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Translation, storage, and processing of this text in an electronic system is FOR EDUCATIONAL PURPOSES ONLY and is not a copyrighted edition. 

 

Combinations of Consolidation Units

 

Creation of combinations of Companies and Profit Centers lines of business

 

When you utilize the matrix functionality, both Company and Profit Center have been assigned the role of consolidation unit in the configuration. In that step, please check all valid combinations for the lines of business. Only then can consolidation system accept data and book consolidation entries. The assignment can take place in three different (display) tabs, but here we use the matrix display.

Down the columns, we list the elements for the legal structure, across is the list of the management structure. There is only one legal reporting entity that includes all company Consolidation Units.

Each consolidated financial statement consideres all submitted data and all consolidation tasks that were configured earlier across the lines of business whenever  a checkmark is set.

In the normal course of business, not all assets and liabilities of a subsidiary can be allocated into the lines of business. It’s recommended to define the line of business corporate (headquarters) in addition to operating units in the management view. The application of such an entity plays a larger role in structuring of capital consolidation. By setting up such a dummy entity we enable the first consolidation and all the subsequent relevant accounting on the legal structure level. Each legal entity is thus configured (checked) for the corporate line of business.

 

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With adoption of IFRS 8.23 there is no legal requirement any more for proportionate allocation to the lines of business in case of equity method of acquisition, but it has remained as an option. The results of such an allocation are deemed to be immaterial in majority of the cases. When applying the equity method the asset valuation is reported in the balance sheet, so the check mark in the corporate line of business is not necessary. Also, please keep in mind that when there is a switch from transitional to full consolidation it may lead to a confusion whenever the corporate line of business is being utilized. In such cases it would be necessary to execute the consolidation task out of process in the originally designated business area.

 

Consolidation Accounting Techniques

 

This configuration step is relevant for capital investment consolidation. We start with explaining the role of the parent unit check mark and how the Consolidation Units are accounted for.

 

Check mark for the Parent Unit

 

Each Consolidation Area needs to have a designated entity that serves as the Parent Unit within the area. The equity of the parent unit is then not included in the consolidated equity calculation (first-step consolidation). Only if a unit itself is a subsidary of a higher level area its equity gets then included. When the Consolidation Area also includes intermediate investments, i.e. the highest parent unit only that is not a part of another unit then it is designated as the top parent.

The Parent Unit check mark is especially important in multi-level enterprise structures, as this is the starting point for calculating the parent portion in the subsidary equity balances. That is also critical for hierarchies that depict legal structure. 

 

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It is necessary to configure parent entity check mark in each structured Consolidation Area and in each area its share from the perspective of such a designated entity.
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From the vantage point of the ulitmate parent entity consideration is given to higher indirect holdings of minority owners that influence goodwill and minority share balances.

When matrix functionality is being utilized the parent unit check mark can be set from either legal or management hierarchy perspective. A decision needs to be made in which units (dimensions) assignments are made. When the check mark for a parent entity is set only in one dimension, it plays the parent role in the capital investment consolidation at all times whenever there is at least one such an entity. If the check mark is set in two dimensions, then capital investment consolidation takes place only in such combinations where all the units are parent units. It is recommended to set the parent check mark in the legal company structure.

 

Assignment to Accounting Techniques

 

In this configuration step it is determined which consolidation accounting method is applied when a unit (company or Profit Center line of business) is included in consolidated entity. In the matrix application this can apply to either legal or management structure. Designate which consolidation (unit) dimension will bear the assignments. The accounting technique and the investment capital consolidations follow the dimensions that have already been configured. The Consolidation Method is geared toward legal structure and it is inappropriate to make such assignments in the Profit Centers.

For the consolidation unit to be included in the consolidation reporting each unit must be assigned a consolidation method. You can select from methods that are already provided in the system and which ensure compliance with the required set of standards (IFRS, US GAAP, local statutory accounting) for ownership and management purposes and make business sense. You can also define a custom consolidation method that fits your own business model.

The assignment of a consolidation unit is dependent on Consolidation Group, i.e. the same unit can have a different set of attributes in different groups.

The assingment is also time and version dependent. A change in the accounting technique setting must allow a change in successive step acquisitions or divestitures and the change in the technique itself. By making the setting change, a period of transitional consolidation is started and is also supported by the system.

When the Consolidation Unit is assigned to multiple Consolidation Groups or when the Consolidation Unit is considered for hierarchy on multiple levels, each Consolidation Group must have a Consolidation Method. Thus, assignment of Consolidation Method is dependent on the settings of the Consolidaiton Group. This allows an equity method of acquisition on one level and a purchase method on another level.

The assignment of accounting technique has large influence on determination of manual or automated postings in the accounting system. With regard to this the basic configuration of Posting Levels needs to be considered.

The method assignment occurs in the following way:

  • Indentify Consolidation Units that will belong to the Consolidation Group
  • Determine which Consolidation Units will have to be controlled and which will be only influenced
  • Identify which FS Items will carry activation of goodwill or handle the negative excess value allocation

When Consolidation Units share the same requirements, they can use the same Consolidation Method. Since the straight-line amortization of goodwill is no longer required, the number of ordinary full purchase consolidation methods has been reduced to two.

When the Consolidation Method is set at the Consolidation Group level, assingment of methods can be simplified through inheritance logic. In case of bottom-up inheritance attributes set at the Consolidation Group level are inherited by all higher levels except for the parent unit check mark. In case of top-down inheritance the setting is inherited by all direct and indirect Consolidation Units within the Consolidation Group. In the subsequent partial step, the inherited method can be overwritten manually by another method. The standard method of purchase accounting is 70200 – Impairment Only Approach.

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