Consolidation and audit of the consolidated financial statements May 2010

Transcription

1 Consolidation and audit of the consolidated financial statements May 2010 PwC Table of contents Consolidated financial statements 1. Belgian legal requirements 1.1. Obligations 1.2. Exemptions 1.3. Content of consolidated financial statements 1.4. Audit of consolidated financial statements 1.5. Publication of consolidated financial statements 1.6. Effective date 1.7. Use of the IFRS framework in Belgium PricewaterhouseCoopers Slide 2

2 Table of contents (continued) 2. Consolidation scope 2.1. Definition 2.2. Control and Holding percentages 2.3. Consolidation methods 2.4. Exclusion from the consolidation scope 2.5. Decision tree 2.6. Examples 2.7. Case studies PricewaterhouseCoopers Slide 3 Table of contents (continued) 3. Consolidation methods 3.1. Full consolidation 3.2. Proportionate consolidation 3.3. Equity method 3.4. Impact of the consolidation method on equity 4. Consolidation process 4.1. Introduction 4.2. Restatements of the local financial statements 4.3. Translation of foreign currency financial statements 4.4. Reconciliation of intercompany balances 5. Consolidation eliminations 5.1. Elimination of intercompany balances and transactions 5.2.Elimination of equity and investments PricewaterhouseCoopers Slide 4

3 Table of contents (continued) 6. Subsequent consolidations 6.1. Unchanged holding percentage 6.2. Subsequent change in the holding percentage 6.3. Deconsolidation 6.4. Subsequent changes to the acquisition cost 6.5. Identification of change in value of assets and liabilities 6.6. Revaluation of an investments 7. Axioms of consolidation 8. Belgian GAAP/IFRS differences CASE STUDIES PricewaterhouseCoopers Slide 5 1. Belgian legal requirements PwC

4 1. Belgian legal requirements 1.1. Obligations Scope Principles Definitions Control Significant influence Consortium 1.2. Exemptions Sub-consolidation Small groups Restrictions Recap PricewaterhouseCoopers Slide 7 1. Belgian legal requirements 1.3. Content of consolidated financial statements Basic principles Structure Accounting principles Translation of consolidated financial statements 1.4. Audit of consolidated financial statements 1.5. Publication of consolidated financial statements 1.6. Effective date 1.7. Use of the IFRS framework in Belgium Optional Mandatory PricewaterhouseCoopers Slide 8

5 1. Belgian legal requirements 1.1. Obligations Scope (art. 108 Corporate law) All companies are in scope, except for : Financial institutions => Companies subject to the law of 22 March 1993 relating to the status and the control of lending institutions, the Belgium National Bank, the Institute of rediscount and guarantee and the administrative department of the government in charge of investing and lending public money ( Caisse des dépôts et consignations / Deposito- en Consignatiekas ); Companies governed by the RD n 64 of 10 November 1967 organising the status of the holding companies (portfolio companies); Investment companies affected by the law of 6 April 1995 relating to the second markets, the status of investment companies and their control, and to brokers and dealers; Economic interest groupings ( G.I.E. / E.S.V. ); Agricultural companies. PricewaterhouseCoopers Slide 9 1. Belgian legal requirements 1.1. Obligations Principles (art. 110 C. Law) A parent company, controlling subsidiaries (exclusively or jointly), shall prepare consolidated financial statements and a consolidated directors report. Definitions: - Parent company - Control - Subsidiary. PricewaterhouseCoopers Slide 10

6 1. Belgian legal requirements 1.1. Obligations Definitions (art. 5 to 14 C. law) Parent company A company excl or jointly controlling one or several subsidiaries. Control Control de jure or de facto to exercise a decisive influence on the appointment of the majority of the members of board of directors or general management or on the orientation of the policies of an enterprise. Subsidiary Company towards which a power of control exists. PricewaterhouseCoopers Slide Belgian legal requirements 1.1. Obligations Control (art. 5 to 9 C. Law) de jure control (irrefutable presumption) - Direct or indirect holding of the majority of the voting rights; Does not include: - Voting rights held on behalf of a third party excluded from the consolidation; - Voting rights held by the company itself or by consolidated subsidiaries; - Shares without voting rights. - Right to appoint or to remove the majority of the directors (Status or contract); - Control in application of an agreement or of the articles of association; - Joint control. de facto control (refutable presumption) - Where it results from other factors than those mentioned above: For example, when voting rights representing the majority of the votes attached to the shares represented at the last two annual shareholders meetings have been exercised. PricewaterhouseCoopers Slide 12

7 1. Belgian legal requirements 1.1. Obligations Control (art. 5 to 9 C. Law) (continued) Exclusive control (art. 8 C. Law.) Control exercised by a company, either alone, either together with one or several subsidiaries. Joint control (art. 9 C. Law) Control exercised jointly by a limited number of shareholders when they have agreed that the decisions concerning the orientation of the enterprise's management policies can not be taken without their mutual consent. A Shareholders agreement is required (Joint Ventures) PricewaterhouseCoopers Slide Belgian legal requirements 1.1. Obligations Control (art. 5 to 9 C. Law) (continued) Direct control (art. 7 C. Law.) Control exercised directly by the parent company on the subsidiary. Parent Subsidiary Indirect control (art. 7 C. Law) Control exercised by another subsidiary. Parent Subsidiary 1 Subsidiary 2 PricewaterhouseCoopers Slide 14

8 1. Belgian legal requirements 1.1. Obligations Significant influence (art. 12 C. Law) Presumption (refutable) - At least 20% of the voting right are held. Associated company - Company, other than a subsidiary or a joint subsidiary, in which another consolidated entity holds a participating interest and in which it exercises a significant influence on the orientation of the management policies. - Not considered as a consolidated company. - Part of the group in the equity and results of associated company s is included in the consolidated financial statements via equity method. PricewaterhouseCoopers Slide Belgian legal requirements 1.1. Obligations Consortium (art. 10 C. Law) A consortium exists when enterprises which are not subsidiaries of each other nor subsidiaries of the same enterprise are under central management. Presumptions: Irrefutable: - It results from an agreement or from a provision of the articles of association. - The members of the Board of Directors are composed for the most part of the same persons. Refutable: - The majority of the shares is held by the same people or companies. Very seldom. PricewaterhouseCoopers Slide 16

