How SAP® Business Planning and Consolidation, starter kit on SAP NetWeaver – powered by SAP HANA™ meets IFRS requirements as regards the first consolidation of an entity
This blog is the sixth of a series explaining how the main International Financial Reporting Standards (IFRS) have been implemented in SAP® Business Planning and Consolidation, starter kit for IFRS on SAP NetWeaver – powered by SAP HANA™.
After an introduction to “IFRS in the Starter Kit” (blog#1) and two blogs dedicated to the Presentation of Financial statements as required by IAS 1 (blog #2) and IAS 7 (blog #3), we describe how the Starter Kit addresses IFRS’s consolidation principles as regards:
- Conversion process (blog #4)
- Current consolidation procedure (blog #5)
- First consolidation of an entity (this blog)
- Associates and Joint Ventures (blog #7)
- Further changes in ownership interests in a subsidiary: loss of control and equity transactions (blog #8)
Let’s focus on the first consolidation of an entity as a result from a business combination.
IFRS 3 requires that each business combination – defined as a transaction in which an acquirer obtains control of one or more businesses – should be accounted for using the acquisition method. IFRS 3 lists four steps in applying the acquisition method:
- Identify the acquirer
- Determine the acquisition date
- Recognize and measure the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree
- Recognize and measure goodwill or a gain from a bargain purchase.
The first two steps are not handled in the consolidation software and are not therefore addressed in this blog.
Measuring assets and liabilities
The acquirer should recognize, separately from goodwill, the identifiable assets acquired and the liabilities assumed and measure them at their acquisition-date fair values. It may result in recognizing some assets and liabilities that the acquiree had not previously recognized in its financial statements (for example, intangible assets such as brand name or customer relationship). These acquisition-date fair values become the initial carrying values of the acquired assets and liabilities in the consolidated financial statements.
In the starter kit, adjustments resulting from the remeasurement of identifiable assets and liabilities (including recognition of assets and liabilities that do not exist in the subsidiary’s separate statements) are booked manually using a dedicated audit-ID (FVA11). Impacts on deferred tax assets and liabilities are also booked manually using the same audit-ID.
Two specific cases need further analysis:
- Accumulated other comprehensive income (other than foreign currency translation reserve)
As at the acquisition date, accumulated other comprehensive income can exist in the acquiree’s separate financial statements. These reserves (revaluation surplus, hedging reserve and fair value reserve) represent the difference between the fair value of the underlying assets (intangible and tangible assets for which revaluation method is applied, hedging instruments used in a cash flow hedge and available-for-sale financial assets) and their original value.
Since these assets are already measured at their fair value, no manualadjustment is generally necessary at the acquisition date. However, in our opinion, the difference between fair value and original value should be part of the acquired equity which means that the accounts mentioned above should be reclassified in ordinary reserves (retained earnings). This reclassification should be done by manual journal entries using audit ID FVA11 in the starter kit.
- Foreign currency translation reserve
The starter kit for IFRS does not allow data collection at a sub consolidated level, except for entities accounted for using the equity method (specific input forms).
For those entities, the foreign currency translation reserve existing as at the acquisition date should be reclassified to retained earnings in the consolidated statements, given that every asset and liability has to be measured at the acquisition-date fair value and translated into group currency using the acquisition-date exchange rate. This reclassification should be done by manual journal entry in the starter kit, using the FVA11 audit ID.
Measuring non-controlling interests (NCI)
For each business combination, the acquirer should measure any non-controlling interest in the acquiree either at fair value (which is mandatory under revised US GAAP) or at their proportionate share of the acquiree’s identifiable net assets. This choice is available for each business combination, so an entity can use fair value for one business combination and the proportionate share of the acquiree’s identifiable net assets for another.
For the purpose of measuring NCI at fair value, it may be possible to determine the acquisition-date fair value on the basis of active market prices for the equity shares not held by the acquirer. When a market price is not available because the shares are not publicly traded, the acquirer should measure the fair value of NCI using other valuation techniques.
When non-controlling interest are measured at fair value, the difference between this amount and their proportionate share of the identifiable net assets is recognized as goodwill (see below).
Goodwill or gain from a bargain purchase
According to IFRS 3 revised, goodwill or gain from a bargain purchase is calculated as follows:
These calculation principles can also be presented as follows to better illustrate the impact of the choice regarding the measurement of non-controlling interests (example given for a goodwill but principles remain the same for a bargain purchase):
In the starter kit
The configuration regarding goodwill relies on dedicated off-balance (technical) accounts (XA1310 for goodwill, XA1310NCI for goodwill attributable to NCI, XA1300 for bargain purchase, XA1300NCI for bargain purchase attributable to NCI). These accounts are populated manually with a breakdown per “interco” used to identify the owner company for accounts XA1310 and XA1300. This declaration will then be used to automatically book the corresponding entry in the consolidated balance sheet.
In case of a bargain purchase, the related gain is booked on a dedicated account in profit or loss (P1640 Gain on a bargain purchase).
In our next blog, we will focus on associates and joint ventures.