consolidated enterprises. Consolidation procedure. Additionally, there are a number of special requirements
The concept of consolidated reporting
Consolidated reporting is prepared in case of restructuring of a business entity. Consolidated reporting is a set of indicators that reflect the financial position at the reporting date and the results of financial and economic activities for groups of enterprises that are interconnected.
Consolidated reporting will drawn up V volume case, If maternal company:
- Holds more than 50% of the voting shares of a joint-stock company or more than 50% of the charter capital of an LLC;
- May govern decisions to be made by the subsidiary under contract or otherwise.
Consolidated reporting is formed by summing up the reporting items of the same name of companies that are included in the parent company.
The most important feature of a group of organizations that are interconnected is the control over the assets and operations of incoming companies and the impact on financial and economic activities.
Stages of preparation of consolidated reporting:
- The process of primary consolidation - the formation of reporting on the date of the merger of companies;
- The process of compiling annual consolidated reporting in future periods of the combined companies
Significance of consolidated reporting
The need to consolidate companies in the international financial market and attract investments by issuing securities has led to the creation of an information need for users to receive reliable information about the activities of the combined companies.
Consolidated financial statements are financial statements that meet the information needs of investors, authorities and other users of information. At the same time, its compilation should be carried out by the main company.
Individual reporting characterized by an element of the accounting method, performs information and control functions, being compiled by all subjects of economic activity in each reporting period.
Consolidated reporting is characterized by the type of financial statements, performs only an informational function in order to provide external users with information about the financial condition and results of the group's activities as a subject of interconnected control relations, for further decision-making.
All organizations that are part of the company's group are represented by independent economic entities. These organizations are interconnected by the relationship of control of the main company over its subsidiaries. Control is the right of the main company to determine the financial and economic policies in order to further obtain economic benefits from their activities. Consolidated reporting does not replace the individual reports of individual companies, but allows you to get an idea of the financial condition, performance and development prospects of a group of enterprises as one organism.
The need for consolidated reporting is determined by the ability to obtain information about the scope of various activities within the group, make it transparent for reporting users, increase their confidence in the group and individual companies included in it.
ultimate maternal company is called the parent company in a group where the subsidiaries are intermediate parent companies of a level below the final one.
Subsidiary company is an entity controlled by a parent company.
If we are talking about a group of companies, then consolidated financial statements are submitted. What is the essence of such a concept?
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Consider what it is, when and how this kind of documentation is presented, and what rules should be followed when compiling.
Surely you know that you must report on your activities to the authorized bodies.
And when presenting ordinary financial statements, there are few questions, as many firms face it. But when should consolidated financial statements be prepared? We will talk about this further.
General points
Consider the basic concepts that you may encounter in the implementation of your activities. Let's clarify what is the purpose of filing consolidated financial statements.
Required definitions
Financial reports are accounting indicators that are reflected in the tables and characterize the movement of property objects, liabilities and the financial condition of the enterprise for a certain period.
This is a system of data on the financial situation in the organization, the financial result of its work and changes in the financial situation. Prepare such reports based on accounting information.
Consolidated financial statements characterize the state in the property and financial plan of the group at the reporting dates, as well as the financial result for the reporting periods.
A feature is the fact that the assets and liabilities, as well as the profits and expenses of several independent firms, are combined into separate financial reporting systems.
Such reporting is prepared by almost all holdings and groups of enterprises. Reports submitted.
For what purpose is it formed?
Consolidated financial statements are the basis for users to make informed decisions about groups of related entities.
This is due to the fact that an enterprise that controls other firms makes transactions that make it possible to distort the real financial situation and the real financial result of the group's work.
For example, it is possible to manipulate the profits and costs of individual firms in the mutual sale of assets or the provision of services at an overpriced or underpriced price.
Such actions are misleading to the external user, since the financial statements of each entity do not allow identifying and assessing the impact of an intragroup transaction.
The main purpose of consolidated financial statements is to present the activities of the parent and subsidiary companies as the activities of a single economic entity.
