolidation of investments (C/I) is a process to eliminate investment and equity of subsidiaries (investee units) in consolidated financial statements.
It calculates non-controlling interests (NCI), goodwill (differential amounts), and reclassifies minority portions of subsidiaries' equity.
Calculations and postings are based on reported investment/equity data, and group-dependent investment share percentages.

Key Terms

Parent (holding): The entity performing the consolidation.
Purchase method: Used when the parent controls a majority (>50%) stake in the investee. Requires including the subsidiary's trial balance.
Equity method: Used when the parent has a minority stake (between 20% and 50%) in the investee. Only changes in the investee's equity affect the consolidated investment value.
Direct share: Percentage of ownership between the investor and the investee.
Group share: Total percentage ownership between the highest-level holding and the investee. Includes indirect ownership.
Non-controlling interest (NCI): Percentage of the investee not owned by the group.
Goodwill: Difference between the purchase price and the fair market value of the investee's equity.

Consolidation Methods

Activity-based COI: Uses predefined system setups for FS Items. Automatically executes consolidation logic for various scenarios (e.g., first consolidation, subsequent consolidation, acquisitions, mergers).
Rule-based COI: Allows customization of consolidation logic using reclassification rules. Pre-delivered methods are available, or customers can design their own rules. Both methods cannot be used simultaneously.

Purchase Method - First Consolidation (Example)

In a purchase method first consolidation, the subsidiary's trial balance is included.
Example uses a 60% ownership scenario, (leading to use of Purchase method).
Non-controlling interests and goodwill amounts are calculated.
The Activity-based method automatically performs these calculations, while the Rule-based method requires predefined rules which include a debit-to-credit table to establish the goodwill calculation.

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Description

Test your understanding of key investment consolidation concepts, including non-controlling interests and the equity method. This quiz will cover the parent-holding relationship, purchase methods, and equity calculations in consolidated financial statements.