9 1. Belgian legal requirements 1.2. Exemptions (art. 112 to 115 C. Law) Sub-consolidation (art.113 C. Law) Small groups (art. 112 C. Law) PricewaterhouseCoopers Slide Belgian legal requirements 1.2. Exemptions (art. 112 to 115 C. Law) Sub-consolidation (art. 113 C. Law) Subsidiary of a parent company : Decision of the Shareholders Meetings - Renewal every two years; - Approved by at least 90% of the shareholders ( S.A./N.V - S.C.A./ C.N.V) - 80% (others); - The company and all its subsidiaries are included into the consolidated financial statements of the ultimate parent company. The consolidated accounts are established and controlled in accordance with: - Either the requirements of a state member of the European Union; - Either equivalent requirements. Information should be provided to allow an easy access to the consolidated financial statements of the parent company which are deposited (Dutch / Fr /G). Disclosure in the notes of the company s annual report is required. This dispensation has to be approved by the workers council (annually). PricewaterhouseCoopers Slide 18

10 1. Belgian legal requirements 1.2. Exemptions (art. 112 to 115 C. Law) Small groups (art.16 C. Law) Not exceeding more than one of the following thresholds for two consecutive years: EUR Mios Turnover (VAT excluded) 29,2 Total balance sheet (Mios) 14,6 Average headcount 250 Those threshold should be computed only when the parent company owns a subsidiary or a joint subsidiary; For joint subsidiary (proportionate consolidation) the threshold should be computed based on the detention percentage. PricewaterhouseCoopers Slide Belgian legal requirements 1.2. Exemptions (art. 112 to 115 C. Law) Restrictions Quoted on a stock exchange Art. 114 C. Law Workers council Art. 115 C. Law Subconsolidation No exemption Agreement of the workers council Small groups No exemption No agreement required PricewaterhouseCoopers Slide 20

11 1. Belgian legal requirements 1.2. Exemptions (art. 112 to 115 C. Law) Recap: Decision Tree Exemptions Included in scope? No Yes Consortium No Control of a company? Yes No Yes Quoted on a stock exchange of a State Member of the European Union? No Yes Yes Small groups? No Sub-consolidation? Yes No No Workers council? Yes Exemption Yes Exemption approved by the workers council? No Consolidation: Mandatory PricewaterhouseCoopers Slide Belgian legal requirements 1.3. Content of consolidated financial statements Basic principles (art. 113 to 124 R.D. 30.I.2001) Content : - Balance sheet, P&L, notes (incl. accounting principles and consolidation criteria); - Directors report. Prepared in EURO or another significant currency; True and fair view; Based on a uniform accounting system; The consolidated financial statements shall be prepared at the same date as the parent company s separate financial statements. PricewaterhouseCoopers Slide 22

12 1. Belgian legal requirements 1.3. Content of consolidated financial statements Basic principles (continued) Possibility to select another date to take into account the closing dates of the largest number of or the most significant subsidiaries. The difference between the closing date of the consolidated entities and the closing date of the consolidated financial statements shall not exceed 3 months. If this criterion is not complied with, interim financial statements shall be prepared. Voluntary consolidation or consolidation to accommodate special requirements In accordance with the royal decree. Availability of information relating to subsidiaries. Presented after appropriation of the net income of the parent company but before the appropriation of the net income of subsidiaries. PricewaterhouseCoopers Slide Belgian legal requirements 1.3. Content of consolidated financial statements Structure (art. 158 to 167 R.D. 30.I.2001) Similar to that of annual financial statements (some differences). Possibility to present the operating result per destination of costs. Consolidated balance sheet presented after appropriation of the non consolidated net income of the parent company. Compliant with the banks and insurance s specific GAAP if this is the main activity. PricewaterhouseCoopers Slide 24

13 1. Belgian legal requirements 1.3. Content of consolidated financial statements Accounting principles (art. 125 to 132 R.D.) Compliant with articles 28 to 77 of R.D of 30.I.2001 relating the annual financial statements, except for articles 34, 44, 76; Restatement, when required, of the financial statements of the subsidiary in order to ensure uniformity, continuity and consistency in the presentation of consolidated financial statements (except if exemption ) - to be assessed Respect of art 115 R.D. 30.I.2001 : true and fair view; Accounting principles of the parent company ( except for exceptions); Permanent application; Economic presentation and not tax driven; Recognition of deferred taxes: - Liabilities (art. 129 R.D.); - Assets : CNC bull. n 46 - C.105/1 : possibility to recognise a deferred tax asset from recoverable tax losses or from consolidation entries, to the extent that: It is probable that taxes will effectively be paid in the foreseeable future; Reference to a foreign or international standard ( IAS 12 of IFRS). PricewaterhouseCoopers Slide Belgian legal requirements 1.3. Content of consolidated financial statements Translation of foreign currency statements (art. 131 and 132 R.D. 30.I.2001) Closing rate for balance sheet Average rate for P&L. Monetary / non monetary. Other methods in specific cases (true and fair view). => see also slides on Translation of foreign currency statements in the framework of the preparation of the consolidation process. PricewaterhouseCoopers Slide 26

14 1. Belgian legal requirements 1.4. Audit of consolidated financial statements (art. 145 to 150 C. Law) Auditor of the parent company or One or several auditors specifically appointed by the shareholders meeting to that purpose. (see second part of this presentation for auditing standards) PricewaterhouseCoopers Slide Belgian legal requirements 1.5. Publication of consolidated financial statements To be presented to the annual shareholder s meeting ( Approved). Same deadlines and conditions than the ones prevailing for the annual statutory financial statements. First consolidation: comparative numbers are optional. PricewaterhouseCoopers Slide 28

15 1. Belgian legal requirements 1.6. Effective date 6 February 2001 for both the R.D. of 30 January 2001 and the law of 7 March 1999 coordinating the Company Law. For the first time for the accounting periods ending on or after 7 February PricewaterhouseCoopers Slide Belgian legal requirements 1.7. Use of the IFRS framework in Belgium Until 2003/2005: so-called «global players» policy Listed companies 2003: Optional 2005: Required for companies with listed shares 2007: Required for companies with listed bonds Other companies 2005: optional (irrevocable choice) 2006: required for banks? : required for all companies (2003 CBN/CNC consultation paper) Some Belgian specific disclosures remains required (consolidation scope, employment, etc.) PricewaterhouseCoopers Slide 30

16 1. Belgian legal requirements 1.7. Use of the IFRS framework in Belgium Current situation European regulation and royal decrees Use of IFRS Consolidated f/s Company f/s Companies not listed on a regulated market Optional (irrevocable) Prohibited Companies listed on a regulated market Required since 2005 Prohibited Companies listed on a regulated market only for their bonds Required since 2007 Prohibited Banks (not listed) Required since 2006 Prohibited Real estate investment trusts Required since 2005 Optional since 2005 Required since 2007 PricewaterhouseCoopers Slide Belgian legal requirements 1.7. Use of the IFRS framework in Belgium IFRS framework in Belgium is IFRS as adopted in the European Union - Timing differences between issuance by the IASB and endorsement by the EU - IFRS for SMEs not endorsed yet nor forseen by a Royal Decree (see however consultation paper). PricewaterhouseCoopers Slide 32

17 2. Consolidation scope PwC 2. Consolidation scope 2.1. Definition 2.2. Control and Holding percentages 2.3. Consolidation methods 2.4. Exclusion from the consolidation scope 2.5. Decision tree 2.6. Examples 2.7. Case studies Direct holdings Indirect holdings Cross holdings Circle holdings including the parent company Shares of the parent company held by a subsidiary PricewaterhouseCoopers Slide 34

18 2. Consolidation scope 2.1. Definition (art. 116 C. Law, art. 106 to 112 R.D. 30.I.2001) Consolidation scope = group composed by companies included in the consolidation: The parent company Subsidiaries Exclusive control (art.5 to 8 and 10 C. Law) Joint ventures Joint control (art. 9 C. Law) Companies not included in the consolidation : Associated companies Significant influence (art. 12 C. Law) Other companies Absence of significant influence PricewaterhouseCoopers Slide Consolidation scope 2.2. Control and Holding percentages Control percentage = Measures the dependence tie of the «subsidiary» and the control power of the group (chain is broken when percentage is < 50%) Objective : to determine the level of control Control level = sum of the control held directly by the parent company and indirectly by subsidiaries or by an intermediate. Holding percentage Determine the consolidation method and perimeter = % held by the group in the equity of the «subsidiary» Objective : to determine the group s share in the equity and net result of the subsidiary (determined via multiplication of holding %) Consolidation entries PricewaterhouseCoopers Slide 36

19 2. Consolidation scope 2.3. Consolidation methods Exclusive control Subsidiary Full consolidation Joint control Joint venture Proportionate consolidation Significant influence Associated company Equity method Absence of significant influence Other Acquisition cost PricewaterhouseCoopers Slide Consolidation scope 2.4. Exclusion from the consolidation scope Exemptions (art. 107 to 111 R.D. 30.I.2001) Optional exclusions (art. 107 R.D. 30.I.2001) 1. Inclusion would be immaterial (in case of several subsidiaries => materiality should be assessed in total) 2. Severe long-term restrictions substantially hinder the effective exercise of control by the parent (ex : political instability) 3. Disproportionate costs and time constraints 4. Investments exclusively held with a view towards their subsequent disposal Accounting at Acquisition cost (less potential impairments) => Motivation in the notes to the consolidated financial statements PricewaterhouseCoopers Slide 38

20 2. Consolidation scope 2.4. Exclusion from the consolidation scope Mandatory exclusions (Art. 108 and 109 R.D. 30.I.2001) 1. Inclusion (of company in which group has de facto control ) not in line with art. 115 R.D. 30/I/2001 (True and fair view principle) 2. Different activities => Non true and fair view 3. Liquidation or no going concern Equity method (whatever the % of control) => Conditions: Motivation in disclosures / Publication of the financial statements of the affected subsidiary PricewaterhouseCoopers Slide Consolidation scope 2.5 Decision tree on consolidation method Control shared with other groups Yes Joint control Integrated activity Yes Proportionate No consolidation De jure control in application of an agreement or of the articles of association No Yes Consolidation exclusions Yes No consolidation Voting rights > 50% No Yes Exclusive Scope Exclusions No Full consolidation No Control Art.108 and 109 (mand.) Art. 107 ( option.) De facto control Yes No Yes Yes 20% voting rights 50% Yes Significant Influence Equity method No No Voting rights < 20% Yes Other investments Acquisition cost PricewaterhouseCoopers Slide 40

21 2. Consolidation scope 2.6. Examples Indirect control Control power Holding percentage M 60% 10% A 55% Direct control B of M in B 55% + 10% = 65% => Exclusive control : F.C. of M in B 60% x 55% + 10% = 43% A M 30% 70% 25% No control A M B 40% 45% 25% B 0% + 70% = 70% => Exclusive control : F.C. 0% + 45% = 45% Significant influence : Equity method 30% x 25% + 70% = 77.50% 40% x 25% + 45% = 55% PricewaterhouseCoopers Slide Consolidation scope 2.7. Case studies Direct holdings M 80% A 35% B M into Holding Percentage Control Link C Method 90% A 80% 80% Exclusive subsidiary Full consolidation B 28% 35% Associated company Equity method C 25.20% no control Other investment Acquisition cost