Another goal is to show the investor and other persons the result of the financial activities of a group of companies that are legally independent, but in fact it is a single economic entity.
The legislative framework
Current legislation:
- (with additions and corrections dated March 24, 2000).
- (as amended on November 4, 2019).
Features of the annual consolidated financial statements
The essence of consolidation is as follows - a group of companies presents consolidated reports. One enterprise is the parent company, it is the parent company, others are subsidiaries.
Each company maintains accounting records, but reporting gives an idea of the overall financial situation.
Reporting of the consolidated type is not a summation of articles of the same name in the reports of the group companies.
Transactions entered into between members of corporate families will not be included in the consolidated accounts, but reflect only assets and liabilities, etc. from transactions with other persons.
Reports of subsidiaries are combined into consolidated reports in such situations:
Compilation is carried out in accordance with IFRS in the currency of Russia or in another currency, if this is stated in the constituent documentation.
They submit reports that are prepared in Russian, unless otherwise specified in the constituent documentation. Reports are compiled for each year within the time frame that is established in the documents of the organization.
In some cases, interim financial statements are prepared. It is submitted no later than 90 days after the end of the reporting period.
Annual reports are submitted:
Annual reporting must be checked by audit organizations without fail. The presentation is carried out together with the consolidated reports.
It is also obligatory to publish reports in the public information system, mass media until September 1 in the next year after the reporting one.
Formation procedure
Prior to compiling consolidated reports, the following information should be obtained from each company:
- on the financial investment of the group companies in the authorized capital of other enterprises;
- on the nominal value of the group's companies;
- on the share premium received;
- on the balance of accounts payable and receivable of the group companies to each other;
- about and loans that are issued by the companies of the group to each other;
- on the accrual and payment of dividends;
- on intragroup profit;
- about purchased from the enterprises of the group, not decommissioned materials, products.
Consolidation of financial statements of a group of companies ensures that the mutual transactions of the group are not repeated.
When preparing reports, information from the report of the parent and subsidiaries is combined by stages to present them as a single economic organization.
And for this, the articles of the reports of the companies of the group are summed up, and then mutual investments and operations are included.
Investor investment balance | Eliminate their capital of the invested enterprise |
Remaining outstanding debt | For internal operations, they are eliminated in full |
Unrealized Income | For internal operations in the balance of goods and fixed assets, they are eliminated in full |
Unrealized loss | Eliminate in the rest of the asset |
net income | What belongs to a third-party shareholder of a subsidiary is indicated separately from income, what belongs to the parent company |
In consolidated reports | Minority share in net assets is allocated |
It is important in what order the debt obligations are combined. Credit and other debt obligations, contributions to reserves and debts between group entities are excluded.
Subsidiary equity items to be consolidated:
- statutory;
- Reserve capital;
- undistributed income (uncovered losses).
Stages of balance sheet consolidation (taking into account whether there are mutual transactions):
Primary reporting methods:
- purchase method;
- mergers.
Rules for the formation of indicators
When compiling, we will use the conditional data of such tables (the first three present the data of the parent company, the rest - the subsidiary).
Report forms are used that are compiled by the parent company on the basis of standard forms. Some indicators are deciphered, which reflect the movement of money between companies.
To simplify the calculations, we exclude a number of indicators (deferred tax liabilities, etc.). Consider the rules for compiling a balance sheet.
At the first stage, line-by-line summation of the information of all balances is carried out. We get an intermediate consolidated balance sheet.
The parent company does not own 100% of the capital of the subsidiary, which means that at the second stage, a minority share in the authorized capital of the subsidiary is accrued.
The consolidated balance sheet contains data on the share of the minority, which will reflect the amount of capital of the subsidiary, which does not belong to the parent company.
The minority share will be 400,000 rubles. This indicator is reflected in a separate article after line 1300. Indicators of the interim consolidated balance sheet:
The consolidated balance sheet does not reflect:
Financial statements should not include:
Information about a dependent company is included in the reporting when the following indicators are reflected:
Fill example
Let's imagine an example of filling out the consolidated reporting form of a group of enterprises:
Capital - 1 million.
