This series of blogs describes how SAP® BusinessObjectsTM Financial Consolidation, Starter Kit for IFRS has been configured to meet International Financial Reporting Standards (IFRS).
In our previous blogs, we have covered the following topics:
- Brief overview of SAP BusinessObjects Financial Consolidation, Starter Kit for IFRS (How Starter kits Meet IFRS requirements – Introduction)
- Presentation of consolidated financial statements according to How Starter Kits meet IFRS – IAS 1 and How Starter Kits meet IFRS – IAS 7
- Translation of a foreign entity’s financial statements as part of the consolidation process following the principles set out in How Starter Kits meet IFRS – IAS 21
We will now start a series of 3 blogs dedicated to IAS 27 “Consolidated and separate financial statements”. IAS 27 prescribes the accounting for investments in subsidiaries both in the separate financial statements of the holding and in the consolidated statements.
IAS 27 is a key standard for preparers of consolidated financial statements even though it does not cover all aspects of the consolidation process:
- IAS 27 specifically addresses the accounting for investments in subsidiaries whereas investments in associates and joint-ventures are covered respectively by How starter kits meet IFRS – IAS 28 andHow starter kits meet IFRS – IAS 31
- translation of foreign entities’ financial statements is dealt with in IAS 21 (see How Starter Kits meet IFRS – IAS 21)
- for the first consolidation of an entity (as the result of a business combination), IAS 27 refers to How starter kits meet IFRS – IFRS 3
In this blog, we will focus on current consolidation procedures excluding translation of foreign operations (see How Starter Kits meet IFRS – IAS 21).
Defining the scope of consolidation
Accounting for investments in consolidated financial statements is different depending on the control or influence the investor has over the investee:
- Subsidiaries (entities that are controlled by the parent) are consolidated using the full consolidation method
- Joint-ventures (entities that are jointly controlled by the parent and other venturers) are included in the consolidated statements using either proportionate consolidation or the equity method (IAS 31)
- Associates (entities over which the parent has significant influence) are accounted for using the equity method (IAS 28).
In the starter kit
In the starter kit, the scope of consolidation can be automatically calculated, based on:
- the information on investments (in number of shares) collected in the holdings’ packages
- the parameters selected in the scope options
Adjustments to group accounting principles
Adjustments to local data may be necessary to in order to:
- apply uniform accounting policies when a consolidated entity uses either non IFRS-compliant accounting methods or IFRS-compliant options that are different from those chosen by the group (e.g. revaluation method for PPE vs cost model),
- take into account the difference between the value of an asset or a liability in local accounts and its value in the consolidated statements due to fair value adjustments made at the acquisition date. For example, if an item of PPE has been revalued at the acquisition date, the annual depreciation expense should be adjusted in the consolidated accounts to be based on this value. In the same way, impairment losses on goodwill have to be recognized when preparing consolidated statements.
In the starter kit
In the starter kit, adjustments are recorded by manual journal entries:
- adjustments to group accounting principles are booked using the audit-ID PACK11 (local adjustments to group accounting policies) if entered in the package at local level or ADJ91 (other central manual adjustments) if entered by the consolidation department
- adjustments due to fair value adjustments at the acquisition date are booked using the audit-ID FVA11 (fair value for incoming entities)
- impairment of goodwill is declared using the audit-ID GW01
Elimination of internal transactions
As regards operations between a parent and its subsidiaries or between subsidiaries, IAS 27 sets out the following principles:
- intragroup balances and transactions, including income, expenses and dividends, are eliminated in full
- profits and losses resulting from intragroup transactions that are recognized in assets, such as inventory and fixed assets, are eliminated in full
In the starter kit
Automatic rules have been configured in the starter kit for the elimination of:
- Internal provisions / impairments
- Internal gains and losses on transfer of fixed assets
- Reciprocal accounts (sales / cost of sales, receivables / payables, and so on)
- Internal dividends
Consolidation of investments
Subsidiaries are consolidated using the full consolidation method, which means line by line adding together like items of assets, liabilities, income and expenses of parent and subsidiaries.
IAS 27 lists the following steps in the consolidation process:
- “the carrying amount of the parent’s investment in each subsidiary and the parent’s portion of equity of each subsidiary are eliminated;
- non-controlling interests in the profit or loss of consolidated subsidiaries for the reporting period are identified; and
- non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the parent’s ownership interests in them.”
Profit or loss and each component of other comprehensive income are attributed to the owners of the parent and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance (contrary to the previous version of IAS 27).
In the starter kit
The starter kit handles the different methods of consolidation required by IFRS (full consolidation, proportionate consolidation and the equity method).
Elimination of investments and calculation of non-controlling interests are automatically handled by consolidation rules. Dedicated audit-IDs are used to ensure a comprehensive audit trail.
As shown above, the elimination of parents’ investments in consolidated entities is made on the dedicated audit-ID INV10.
As regards booking of non-controlling interests, different audit-IDs are generated depending on the original audit-ID (on which the amount at 100% has been accounted for). In the example above, non-controlling interests are stored on audit-ID “NCI-PACK01” because they correspond to the NCI’s share in the “local” subsidiary’s equity (as entered in the package on audit-ID PACK01).
The correlation map between original audit-IDs and the audit-IDs used for NCI calculation is the following:
In the next two blogs, we will focus on how to handle changes in scope according to IAS 27 and using the starter kit: