2024 V-5 AGR Consolidation PDF

ACCOUNTABILITY GOVERNANCE AND REGULATION II Meaning of consolidation and «how» to consolidate Chiara Saccon Venice 2024 5  Programme and study materials Accounting Regulation (slides and Leuz...

ACCOUNTABILITY GOVERNANCE AND REGULATION II Meaning of consolidation and «how» to consolidate Chiara Saccon Venice 2024 5  Programme and study materials Accounting Regulation (slides and Leuz article) Consolidation according to theories (slides and exercises) TEXTBOOK: IFRS regulation – Chapter 2 IFRS: an overview IFRS Consolidation: when to consolidate – Chapter 4 Consolidated financial statements IFRS Consolidation: how to consolidate – Chapter 3 Meaning of consolidation – Chapter 5 Combining individual financial statem. – Chapter 6 More on consolidation accounting Accountability, Governance and Regulation Meaning of consolidation The role of consolidated financial statements is to inform users on the group performance in order to allow wise economic decisions (group as a whole or a single entity) Its importance: – Information conveyed by the individual financial report is not always enough, and – Could provide misleading information  How to prepare consolidated financial statements (through consolidation accounting) Consolidation accounting= a method of combining the individual financial statements (BS, IS) of the parent with those of its subsidiaries into an overall set of statements as if the parent and its subsidiaries were a single entity The parent company has to add to its accounts all assets and liabilities of the subsidiaries as if the parent had acquired them directly rather than invested in the subsidiaries’ shares Controlling stake/strong link (e.g. 70%) determine 100% of control of the investor on the investee assets and liabilities  Consolidation process The consolidation process includes the following steps: 1. Collect the individual companies’ financial statements 2. Make them uniform (accounting period, accounting policies, reporting currency, layout) 3. Combine assets, liabilities, equity, income, expenses of the parent with those of its subsidiaries 4. Eliminate the carrying amount of the parent’s investment 5. Eliminate any intra-group assets, liabilities, equity, income, expenses 6. Calculate and allocate the group’s and non controlling interests’ results 7. Prepare consolidated financial statements  Consolidation meaning and process Example to understand the meaning of consolidation and to put the consolidation process into practice Company ETA wants to start a new activity, two choices: – 1. Buy the necessary assets and perform the activity direcly – 2. Buy shares of a separate company BETA and perform the activity indirectly by controlling it  1. ETA performs the new activity direcly ETA balance sheet when it decides to start the new activity directly ETA balance sheet Cash 400Liabilities 600 Other Assets 600Equity 400 ETA buys assets (plant) necessary to perform the activity (cost=100). Resulting balance sheet: ETA balance sheet Cash 300Liabilities 600 Other Assets 600Equity 400 Plant 100 Only one legal entity (ETA), no consolidation issues  2. ETA buys shares of BETA ETA balance sheet when it decides to start the new activity ETA balance sheet Cash 400Liabilities 600 Other Assets 600Equity 400 ETA buys shares of BETA (cost=100). Resulting balance sheets: ETA balance sheet Cash 300Liabilities 600 Other Assets 600Equity 400 Investments 100 BETA balance sheet Plant 100Equity 100 Two legal entities (ETA-BETA), consolidation issues  2. ETA buys shares of BETA In preparing consolidated financial statements all items of the subsidiary have to be added to the parent’s accounts as if the parent has acquired the assets and liabilities directly and the financial statements (here BS) should look exactly as the BS of ETA in the first case Consolidation steps (1 and 2 done): 3. Combine assets, liabilities, equity, income, expenses of the parent with those of its subsidiaries 4. Eliminate the carrying amount of the parent’s investment  Consolidation worksheet ITEMS ETA BETA Aggr. Adjust. Consol. Cash 300 300 300 Investments 100 100 -100 0 Plant 100 100 100 Other assets 600 600 600 Total assets 1.000 100 1.100 -100 1.000 0 Liabilities 600 600 0 600 Equity 400 100 500 -100 400 Total Liabilities and Equity 1.000 100 1.100 -100 1.000 0  Consolidation financial statements Final consolidated balance sheet of the group: Consolidated balance sheet Cash 300Liabilities 600 Other Assets 600Equity 400 Plant 100