In paragraph 3, the following balance sheet items are excluded:
In paragraph 6:
In paragraph 7:
Form 2 (in million rubles per quarter):
In order to consolidate the form, an analysis is carried out for the reporting period on account 60, 62, 76 to clear revenue and cost from internal settlements in the group.The proceeds are cleared from the debit turnover on account 62 for intergroup settlements with, since the form reflects the proceeds without.
The cost price is cleared from the credit turnover on account 60 for intergroup settlements.
Conducting an analysis
The analysis provides disclosure of data of corporate associations. The preliminary stage of the analysis of reports is an assessment of how correctly the consolidation parameters are determined and the company is legally included in the group, taking into account the legal framework and IFRS requirements.
When analyzing reports, a number of factors are taken into account:
- the share and degree of functional and financial influence on certain firms;
- object and subject of consolidation;
- the impact of companies' accounting policies on consolidated statements.
The object in the analysis is indicators in the form of a minimum number of articles that are presented in reports ().
Analyzed:
- the number of shares that were issued and paid for, as well as issued but not paid;
- nominal indicators of the value of shares;
- reconciliation for shares that were issued in the reporting period;
- share of ownership in the capital of the group that belongs to the parent company, subsidiary;
- rights and restrictions of shareholders.
When carrying out the analysis, standard methods are used (vertical, horizontal, etc.). A specific direction of analysis is the estimation of the minority share.
If there is direct ownership, then the analysis will not cause difficulties, if indirect, special calculations are made, taking into account cross-ownership of shares.
When analyzing, articles are distinguished that should be eliminated:
Analyzing balance:
Analyzing the consolidated balance sheet, the following financial ratios are determined:
- indicator of the property situation of firms;
- data for assessing the structure of the source of financing of the capital of firms;
- liquidity ratio;
- financial sustainability data;
- indicator of business activity of the enterprise.
Analyzing the consolidated statement of profit and loss, the share of the subsidiary in the financial result of the group is determined.
They establish the minority share in the income and losses of subsidiaries, and as a result determine the net income that the parent company receives.
What is the submission deadline?
Financial statements are submitted by March 31 of the year following the end of the reporting period. The deadlines for filing a consolidated type of reporting are described in.
When filing, it is worth following the order that was prescribed in the constituent documentation. Reports are submitted before the general meeting of founders is held, but no later than 120 days after the end of the reporting year.
The signatures on the reports are put by the management or other authorized persons. When should such reporting be published? Reports must be published within 30 days after they are presented to the user.
Emerging nuances
There are some features that are worth remembering for legal entities with different forms of ownership. Let's outline them briefly.
For LLC
Reports can be combined if the parent company has an authorized capital of at least 50%. Data on dependent companies are included if the parent company has more than 20% of the authorized capital.
For OJSC
To consolidate reporting, the main company should have 50% of the shares.
In order for the Data on the consolidated financial statements of an JSC (its affiliates) to be included in the reports, the JSC must have more than 20% of voting shares.
- actions that are performed within the corporation are not taken into account - only those are shown
- actions that are aimed at cooperation with third parties;
- reporting does not reveal the presence or absence of profit - the analysis is carried out in order to evaluate the activities of this group of objects.
But consolidation is not always possible. There are several cases when it should not be carried out:
- the organization has enterprises dependent on it, but it itself is included in the group of subsidiaries;
- if the activity of the enterprise is very different from other firms of the corporation;
- if all the necessary data for the consolidation cannot be provided or received within the time allotted for this;
- a company that is dependent does not have significant resources;
- if the firm was bought by the company only in order to gain funds from its resale;
- the organization can carry out its activities only within a strictly regulated framework.
Consolidated reporting should not be formed by subsidiaries, but only by the parent organization.
Regulatory regulation in Russia
Large enterprises form such consolidated statements in order to be able to get a complete picture of what is happening at all subsidiaries. This is very important from the information side, therefore, legislative norms and regulations are engaged in the formation of the procedure for its determination.