22 2. Consolidation scope 2.7. Case studies Indirect holdings A 60% 40% M 20% B 30% A 60% M 35% B M into Holding Control Method Holding Control Method Percentage Percentage A 60% 60% Full 30% 30% Equity consolidation method B 44% 60% Full 53% 35% Equity consolidation method PricewaterhouseCoopers Slide Consolidation scope 2.7. Case studies Cross - holdings M 80% (a) 10% (b) A Shareholders of M into Holding Percentage Control Method M % (1) 100 %(parent company) Full consolidation A % (2) 80 % Full consolidation (1) 1-b = 1-10% = % [= 90% + 90% x 80% x 10% + (90% x 80% x 10%)² + ] 1-ab 1 - (80% x 10%) (2) (1 - b) x a = 1-10% x 80% = 78.26% [= 97,83% x 80%] 1 - ab 1 - (80% x 10%) PricewaterhouseCoopers Slide 44

23 2. Consolidation scope 2.7. Case studies Circle holdings including the parent company 80% (m) 60% (a) A M B 10% (b) Shareholders of M into Holding Percentage Control Method M 94.54% (1) 100% (parent company) Full consolidation A 75.63% (2) 80% Full consolidation B 45.38% (3) 60% Full consolidation PricewaterhouseCoopers Slide Consolidation scope 2.7. Case studies Circle holdings including the parent company (continued) Reminder: No voting rights are attached to the shares of the parent company held by a subsidiary. Consequently, holding percentages are determined as follows: (1) 1-b = 1-10% = % [= 90% + 90% x 80% x 60% x10% + (90% x 80% x 60% x 10%)² + ] 1-abm 1 - (80% x 60% x 10%) (2) (1-b) m = 80% x 94.54% = % 1 - abm (3) (1-b) ma = 60% x 75.63% = % 1-abm PricewaterhouseCoopers Slide 46

24 2. Consolidated scope 2.7. Case studies Own shares 100% (d) M A B 60% (a) 20% (c) 5% own shares (b) M into Holding percentage Control Method M 100 % 100 % Full consolidation A % (3) % (1) Full consolidation B % (4) 100 % (2) Full consolidation PricewaterhouseCoopers Slide Consolidated scope 2.7. Case studies Own shares (continued) Reminder: No voting rights are attached to the shares of the parent company held by itself or by a subsidiary (1) & (3) 60 % + 20 % = % 1-5 % 1-5 % (2) Control of B at 100% by A, so control of B by M at 100 %. (4) 84,21% x (1-20 %) x 100 % = % 1- (100 % x 20 %) PricewaterhouseCoopers Slide 48

25 3. Consolidation methods PwC 3. Consolidation methods 3.1. Full consolidation 3.2. Proportionate consolidation 3.3. Equity method 3.4. Impact of the consolidation method selected on the consolidated equity PricewaterhouseCoopers Slide 50

26 3. Consolidation methods 3.1. Full consolidation (art. 136 to 149 R.D. 30.I.2001) Balance sheet Replace the value of the investment in a subsidiary by the assets and liabilities of this subsidiary; Net equity proportionally divided between the group (parent) and minority interests. P&L Subsidiary s costs and revenues are added to those of parent company; Consolidated net income is shared out between the group and minority interests; Equity includes net income of the accounting period at the acquisition date, except if an interim dividend was distributed prior the acquisition. PricewaterhouseCoopers Slide Consolidation methods 3.1. Full consolidation (art. 136 to 149 R.D. 30.I.2001) Assets M Inv. in F Assets M except Investment in F Share capital and share premium of M Retained earnings Equity M Liabilities M Liabilities M Assets F Assets F Liabilities F Equity F Liabilities F PricewaterhouseCoopers Slide 52

27 3. Consolidation methods 3.1. Full consolidation (art. 136 to 149 R.D. 30.I.2001) Process: Possible restatements in order to ensure the consistency of accounting principles; Addition of balance sheets and P&L s; Elimination of intra-group transactions (receivables, liabilities, expenses and income); Cancellation of unrealised intra-group profits; Calculation of minority interests; Elimination of investments against equity; Determination of the first consolidation difference and the minority interests as at acquisition date; Allocation of the first consolidation difference and of minority interests to the subsidiary s assets and liabilities of the subsidiary (further to this allocation a goodwill/badwill cannot be transformed into a badwill/ goodwill under Belgian GAAP); Determination of the final goodwill/badwill and minority interests. PricewaterhouseCoopers Slide Consolidation methods 3.1. Full consolidation (art. 136 to 149 R.D. 30.I.2001) BALANCE SHEET (BEF 000) S : Incorporated and held by «M» at 75 %, first consolidation M S Addition Consolidation Consolidated M+S entries Accounts ASSET ASSETS INVESTMENT F TOTAL EQUITY & LIABILITIES SHARE CAPITAL RETAINED EARNINGS NET INCOME EQUITY MINORITY INT LIABILITIES TOTAL PricewaterhouseCoopers Slide 54

28 3. Consolidation methods 3.1. Full consolidation (art. 136 to 149 R.D. 30.I.2001) M S Addition Consolidation Consolidated M+S entries Financial Statements TURNOVER OTHER INCOME TOTAL INCOMES EXPENSES (operating) OTHER EXPENSES TAXES TOTAL EXPENSES NET PROFIT PricewaterhouseCoopers Slide Consolidation methods 3.1. Full consolidation (art. 136 to 149 R.D. 30.I.2001) 1 DT 10 Share Capital 200 DT 9910 Retained Earnings 25 CR 28 Investment 150 CR 9913 Minority interests 75 Elimination of the investment and recognition of minority interests Opening minority interests 25% OF SHARE CAPITAL : 25% X 200 = 50 25% OF RETAINED EARNINGS : 25% X 100 = PricewaterhouseCoopers Slide 56

