How to handle the partial disposal of an investment while retaining control with SAP Financial Consolidation 10.0, Starter Kit for IFRS?

Transcription

1 How to handle the partial disposal of an investment while retaining control with SAP Financial Consolidation 10.0, Starter Kit for IFRS?

2 TABLE OF CONTENTS INTRODUCTION... 3 WHAT ARE THE REGULATION REQUIREMENTS?... 4 PRESENTATION OF THE BUSINESS CASE... 5 HOW TO HANDLE THE PARTIAL DISPOSAL OF AN INVESTMENT (CONTROL RETAINED) IN THE IFRS STARTER KIT?... 7 Reminder... 7 Overview of the operating process... 7 Consolidation scope... 8 Automatic journal entries... 8 Manual journal entries... 8 Retrieval of consolidated data... 9 HOW THE PARTIAL DISPOSAL OF AN INVESTMENT (CONTROL RETAINED) AFFECTS FINANCIAL STATEMENTS Consolidated Statement of Financial position Consolidated statement of cash flows Statement of changes in equity SAP AG. All rights reserved. SAP, R/3, SAP NetWeaver, Duet, PartnerEdge, ByDesign, SAP BusinessObjects Explorer, StreamWork, SAP HANA, and other SAP products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of SAP AG in Germany and other countries. Business Objects and the Business Objects logo, BusinessObjects, Crystal Reports, Crystal Decisions, Web Intelligence, Xcelsius, and other Business Objects products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of Business Objects Software Ltd. Business Objects is an SAP company. Sybase and Adaptive Server, ianywhere, Sybase 365, SQL Anywhere, and other Sybase products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of Sybase Inc. Sybase is an SAP company. Crossgate, m@gic EDDY, B2B 360, and B2B 360 Services are registered trademarks of Crossgate AG in Germany and other countries. Crossgate is an SAP company. All other product and service names mentioned are the trademarks of their respective companies. Data contained in this document serves informational purposes only. National product specifications may vary. These materials are subject to change without notice. These materials are provided by SAP AG and its affiliated companies ("SAP Group") for informational purposes only, without representation or warranty of any kind, and SAP Group shall not be liable for errors or omissions with respect to the materials. The only warranties for SAP Group products and services are those that are set forth in the express warranty statements accompanying such products and services, if any. Nothing herein should be construed as constituting an additional warranty.

3 INTRODUCTION This practical guide is part of a new series of seven guides dedicated to help deal with the most frequent consolidation M&A requirements when using the SAP Financial Consolidation 10.0, starter kit for IFRS. A first series was published to help deal with those cases when using SAP Planning and Consolidation 10.0, starter kit for IFRS, version for SAP NetWeaver. In this paper the partial disposal of a subsidiary while retaining control (equity transaction) is explained through a real use case scenario and presented in three steps: what the IFRS text says, how the business use case is handled in Financial Consolidation, and what impact the CFO should expect on her/his company s financial statements. You can use this new paper to demonstrate SAP s supremacy in addressing customers most complex and frequent business requirements. SAP solutions for consolidation, part of SAP enterprise performance management (EPM) solutions, include SAP Financial Consolidation and SAP Business Planning and Consolidation. A starter kit for IFRS has been developed for each solution to perform, validate and publish a statutory consolidation in accordance with IFRS. These starter kits are based on a dynamic configuration easy to customize to specific requirement. They are provided with documentations. To know more: You will find further regulation analysis on how SAP Financial consolidation 10.0, Starter kit for IFRS meets IFRS requirements and further indications on how to deal with scope changes in the SAP Financial consolidation 10.0, Starter kit for IFRS SP2 Operating guide. To be kept informed of the most recent releases and new documentations: Follow us on SAP Community Network 3