In the Russian Federation, the consolidation of enterprises and the preparation of their financial statements are regulated by the following legislative acts:
- "On Accounting" - the law defines the basic concepts and procedure for compiling a report;
- "Accounting statements of the organization" - in it you can find the composition of the data that should be written in such a report;
- data from methodological recommendations for reporting in accounting.
These laws and regulations contain only basic information about consolidation. They do not spell out the nuances, and many aspects are generally released from attention. This happened due to the fact that the basic laws have been in force since the days of the USSR, and at that time accounting was not given the functions of working within the framework of a market economy. Today, the government is developing new legislation that will be able to really regulate all aspects of consolidation.
The control of the consolidation of enterprises is carried out by international legislation, namely the International Financial Reporting Standards.
When and why is it made up?
In many groups, you can find enterprises that, while operating as part of a group, are in fact completely legally independent. All representatives of such an association must provide financial statements. But if you look from a practical point of view, then it is almost impossible for those users who are not connected with the work of the company to determine the state of affairs in a group of organizations, having only individual documents available.
For these purposes, large enterprises compile consolidated financial statements. They are intended to show the real state of affairs in the economic sector of the group of enterprises.
If an enterprise has subsidiaries, then the preparation of consolidated financial statements is its direct obligation. Full control over dependent firms is exercised by the parent company in such cases:
- she has a 51 percent stake in this firm;
- employees of the company have the opportunity to appoint and dismiss the management of another company;
- the main enterprise can impose its policies on another firm.
Requirements and methods of its formation
In order to collect all the information for reporting, it is necessary to process a huge amount of data from different enterprises (moreover, the more firms are part of the corporation, the more information is required). To facilitate this procedure, there are several ways to carry it out.
The choice of this method depends on the enterprise, the nature of its activities and the share owned by the parent company.
It is behind the main enterprise that the choice of the method for work is worth. It can choose from the following methods:
Acquisition method
It can be used by those groups of enterprises that have dependent firms. Before preparing the analysis, it should be clearly defined which firms become subsidiaries and which become parent firms. It is also necessary to check their similarities in those issues that can be called significant.
Consolidation involves summing up data on similar items of income and expenses. But not all data is included in this process. It is not necessary to indicate the investment capital that the main company invests in dependents. It is also not necessary to include in the report those funds that were carried out on transactions between these firms, within the corporation.
Equity method
It can be used when the company is not the parent company, but has a very large influence on it. This is possible if the corporation owns more than 20 percent of the capital of this firm, which affects its activities. In the consolidated financial statements, it is necessary to display the enterprise over which control is exercised.
Pooling of interests method
This method can only be applied if the owners of the enterprise are several firms with an equal share of ownership. In this case, the definition of any of the firms as the parent is impossible. Moreover, each of the owners must enter data on the dependent company into their accounts.
Combined
It is important to use this method for those corporations that own several firms. In this case, it is first necessary to draw up reports for all enterprises separately, after which their data is summarized in a single report.
Proportional Consolidation
It is applied in the event that an agreement on common activities has been concluded between the enterprises. Such an agreement should include all information about the rights and obligations of each of the parties.
Consolidation can be carried out by any of the above methods, if the nature of the relationship between enterprises allows it.
Reporting analysis
Consolidated reporting should have the same structure as the analysis of all firms separately. This can be understood in such a way that such reporting has the form of a simple balance sheet. To study the state of affairs at the enterprise, the following data is taken into account:
- sales profitability;
- where does the capital of the company come from (indicate all sources);
- what is the financial condition of the corporation;
- How liquid are the firm's assets?
- asset turnover procedure;
- how much is the capital of the organization;
- what resistance to a stressful financial condition the enterprise has.
Methods and ways of compiling a consolidated report completely depend on several factors. Among them, one can note the nature of relations between organizations, the conditions and procedure for the formation of a group of enterprises.
In contact with
Procedures and principles of preparationand presentation of the consolidatedreporting
When preparing consolidated financial statements, the financial statements of the parent company and subsidiaries are combined in stages in order to present them as a single economic organization. For these purposes, first, the reporting items of the group companies are summarized line by line, and then mutual investments and operations are excluded.