29 3. Consolidation methods 3.1. Full consolidation (art. 136 to 149 R.D. 30.I.2001) 2 DT Share of minority interests in the net income 10 CR 9913 Minority interests 10 Recognition of the minority interests in the net income 25 % X 40 = 10 PricewaterhouseCoopers Slide Consolidation methods 3.1. Full consolidation (art. 136 to 149 R.D. 30.I.2001) BALANCE SHEET (BEF 000) S : Incorporated and held by «M» at 75 %, first consolidation M S Addition Consolidated Consolidated M+S entries accounts ASSETS ASSETS INVESTMENT F (150) - TOTAL (150) EQUITY & LIABILITIES SHARE CAPITAL (200) 400 RETAINED EARNINGS (25) 375 NET INCOME (10) 130 EQUITY (235) 905 MINORITY INT LIABILITIES TOTAL (150) PricewaterhouseCoopers Slide 58

30 3. Consolidation methods 3.1. Full consolidation (art. 136 to 149 R.D. 30.I.2001) P&L M S Addition Consolidation Consolidated M+S entries accounts TURNOVER OTHER INCOME TOTAL INCOME EXPENSES (Operating) OTHER EXPENSES TAXES TOTAL EXPENSES NET INCOME MINORITY INTERESTS GROUP'S SHARE PricewaterhouseCoopers Slide Consolidation methods 3.2. Proportionate consolidation Balance sheet Replace value of the investment in a subsidiary by the share (holding interest) of assets and liabilities of the subsidiary held by the group; No minority interests. P&L Fraction of income and expenses of the subsidiary incorporated proportionately (i.e.: incorporated in the consolidated accounts in proportion of the group s holding interest); No minority interests. PricewaterhouseCoopers Slide 60

31 3. Consolidation methods 3.2. Proportionate consolidation BALANCE SHEET (BEF 000) S : Incorporated and held by «M» at 75 %, first consolidation M S % Addition Consolidated Consolidated S M+S% entries accounts ASSETS ASSETS INVESTMENT F TOTAL EQUITY & LIABILITIES SHARE CAPITAL RETAINED EARNINGS NET INCOME EQUITY MINORITY INT LIABILITIES TOTAL PricewaterhouseCoopers Slide Consolidation methods 3.2. Proportionate consolidation P&L M S % Addition Consolidated Consolidated S M+S% entries accounts TURNOVER OTHER INCOME TOTAL INCOME EXPENSES (Operating) OTHER EXPENSES TAX TOTAL EXPENSES NET INCOME PricewaterhouseCoopers Slide 62

32 3. Consolidation methods 3.2. Proportionate consolidation DT 10 SHARE CAPITAL F 150 CR 28 INVESTMENT "M" IN "S" 150 Investment eliminated against equity Investment of M in S 150 Share Capital 200 Interest % 75 Capital held 150 PricewaterhouseCoopers Slide Consolidation methods 3.2. Proportionate consolidation Balance sheet S: Incorporated and held by M at 75% M S % Addition Consolidation Consolidated S M+S% entries accounts ASSETS ASSETS INVESTMENT F (150) - TOTAL (150) EQUITY & LIABILITIES SHARE CAPITAL (150) 400 RETAINED EARNINGS NET INCOME EQUITY (150) 905 MINORITY INT LIABILITIES TOTAL (150) PricewaterhouseCoopers Slide 64

33 3. Consolidation methods 3.2. Proportionate consolidation P&L M S % Addition Consolidation Consolidated S M+S% entries entries TURNOVER OTHER INCOME TOTAL INCOME EXPENSES (OPERATING) OTHER EXPENSES TAXES TOTAL EXPENSES NET INCOME PricewaterhouseCoopers Slide Consolidation methods 3.3. Equity method Is rather a valuation method then a consolidation method. Concerns Associated companies; Some investments excluded from the consolidation scope. Principle In the balance sheet, the investment is accounted for as the equity portion owned by the group in the company; The P&L reports the group s share in the net result of the company accounted for under the equity method. PricewaterhouseCoopers Slide 66

34 3. Consolidation methods 3.3. Equity method EQUITY METHOD DT INVESTMENT ACCOUNTED FOR UNDER 150 THE EQUITY METHOD CR 28 SHARES "S" 150 The investments accounted should be under the "equity method" Investment of "M" in "S" 150 Share capital 200 Retained earnings 100 Opening equity 300 % Interest 75 Investment accounted for under the equity method 225 Adjustement to be accounted for 75 PricewaterhouseCoopers Slide Consolidation methods 3.3. Equity method DT INVESTMENT ACCOUNTED FOR UNDER THE EQUITY METHOD 75 CR 9910 RETAINED EARNINGS 75 Determination of the parent company's share in the net income and retained earnings of the investment accounted for under the "equity method". NET INCOME "S" 40 RETAINED EARNINGS "S" 100 % INTEREST 75 "M" SHARE IN NET INCOME 30 RETAINED EARNINGS 75 DT INVESTMENT ACCOUNTED FOR UNDER THE EQUITY METHOD (B/S) 30 CR SHARE IN THE RESULT OF INVESTMENTS ACCOUNTED FOR UNDER THE EQUITY METHOD 30 PricewaterhouseCoopers Slide 68

35 3. Consolidation methods 3.3. Equity method Balance sheet S: Incorporated & held by M at 75% M S Equity Consolidated method accounts ASSETS ASSETS INVESTMENT S (150) - INVESTMENTS ACCOUNTED FOR UNDER THE EQUITY METHOD TOTAL EQUITY & LIABILITIES SHARE CAPITAL RETAINED EARNINGS NET INCOME EQUITY MINORITY INT LIABILITIES TOTAL PricewaterhouseCoopers Slide Consolidation methods 3.4. Impact of the consolidation method selected on the consolidated equity Full Proportionate Equity consolidation consolidation method Share capital Retained earnings Net income Equity Whatever the consolidation method applied, there is no impact on the consolidated equity PricewaterhouseCoopers Slide 70