4 WHAT ARE THE REGULATION REQUIREMENTS? According to IFRS 3 and IFRS10, only a change in control is a significant economic event. Once control has been achieved, any subsequent transactions that do not result in a loss of control are accounted for as equity transactions. Equity transactions should be accounted for as follows: The carrying amounts of the controlling and non-controlling interests should be adjusted to reflect the changes in their relative interests in the subsidiary Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid is recognized directly in equity and attributed to the owners of the parent No change in the carrying amounts of the subsidiary s assets (including goodwill) should be recognized as a result of such transactions IFRS 10 does not give detailed guidance on how to measure the amount to be allocated to the parent and non-controlling interest to reflect a change in their relative interests in the subsidiary. Main issues regard goodwill and accumulated other comprehensive income. Goodwill In the Basis for conclusions of IFRS 3 (BC218), the Board explains that the adjustment to the carrying amount of non-controlling interests, that will be recognized when the acquirer purchases shares held by noncontrolling interests, will be affected by the choice of measurement basis for non-controlling interests at acquisition date (fair value or proportionate share of net assets). It means that, when parent acquires noncontrolling interests that have been initially measured at their fair value, goodwill is included in the carrying amount of non-controlling interests that is transferred to group equity. With partial disposals, where the parent disposes part of its interest to non-controlling interest without losing control, the question remains whether part of the parent s goodwill should be transferred to NCI or not. Interpretations published by professional bodies differ. Some consider that goodwill is part of the transfer whereas others think that no goodwill has to be allocated to NCI (which means that principles apply differently whether the equity transaction is an increase or a decrease of the parent s ownership interest). Accumulated other comprehensive income As regards partial disposals, IAS 21 requires that the entity shall re-attribute the proportionate share of the cumulative amount of the exchange differences recognized in other comprehensive income to the noncontrolling interests in that foreign operation ( 48.C). IAS 39 has been amended in the same manner regarding hedging reserves. On the other hand, IFRS are silent when it comes to an increase in parent s ownership interest. SFAS 160 Non-Controlling Interests in Consolidated Financial Statements, which is supposed to be the US GAAP equivalent of IFRS 10, is clearer: A change in a parent s ownership interest might occur in a subsidiary that has accumulated other comprehensive income. If that is the case, the carrying amount of accumulated other comprehensive income shall be adjusted to reflect the change in the ownership interest in the subsidiary through a corresponding charge or credit to equity attributable to the parent ( 34). As a consequence, we assume that accumulated other comprehensive income has to be re-allocated between group and NCI according to their new respective shares, regardless of whether there is an increase or a decrease in the parent s ownership interest. 4

5 PRESENTATION OF THE BUSINESS CASE This business case is included in the set of data provided with the IFRS starter kit SP2. It is possible to retrieve it using the following settings: - CATEGORY: A- ACTUAL, - DATA ENTRY PERIOD: , - CONSOLIDATION CURRENCY: USD - SCOPE: CASE4, - VERSION: IFRSYTD, - REPORTING UNIT: P4, S4 Y 2020 Y 2021 Parent P4 Parent P4 100% 70% Subsidiary S4 Subsidiary S4 Year 2019 Parent company P4 (USD) purchased a 100% interest in subsidiary S4 for USD S4 Fair value of net assets is USD Goodwill calculated = USD Year 2020 S4 Profit for the year = USD Year 2021 P4 sells 30% interests to NCI for USD at the beginning of

6 P4 individual accounts in 2021: Y2019 S4 Acquisition Sale of 30% of S4 Y2021 S4 Gross value sold Before After ( x 30% = ) Investments in S Cash and cash equivalents Assets Cash received on the sale of S Issued capital Y2021 S4 Selling price Retained earnings Y2021 S4 Gross value sold Equity & Liabilities S4 individual accounts at the beginning of 2021: Disp. Date Cash and cash equivalents Assets Issued capital Retained earnings Equity & Liabilities Equity transaction impact on consolidated statement of financial position: Sale of 30% of S4 Before After Goodwill Δ = Cash received on the sale of S Cash and cash equivalents Assets Share of equity transferred to NCI Gross value of investment sold Issued capital Gain on sale of 30% of S Retained earnings Δ = Effect of decrease in financial rate Non-controlling interest Equity & Liabilities Δ = Incoming NCI ( x 30%) =

7 HOW TO HANDLE THE PARTIAL DISPOSAL OF AN INVESTMENT (CONTROL RETAINED) IN THE IFRS STARTER KIT? REMINDER The amounts stored in the database are identified thanks to a set of elements called dimensions. The main dimensions are listed below: The account dimension indicates which item of the balance sheet or P&L is impacted. The flow dimension is used to identify and analyze the changes between the opening (flow F00) and closing (flow F99) balances. The audit ID dimension identifies the origin of the data for input data, local adjustments, manual and automatic journal entries. The in-built dimension (Journal entry number) provides a full audit trail as it retrieves the number of the manual or automatic journal entry. The use of this feature is illustrated in the chapter How the partial disposal of an investment (control retained) affects financial statements where we show screenshots of the analysis reports that can be accessed by drill down from the financial statements. OVERVIEW OF THE OPERATING PROCESS The actions to perform to deal with a decrease in interest rate are listed hereafter. A tick mark indicates which actions apply to case#4. In this business case, we will focus on year Package data entry Parent: Consolidation scope Manual journal entries: Subsidiary: Parent: Consolidation: Report navigator: Parent company has to account for the selling price on the sale of part of the investment (schedules PA2100 and PA2300) Enter the new financial rate of the subsidiary Correct the allocation of the net income between CI and NCI using audit ID NCI11- Calculation of NCI - Correction (if occurs during the period) The gain or loss on the sale accounted for in the net income, must be reclassified into retained earnings on flow F92 using audit ID INV31 (Local currency) or 1 INV32 - Adj.on gain /loss on disp of subsidiary, JV or associate (consolidation currency). Run the consolidation processing Validate the scope change accounting with dedicated preconfigured reports P P P P P 1 INV32 should be used if the holding company of an outgoing company is in foreign currency. In that case the correction of the gain/loss should be booked with the consolidation currency to avoid conversion calculation. 7