Consolidation should ensure that the mutual transactions of the group companies are not repeated.
When compiling consolidated financial statements, the parent organization and subsidiaries must use a single accounting policy in relation to the assessment of similar items of property and liabilities, income and expenses, etc.
The consolidated financial statements combine the financial statements of the parent organization and subsidiaries, compiled for the same reporting period and on the same reporting date.
The organization must compile consolidated financial statements in the amount and manner established by the Accounting Regulations "Accounting Statements of the Organization" (PBU 4/99), in the forms developed by the parent organization on the basis of standard forms of financial statements. Wherein:
forms of financial statements can be supplemented with data required by users of consolidated financial statements;
articles (lines) of accounting forms for which the group does not have indicators may not be given, except in cases where the corresponding indicators were obtained in the period preceding the reporting period;
Numerical indicators of individual assets, liabilities and business transactions should be presented in the consolidated financial statements separately, if without knowledge of them it is impossible for users to assess the financial position of the group or the financial result of its activities. Numerical indicators for certain types of assets, liabilities and business transactions are not presented in the consolidated balance sheet or consolidated profit and loss statement, if each of these indicators individually is not significant for the assessment by users of the financial position of the group or the financial result of its activities, but is reflected in the total amount in explanations to the consolidated balance sheet and consolidated income statement.
The parent organization adheres to the accepted form of the consolidated balance sheet, consolidated income statement and explanations to them from one reporting period to another. Changes in selected forms of the consolidated balance sheet, consolidated income statement and explanations to them are disclosed in the explanations to these reporting forms, indicating the reasons that caused this change.
The volume and procedure, including the deadlines for the submission of financial statements of subsidiaries and affiliates of the parent organization (including additional information necessary for the preparation of consolidated financial statements), are established by the parent organization.
Prior to the preparation of consolidated financial statements, it is necessary to verify and settle all mutual settlements and other financial relationships between the parent organization and subsidiaries, as well as between subsidiaries.
The name of each component of the consolidated financial statements must contain the word "consolidated" and the name of the group.
Consolidated financial statements are submitted to the founders (participants) of the parent organization, and to other interested users - in cases established by the legislation of the Russian Federation, or by decision of the parent organization.
It is advisable for the parent organization to draw up consolidated financial statements no later than June 30 of the year following the reporting year, unless otherwise provided by the legislation of the Russian Federation or the constituent documents of this organization.
The consolidated financial statements are signed by the head and chief accountant (accountant) of the head organization.
By decision of the group members, consolidated financial statements may be published as part of the published financial statements of the parent organization.
to the consolidated financial statements Not includingreports enterprises that, in principle, are included in the scope of consolidation, but are not of interest for consolidation. These include:
companies, control over which can be considered temporary. For example, a controlling interest in a subsidiary is acquired and owned by the parent company solely for the purpose of its subsequent sale in the near future ( lack of control);
subsidiaries operating under conditions of long-term insurmountable restrictions that deprive them of the ability (or significantly reduce it) to transfer funds to the account of the parent company. For example, due to currency restrictions at foreign branches, “blocking” of bank accounts, etc. ( non-compliance with the requirements of materiality and rationality);
subsidiaries whose economic activity differs sharply from the nature of the activities of the main parent company, for example, a bank and an industrial joint-stock company, a trading and insurance company ( various activities).
In addition, reporting is not prepared if the parent organization has only dependent companies.
Thus, the consolidation procedure covers such calculations as:
capital consolidation;
consolidation of balance sheet items related to intra-group settlements and operations;
consolidation of financial results (profit or loss) from intra-group sales of products (works, services), as well as mutual volumes of sales of products (works, services) between the parent and subsidiaries and related costs;
consolidation of other mutual (operating and non-operating) income and expenses within the group;
the amount of dividends of the parent and subsidiaries.
In accordance with international standards, consolidated reporting must be based on certain principles and methods (meet certain requirements).