36 4. Preparation of the consolidation process PwC 4. Preparation of the consolidation process 4.1. Introduction 4.2. Restatements of the local financial statements Principles Major restatements of the local financial statements Restatement of formation expenses example Restatement of Fixed assets - cost of acquisition example Restatement of Fixed assets - depreciation example Restatement of Inventories and WIP - cost of acquisition example Restatement of a general provision not allowed in consolidation Restatement of the tax expense Restatement of the tangible fixed assets and tax expense example PricewaterhouseCoopers Slide 72

37 4. Preparation of the consolidation process 4.3. Translation of foreign currency financial statements Preliminary note Legal reference Foreign entities / Integral operations Specificities Comparison of both translation methods Distinction between monetary and non monetary components of the financial statements 4.4. Reconciliation of intercompany balances PricewaterhouseCoopers Slide Preparation of the consolidation process 4.1. Introduction Operations required prior to the consolidation process: Restatement of the local financial statements; Translation of the financial statements denominated in a foreign currency; Reconciliation of inter-company balances; Reclassifications => uniform presentation; Consolidation reporting package. PricewaterhouseCoopers Slide 74

38 4. Preparation of the consolidation process 4.2. Restatements of the local financial statements Principles Consistency in the accounting principles. Art. 125 to 132 R.D. 30.I.2001: => See caption accounting principles For the subsidiaries included in the consolidation PricewaterhouseCoopers Slide Preparation of the consolidation process 4.2. Restatements of the local financial statements Major restatements of the local financial statements Formation expenses - Amortised over a 5 year-period; - Expensed as incurred. Intangible assets - R&D expenses (IFRS : difference between research and development; US GAAP : expensed as incurred); - Goodwill. Tangible assets - Difference of acquisition value; - Revaluations (non authorised under US GAAP); - Depreciation : - Rate; - Method. PricewaterhouseCoopers Slide 76

39 4. Preparation of the consolidation process 4.2. Restatements of the local financial statements Major restatements of the local financial statements (continued) Investments in subsidiaries and affiliates - Difference in the valuation method. Inventories & WIP - Valuation method; - Pricing method; - Restatement of the depreciation included in the cost price; - Evaluation of amounts written off; - Difference on WIP valuation (direct costs-indirect costs/method of percentage of completion or not). Receivables and liabilities - Receivables written off; - Accounting for non-interests bearing long term receivables and liabilities. Provisions for liabilities and charges - Differences of valuation rules (timing difference); - Provision for employee benefits (IAS 19). PricewaterhouseCoopers Slide Preparation of the consolidation process 4.2. Restatements of the local financial statements Major restatements of the local financial statements (continued) Tax expense - Tax effect of the gross restatements accounted for (recognition or reversal of deferred tax assets or liabilities). NB: The restatements prior to the consolidation process are not accounted for in the local financial statements of each company. These restatements are recorded: Either in the specific consolidation accounting system : Consolidation Ledger (if it exists); Either in an external accounting system (Excel, ). In this case, the restatements have to be booked every year (not recommended). PricewaterhouseCoopers Slide 78

40 4. Preparation of the consolidation process 4.2. Restatements of the local financial statements Restatement of formation expenses - example Data - Formation expenses : Euro ,00 - Statutory financial statements: 5 years straight-line depreciation method - Consolidated financial statements : expensed as incurred - Deferred taxes are voluntarily excluded Amortisation expenses Year Local Group Difference (20) PricewaterhouseCoopers Slide Preparation of the consolidation process 4.2. Restatements of the local financial statements Restatement of formation expenses - example (continued) 1st year N DT CT ACCOUNT 63 Amortisation expense 20 Formation expenses Additional amortisation expense DT 20 CT 20 2nd year (without consolidation Ledger) 1 DT CT 9910 Retained earnings 20 Formation expense DT CT 20 Formation expenses 63 Amortisation expense 5 5 PricewaterhouseCoopers Slide 80

41 4. Preparation of the consolidation process 4.2. Restatements of the local financial statements Restatement of formation expenses - example (continued) 3rd year 4th year DT CT DT 9910 Retained earnings 15 CT CT 20 Formation expenses 63 Amortisation expense 10 5 DT CT DT 9910 Retained earnings 10 CT 20 Formation expenses 5 CT 63 Amortisation expense 5 5th year (without consolidation Ledger) (without consolidation Ledger) (without consolidation Ledger) DT CT DT 9910 Retained earnings 5 CT 63 Amortisation expense 5 PricewaterhouseCoopers Slide Preparation of the consolidation process 4.2. Restatements of the local financial statements Restatement of Fixed assets - cost of acquisition - example Gross book value 250 Capitalised interests 25 Acquisition cost 275 Not included for consolidation purposes Depreciated over a 10 year-period Disposal end N+1 for 225 PricewaterhouseCoopers Slide 82

42 4. Preparation of the consolidation process 4.2. Restatements of the local financial statements Restatement of Fixed assets - cost of acquisition (continued) Accounting year N N DT/CT 1 DT CT ACCOUNT 65 Capitalized interests (P&L accounts) 22 Fixed assets Reversal of capitalised interests DT 25 CT 25 2 DT CT 229 Accumulated depreciation 63 Depreciation expenses (P&L) Reversal of depreciation of capitalised interests 2,5 2,5 PricewaterhouseCoopers Slide Preparation of the consolidation process 4.2. Restatements of the local financial statements Restatement of Fixed assets - cost of acquisition - example (continued) Year N+1 ( ) Statutory Difference Consolidated Financial statements GBV Depreciation end N+1 (55) (5) (50) NBV Selling price Net income 5 (20) 25 PricewaterhouseCoopers Slide 84