8 CONSOLIDATION SCOPE The financial rate variation is calculated automatically after having entered the closing financial rate, by difference with the financial rate of the opening consolidation scope. AUTOMATIC JOURNAL ENTRIES Elimination of the decrease in investment at parent s using audit ID INV10 Elimination of investment. Posting of the impact at subsidiary using flow F92- Change in interest rate and audit ID INV10 Reclassification of equity accounts between controlling interests and NCI according to the change of financial rate is posted on flow F92 for all audit IDs (except goodwill). MANUAL JOURNAL ENTRIES A manual journal entry is posted to reclassify the gain on partial disposal of S4 to retained earnings using the dedicated audit ID INV31 Adj. on gains and losses on disposal of a subsidiary, JV or associate (Local currency) - Man (c) (e) Posted on P4 Using dedicated audit ID for gains or losses on sale of investment INV31 (c) in P4 currency (USD) (d) Using the accounting scheme for gains or losses on sale of investments (e) On flow F92 (change in interest rate) (d) (d) 8

9 RETRIEVAL OF CONSOLIDATED DATA After running the consolidation, the consolidated balance sheet is as follows: (e) (d) (c) F00 shows the consolidated opening balance sheet of P4 + S4 No gain / loss on the sale of 30% of S4 (c) Cash inflow due to disposal of 30% of S4 (d) Clearing accounts used to post investment eliminition are balanced (e) Flow F92 is unbalanced and the difference is the gain or loss on sale of S4 in P4's individual accounts. The sum of Retai ned earnings and NCI on flow F92 is equal to the consideration received for the disposal of 30% of S4 Figure 1- Report C31-05: Balance Sheet by flow 9

10 The equity movements are explained below: (d) (c) Reclassification of the 30% Controlling Interests to Non Controlling Interests -> Share capital ( x 30% = 6 000) -> Retained earnings ( x 30% = ) Gain on sale of S4 in P4's individual statements is reclassified to retained earnings by manual journal entry (c) Investment elimination trigerred by P4 (d) We consider in case #5 that goodwill allocation is not affected by the equity transaction Figure 2- Report C31-12: Balance Sheet by flow, audit ID and reporting unit (extract) 10

11 Analysis of account E1610 Retained earnings (c) (c) Reclassification of the equity between CI and NCI to take into account the 30% change in interest rate ( x 30%) Reversal of the elimination of sold investment with detail by share (holding entity P4) (c) Manual journal entry #21 posted in order to reclassify the gain on sale of S4 to retained earnings Figure 3- Report C32-05: General Ledger by audit ID, share, JE number 11

12 HOW THE PARTIAL DISPOSAL OF AN INVESTMENT (CONTROL RETAINED) AFFECTS FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF FINANCIAL POSITION (c) Figure 4- Report C11-05: Statement of Financial Position As stated previously, the equity transaction (partial disposal while retaining control) impacts the following accounts: the cash received for the proceed of S the controlling interest : Share of equity lost Gross value of invt sold Gain on sale of S (c) the 30% incoming NCI: x 30% You can drill down from any item of the statement of financial position to the detail by entity, account, flows, audit ID and journal entry Figure 5- Report C32-05: GL by audit ID, partner, JE number 12

13 CONSOLIDATED STATEMENT OF CASH FLOWS Figure 6- Report C11-25: Statement of Cash Flows As stated previously, the cash inflow corresponds to the proceeds received when selling 30% of S4: - Net book value of sold investments - Gain on sale in P4's individual accounts 13

14 STATEMENT OF CHANGES IN EQUITY Figure 7- Report C11-30: Statement of Changes in Equity As expected, the changes in equity come from: the difference between the sale price and the share of interest sold i.e = the 30% incoming Non Controlling interest : x 30% = You can drill down from the statement of changes in equity to the detail by account / flows... Figure 8- Report C23-25: Statement of Changes in Equity breakdown...then to the detail by entity, flow, audit ID Figure 9- Report C32-15: General ledger by reporting unit and audit ID (flows) 14