The principle of completeness. All assets, liabilities, deferred expenses, deferred income of the consolidated group are accepted in full, regardless of the share of the parent company. Minority interest is shown in the balance sheet as a separate item under the appropriate heading.
The principle of equity. Since the parent company and subsidiaries are treated as a single economic unit, equity is determined by the book value of the shares of the consolidated enterprises, as well as by the financial results of these enterprises and reserves.
The principle of a fair and reliable assessment. Consolidated financial statements must be presented in a clear and easy to understand form and give a true and fair picture of the assets, liabilities, financial position, profits and losses of the enterprises included in the group and considered as a whole.
The principle of constancy in the use of methods of consolidation tions and evaluations and the principle of a functioning enterprise. Consolidation methods should be applied for a long time, provided that the enterprise is functioning, i.e. does not intend to cease operations in the foreseeable future. Deviations are permissible in exceptional cases, and they must be disclosed in the annexes to the reporting with the appropriate justification. These principles apply to both forms and methods of preparing consolidated financial statements.
The principle of materiality. This principle provides for the disclosure of such items, the value of which may affect the adoption or change of a decision on the financial and economic activities of the company.
Unified assessment methods. Assets, liabilities, prepaid expenses, profits and expenses of the consolidated company must be taken into account in their entirety. It does not matter how they are presented in the current accounting and reporting of the enterprises belonging to the group, since the parent company does not impose a prohibition and does not implement selective accounting approaches. It is important that when consolidating the assets and liabilities of the parent company and subsidiaries, they are valued according to the same methodology used by the parent company. Valuation methods in accordance with the legislation that the parent company complies with should be applied in the preparation of consolidated financial statements.
7. Single compilation date. Consolidated financial statements must be prepared on the balance sheet date of the parent company. The financial statements of subsidiaries should also be restated at the date of the consolidated financial statements.
Most of the principles discussed above, on which consolidated financial statements are based in accordance with international standards, are also reflected in Russian norms.tive documents governing the compilation of consolidated accountingTerek reporting.
Depending on the presence or absence of mutual operations, the following stages of consolidation can be distinguished:
primary consolidation is made when compiling for the first time the consolidated financial statements of previously independent enterprises and is associated with the acquisition of an investee enterprise;
subsequent consolidation is made when compiling the consolidated financial statements of a group formed earlier and already carrying out mutual operations.
The technique and methods of preparing consolidated financial statements vary from country to country.
Depending on the nature of the transaction, when investing and establishing control, there are two methods for compiling primary consolidated financial statements:
♦ purchase (acquisition) method; ♦ merger (acquisition) method. These methods differ procedurally and have a large impact on the aggregate financial results presented in the consolidated financial statements.
7.3. Primary Consolidation Methods
Independent enterprises can be combined into a single economic unit. Combinations may result in the creation of a new entity that takes control of the combining entities, the transfer of the net assets of one or more of the combining entities to another entity, or the dissolution of one or more of the combining entities.
The merger can be done through purchases net assets or shares of another enterprise.
Merging can also be done by mergers. Although the requirements for a legal merger vary from country to country, it is usually a combination of two businesses in which:
assets and liabilities of one enterprise are transferred to another enterprise and the first one is liquidated;
the assets and liabilities of the two enterprises are merged into a new enterprise and the two former enterprises are liquidated.
Associations are of horizontal, vertical and conglomerate types.
Horizontal union - when one enterprise is merged with another and both of them belong to a single branch of production.
Vertical join - when enterprises that are at different poles of the production process and interact according to the scheme “supplier-manufacturer-buyer” merge.
conglomerate association - when a diversified association is created from enterprises of diversified affiliation.
Merger transactions in which one of the combining entities acquires control over the other are consideredby kupka.
The date of purchase is the date from which the acquirer has the right to govern the financial and operating policies of the acquiree in order to benefit from its activities. In practice, this date is the date of the general meeting of shareholders that approves the transaction and makes the necessary changes to the constituent documents.
Control is deemed to be established when one of the combining entities acquires the right to more than one-half of the voting rights of the other combining entity, unless (in exceptional cases) it can be clearly demonstrated that such ownership does not entail control.