43 4. Preparation of the consolidation process 4.2. Restatements of the local financial statements Restatement of Fixed assets - cost of acquisition example (continued) Year N+1 N DT/CT 1 2 ACCOUNT DT 229 Accumulated depreciation CT 63 Depreciation expense 2,5 2,5 Reversal of the depreciation expense (N+1) DT 22 Fixed assets 25 CT 229 Accumulated depreciation 5 CT 763 Gain on disposal 20 Restatement of the gain on disposal DT CT PricewaterhouseCoopers Slide Preparation of the consolidation process 4.2. Restatements of the local financial statements Restatement of Fixed assets - depreciation - example Data: - Acquisition cost: EUR 250; - Depreciation over a 5 year-period using the double declining method for statutory purposes; - Depreciation over a 5 year-period using the straight-line method for consolidation purposes. PricewaterhouseCoopers Slide 86

44 4. Preparation of the consolidation process 4.2. Restatements of the local financial statements Restatement of Fixed assets - depreciation example (continued) Year Statutory Group Difference Current Accumul Current Accumul Current Total PricewaterhouseCoopers Slide Preparation of the consolidation process 4.2. Restatements of the local financial statements Restatement of Fixed assets depreciation example (continued) Year DT/CT 4 DT CT 5 DT CT ACCOUNT DT 229 Accumulated depreciation 50 CT 63 Depreciation expense 50 DT 229 Accumulated depreciation 10 CT 63 Depreciation expense 10 No restatement 63 Depreciation expense 229 Accumulated depreciation 63 Depreciation expense 229 Accumulated depreciation DT CT PricewaterhouseCoopers Slide 88

45 4. Preparation of the consolidation process 4.2. Restatements of the local financial statements Restatement of Inventories & WIP - acquisition cost - example Statutory financial statements Consolidated financial statements Inventories of the subsidiary at the end of N N Year N DT/CT ACCOUNT DT CT DT CT 30/34 Inventories 609/71 Change in inventories (P&L) Inventory restatement N PricewaterhouseCoopers Slide Preparation of the consolidation process 4.2. Restatements of the local financial statements Restatement of Inventories & WIP - acquisition cost example (continued) Year N+1 DT/CT ACCOUNT DT CT DT CT 30/34 Inventories 609/71 Change in inventories (P&L) Inventory restatement N PricewaterhouseCoopers Slide 90

46 4. Preparation of the consolidation process 4.2. Restatements of the local financial statements Restatement of a general provision not allowed in consolidation BEF 000 Opening balance Additional provision (N) Total DT/CT DT CT ACCOUNT DT 16 Provision Increase in provisions CT PricewaterhouseCoopers Slide Preparation of the consolidation process 4.2. Restatements of the local financial statements Restatement of the tax expense A. Belgian accounting principles The consolidation restatements are free from tax effect BUT Must be accounted for «after tax» when they relate to transactions normally subject to taxation ACCOUNTING FOR DEFERRED TAXES Art. 129 of R.D.30.I.2001 stipulates that «A deferred tax liability is recognised to the extent that it is probable that taxes will effectively be paid in a foreseeable future» Deferred tax liability is shown under a specific heading in the consolidated financial statements (R.D.of 30.I.2001). PricewaterhouseCoopers Slide 92

47 4. Preparation of the consolidation process 4.2. Restatements of the local financial statements Restatement of the tax expense (continued) According to the «CNC», deferred tax assets can be recognised (e.g: on tax losses to be carried forward) for consolidation purposes under strict conditions : - respect of the prudence principle - use of the IFRS framework (bulletin CNC n /1). The deferred taxation is gradually reversed and never settled by a payment. More precise recommendations dealing with deferred taxation are developed in various other standards (IAS 12, FAS 109, APB11, ). PricewaterhouseCoopers Slide Preparation of the consolidation process 4.2. Restatements of the local financial statements Restatement of the tax expense (continued) B. IAS 12 IAS 12 provides the guidelines on the methodology to be applied in order to assess deferred taxes: A deferred tax liability: Arising from timing or temporary differences should be assessed; Results from the difference between the net income and the taxable net income; Example: - Economic depreciation vs. tax depreciation; - Capitalised and amortised R&D costs vs. expensed as incurred. Should be measured using the rate of tax expected to apply when the asset is recovered or the liability is settled. PricewaterhouseCoopers Slide 94

48 4. Preparation of the consolidation process 4.2. Restatements of the local financial statements Restatement of the tax expense (continued) B. IAS 12 (continued) No recognition of deferred taxation (asset, liability) on goodwill/badwill permanent difference. A deferred tax asset is recognised: On deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised; On recoverable tax losses when it is probable that those tax losses will be used to offset a future taxable profit. IAS 12 also allows the recognition of deferred tax related to the revaluation of an asset at its fair value, even if there is no intention of disposal of this asset in the future. PricewaterhouseCoopers Slide Preparation of the consolidation process 4.2. Restatements of the local financial statements Restatement of the tax expense (continued) C. In practice Temporary differences = differences Between the consolidated net income and the statutory net income: --- Depreciation expense: - Inventory valuation; - Provisions. Between the statutory net income and the tax net income: - Provisions (for doubtful receivables); - Depreciation. Permanent differences = do not lead to the recognition of deferred taxation Not deductible expenses (DNA / VU); Revenue definitely taxed (RDT / DBI); Deduction for investments; Consolidation goodwill-badwill. PricewaterhouseCoopers Slide 96

