This series of blogs describes how SAP 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 Financial Consolidation starter kit for IFRS (blog #1)
- Presentation of consolidated financial statements according to IAS 1 and IAS 7
- Translation of a foreign entity’s financial statements as set out in IAS 21
We will now start a series of four blogs dedicated to the consolidation process.
Consolidation principles are addressed by several IFRS:
- IFRS 10 Consolidated financial statements focuses on the accounting of investments in subsidiaries in the consolidated statements whereas investments in associates and in joint ventures are respectively covered by IAS 28 and IFRS 11
- IFRS 3 Business Combinations specifies the accounting of business combinations which include the first consolidation of a subsidiary and step acquisitions (associate or joint venture becoming a subsidiary)
For the purpose of this series of blogs, we will address these key issues in the following order:
- Current consolidation procedures (see below)
- First consolidation of an entity (consolidation – part 2)
- Associates and joint ventures (consolidation – part 3)
- Further changes in ownership interests in a subsidiary: loss of control and equity transactions (consolidation – part 4)
Let’s start with the current consolidation principles that may be summarized as follows:
- definition of the scope of consolidation,
- adjustments to group accounting principles
- elimination of internal transactions
- consolidation of investments
Defining the scope of consolidation
The consolidation scope lists all entities that must be included in the consolidated statements whether fully or using the equity method.
IFRS 10 defines the principle of control and establishes control as the basis for determining which entities are fully consolidated. IFRS 11 sets out principles to classify joint arrangements into joint operations or joint ventures and requires that joint ventures are accounted for using equity method in the consolidated statements. IAS 28 gives guidance to assess whether a significant influence exists and requires associates (which are entities under significant influence) to be accounted for using equity method.
In the starter kit, the consolidation scope can be automatically calculated on the basis of information on investments (in number of shares) collected in the holdings’ packages.
Manual adjustments are possible to change, for example, the consolidation method where the usual thresholds do not apply (e.g. a subsidiary controlled with less than 50% of the voting power).
Adjustments to group accounting principles
Adjustments to local data may be necessary to in order to:
- apply uniform accounting policies – as required by IFRS 10. B87 – 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, adjustments are recorded by manual journal entries using dedicated audit-IDs. For example, 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.
Elimination of internal transactions
As regards operations between a parent and its subsidiaries or between subsidiaries, IFRS 10 sets out the following principles:
- intragroup balances and transactions, including income, expenses and cash flows, 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 as regards 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, equity, income, expenses and cash flows of the parent and with those of its subsidiaries;
- offsetting the carrying amount of the parent’s investment in each subsidiary and the parent’s portion of equity of each subsidiary (IFRS 10.B86)
In the statement of financial position, non-controlling interests are presented within equity, separately from the equity of the owners of the parent (IFRS 10.22).
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 (IFRS 10.B94).
In the starter kit, 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 automatically booked using 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 our next blog we will continue with consolidation requirements, focusing on business combinations (IFRS 3).