Additional signs of control:
the right to manage the financial and production policies of another enterprise in accordance with the charter or agreement;
the right to appoint or replace a majority of the members of the management board or an equivalent governing body of another enterprise;
If it is difficult to determine the buyer company, you can be guided by additional indirect signs of the purchase:
the fair value ratio of the merging entities (the larger entity is the acquirer);
the ability to decide on the selection of management personnel for another enterprise (in such cases, the dominant enterprise is the buyer).
Sometimes a company acquires shares in another company, but in issues enough of its shares as compensation, giving the right to more votes so that control of the combined entities passes to the owners of the entity in which the shares were originally acquired. Such a situation is called reverse acquisition . Legally, the entity issuing the shares may be treated as either the parent entity or the successor entity to whose shareholders control of the combined entities is transferred. In this case, it becomes the acquiring enterprise and receives the right to vote or other rights. It is believed that the company issuing shares was acquired by another enterprise; the latter is considered the buyer and shopping method applied to the assets and liabilities of the enterprise, issuing shares.
When the shareholders of the merging enterprises do not create a dominant partner, and unite in essence, on equal terms for the purpose of separating control over all or almost all assets And production activities, then we are talking about merger. In addition, the management of the combined enterprises participates in the management of the combined structure and, as a result, the shareholders of the enterprises jointly share the risks and "benefits of such a structure.
For example, The American automobile giant Chrysler and the German concern Daimler Benz merged into one company, Daimler Chrysler.
Confluence entity is that the acquisition does not take place and the joint sharing of risks and rewards continues, which, as it were, existed before the business combination. In a merger, the combined entities continue to operate separately as before, although they are under common, joint control. Accordingly, only minimal changes occur when the individual financial statements are combined.
The merger is subject to stringent requirements. For a transaction to be classified as a merger rather than an acquisition, 12 conditions must be met.
Either of the combining parties must not be a subsidiary or division of another combining enterprise for two years.
Each of the merging parties must be independent of the other merging entities.
The merger is carried out as a single transaction in accordance with a special plan within one year after the adoption of such a plan.
At the completion date of the merger plan, one of the merging entities will issue only ordinary shares with rights identical to those of outstanding shares in exchange for substantially all of the voting ordinary shares of the other entity. Their share must be at least 90% of the common voting shares to be exchanged.
Neither of the merging parties, during the two years prior to the adoption of the merger plan or between its adoption and completion, intends to make changes to the equity structure in order to affect the terms of the exchange, for example, through an additional issue of shares, their distribution to existing shareholders, an exchange or withdrawal from circulation.
The merging entities, after the adoption of the plan and before its completion, purchase ordinary shares in the usual amount for purposes other than the merger.
As a result of the exchange of shares, the shares of the owners of ordinary shares remain the same.
The combined company does not expressly or implicitly agree to redeem or retire all or part of the ordinary shares for the purpose of influencing the combination.
The combined company does not enter into financial transactions for the benefit of former shareholders, for example, does not use the shares issued for the combination as collateral for loans.
The combined company does not plan to dispose of a significant portion of its assets within two years of the merger, except in transactions that are customary for the merged entities or to eliminate duplication or excess capacity.
Since the merger results in the creation of a single structure, the combined entity adopts a single unified accounting policy. Therefore, the combined entity recognizes the assets, liabilities and equity of the combining entities at their current carrying amounts, adjusted only to align with the combining entities' accounting policies and apply them to all reporting periods presented.
For any business combination, the financial statements should provide additional information:
names and descriptions of the merging entities;
accounting methods;
the effective date of the combination for accounting purposes;
information about the production activities that it was decided to liquidate.
At the time of buying it is necessary to provide such data:
the cost of the acquisition and the value of the purchase consideration paid or contingently payable;
details of the nature and amount of the restructuring allowance and other closure costs arising from the acquisition and recognized at the acquisition date.
The financial statements should disclose:
methods of accounting for positive and negative business reputation, including for the depreciation period;
justification of the useful life of positive and negative goodwill or amortization period for negative goodwill;
depreciation methods;
the results of reconciliation of the residual value of positive and negative goodwill.
When merged Reporting should include additional information relating to:
the description and number of shares issued, along with the percentage of each enterprise's voting shares exchanged for the purpose of pooling capital shares;
the amount of assets and liabilities contributed by each enterprise;
details of sales income, other operating income, extraordinary items, and the net profit or loss of each entity prior to the date of the combination, which are included in the net profit or loss in the combined entity's financial statements.
Consolidated financial statements include, in addition to the balance sheet, a consolidated income statement. When compiling such a report, the financial results of the activities of the merging companies, their presentation will depend on the method of consolidation - purchase or merger.
In case of an acquisition, financial results are included in the consolidated income statement only from the date of acquisition, and in case of a merger - for the entire financial year.
It should be noted that the merger is more preferable for enterprises seeking to maximize sales, profits, assets and minimize costs as a result of such a combination.
7.4. Subsequent consolidation
The next stage of consolidation - the consolidation of the reporting of enterprises that have worked for some time in the group - has a number of features.
When consolidating the financial statements of companies within the group, in subsequent periods of their activity, additional difficulties arise due to the need to eliminate items reflecting mutual intra-company transactions in order to avoid double counting and artificially inflating the amount of capital and financial results.
Articles subject to elimination - these are items that are excluded from the consolidated financial statements because they result in a recounting and misrepresentation of the group's financial performance.
The concept of a group implies a special relationship to transactions between companies within the group. Intra-company transactions are similar to transactions between divisions (departments) within a company. Such operations are carried out in the course of trade transactions and settlements on them, the issuance of loans, and the receipt of dividends. All such transactions should be eliminated in the preparation of the consolidated balance sheet and income statement, as well as intercompany settlement balances.
When preparing consolidated financial statements,elimination the following calculations:
debt on contributions not yet made to the authorized capital;
advances received or given;
loans of companies belonging to the group;
mutual receivables and payables of the group companies (since a single economic unit cannot have receivables or payables to itself);
other assets and securities;
deferred expenses and income;
unexpected operations.
If the amounts of accounts receivable of one company fully correspond to the amounts of accounts payable of another company included in the group, then they are mutually eliminated.
In the preparation of subsequent consolidated income statements, adjustments are made in four main areas:
exclusion of interim results caused by intra-group sales;
depreciation of goodwill that arose during the creation of the group;
amortization of the deviation of the fair value of assets and liabilities from their carrying value included in these items on initial consolidation;
allocating a minority interest in the performance of a subsidiary.
When investing less than 100% in the capital of the acquired enterprise, the so-called minority share - this is the share of third-party shareholders, which in the consolidated financial statements should be reflected separately from the group's capital.
The "Minority interest" indicator is the share of participation of the owners of the shares of subsidiaries. This measure is used to adjust the financial result (profit or loss) of the group to determine the net income attributable to the parent company. In the consolidated balance sheet of subsidiaries and in the income statement, the minority interest for the reporting period is determined and shown separately.
In this case, the minority share in the consolidated balance sheet is determined by calculation based on the amount of capital of the subsidiary as of the reporting date and the percentage of shares not owned by the parent company in their total number. The value of a subsidiary's capital is determined as the result of section III "Capital and reserves" of its balance sheet minus the items "Social Sphere Fund" and "Target financing and receipts".
(Minority interest is calculated as the product of the equity capital of a group subsidiary and the percentage of its share capital owned by small owners)
In the balance sheet the indicator of the minority share is reflected after the total of the sectionIIIbalance. In the consolidated income statement, the minority share reflects the value of the financial result of the subsidiary's activities that does not belong to the parent organization; this share is calculated based on the amount of undistributed profit or uncovered loss of the subsidiary for the reporting period and the percentage of voting shares not owned by the parent company in their total number.
In the consolidated income statement, the indicator of minority interest is shown as a separate item on the line to be entered; income and expenses are also allocated as a separate article. The income and expenses of the group in the consolidated report are given minus the corresponding income and expenses of the minority.