49 4. Preparation of the consolidation process 4.2. Restatements of the local financial statements Restatement of the tangible fixed assets and tax expense example Data: - Acquisition cost: EUR Depreciated over a 5 year-period Double declining method for statutory purposes - Depreciated over a 5 year-period Straight-line method for consolidation purposes - Tax rate: 40% - The net income before tax and depreciation expense amounts to EUR each year. PricewaterhouseCoopers Slide Preparation of the consolidation process 4.2. Restatements of the local financial statements Restatement of the tangible fixed assets and tax expense example (continued) YEAR DEPRECIATION IMPACT ON THE NET INCOME DIFFERENCE STATUTORY (EUR '000) GROUP (EUR '000) (EUR '000) GROUP (EUR '000) DEPRECIATION ACCUMULATED DEPRECIATION ACCUMULATED DEPRECIATION TAX DEFERRED ADJUSTMENT TAX LIABILITY ,4 2, , , TOTAL PricewaterhouseCoopers Slide 98

50 4. Preparation of the consolidation process 4.2. Restatements of the local financial statements Restatement of the tangible fixed assets and tax expense example (continued) Net income before depreciation expense & tax Depreciation expense (10) (6) (5) (4) - (25) Net income before tax Current tax (6) (7,6) (8) (8,4) (10) (40) Net profit Net income before depreciation exp.& tax Depreciation exp. (5) (5) (5) (5) (5) (25) Net income before tax Current tax (6) (7,6) (8) (8,4) (10) (40) Deferred tax (2) (0,4) - 0,4 2 - Net profit PricewaterhouseCoopers Slide Preparation of the consolidation process 4.2. Restatements of the local financial statements Restatement of the tangible fixed assets and tax expense example (continued) Period N N DT/CT ACCOUNT DT CT 1 2 DT CT DT CT 229 Accumulated depreciation 63 Depreciation expense Restatement of depreciation 67 Tax expense 45 Deferred tax liability Recognition of deferred tax expense PricewaterhouseCoopers Slide 100

51 4. Preparation of the consolidation process 4.2. Restatements of the local financial statements Restatement of the tangible fixed assets and tax expense example (continued) Period N+1 N DT/CT ACCOUNT DT CT 3 4 DT CT DT CT 229 Accumulated depreciation 63 Depreciation expense Restatement of depreciation 67 Tax expense 45 Deferred tax liability Recognition of deferred tax expense 1 0,4 1 0,4 Period N+2 N DT/CT ACCOUNT DT CT PricewaterhouseCoopers Slide Preparation of the consolidation process 4.2. Restatements of the local financial statements Restatement of the tangible fixed assets and tax expense example (continued) Period N+3 N DT/CT ACCOUNT DT CT 5 DT CT 63 Depreciation expense 229 Accumulated depreciation Restatement of depreciation DT CT 45 Deferred tax liability 67 Tax expense Reversal of the deferred tax entry 0,4 0,4 PricewaterhouseCoopers Slide 102

52 4. Preparation of the consolidation process 4.2. Restatements of the local financial statements Restatement of the tangible fixed assets and tax expense example (continued) Period N+4 N DT/CT ACCOUNT DT CT 7 DT CT 63 Depreciation expense 229 Accumulated depreciation Restatement of depreciation DT CT 45 Deferred taxa liability 67 Tax expense Reversal of the deferred tax entry 2 2 PricewaterhouseCoopers Slide Preparation of the consolidation process 4.3. Translation of foreign currency statements Preliminary note The current consolidation software handle the translation of foreign currency statements. In this case, the translation is not considered as a pre-consolidation exercise. In fact, this transaction is part of the operations of consolidation (refer to caption Operations of consolidation) Legal reference Art 131 and 132 of R.D. 30.I.2001 Two possibilities : Monetary/non-monetary method Closing rate method PricewaterhouseCoopers Slide 104

53 4. Preparation of the consolidation process 4.3. Translation of foreign currency statements Legal reference (continued) - Monetary/non-monetary method Monetary assets / liabilities (incl. speculative transactions): closing rate; Non monetary assets/ liabilities: historical rate; Equity: historical rate; P&L accounts: historical rate or average rate (in accordance with parent company rules). Translation difference => posted to P&L; Share of the difference to be allocated to the minority interest under the caption «Share of minority interest in the net result»; Monetary hedged captions: monetary caption and hedging transactions at hedging contract rate. PricewaterhouseCoopers Slide Preparation of the consolidation process 4.3. Translation of foreign currency statements Legal reference (continued) - Closing rate method Assets / Liabilities (including speculative transactions): closing rate; Equity: historical rate; Profit and loss: average rate. Translation differences posted to equity as «CTA»; Share of the translation differences attributable to minority shareholders posted in the liabilities under «Minority interests»; Specific hedged operations: identical to the monetary/non-monetary method (hedging rate). PricewaterhouseCoopers Slide 106

54 4. Preparation of the consolidation process 4.3. Translation of foreign currency statements Legal reference (continued) - Monetary / non-monetary method When transactions of the subsidiary are principally performed in the parent company s currency; When the exchange rate fluctuations of the local currency/ consolidation currency have a significant effect on the transactions and cash flow of the subsidiary. - Closing rate method When the exchange rate fluctuations of the local currency/ consolidation currency have little or no influence on the transactions and cash flows of the subsidiary. PricewaterhouseCoopers Slide Preparation of the consolidation process 4.3. Translation of foreign currency statements Foreign entities / Integral operations Has an economic and financial autonomy. Daily activities of the company do not affect the cash flows of the parent company. Daily activities not or little connected to those of the parent company. Own and local financing of activities. Operates in a market different of the parent company s. Local payment of the manpower, the raw materials, and other production costs. Other elements indicating the autonomy of the subsidiary. The activity of the company is mainly integrated within the activity of the parent company or of another group company. Predominance of the national currency of the parent company in the transactions and funding. Numerous operations concluded with the parent company. Financing principally provided by the parent company. Market is the parent company s country. Products and services mainly received from the parent company s country. Other factors indicating the dependence of the subsidiary. Closing rate method Monetary/ non-monetary method PricewaterhouseCoopers Slide 108

55 4. Preparation of the consolidation process 4.3. Translation of foreign currency statements Specificities No obligation to use the same method for all the subsidiaries. Possibility to adopt other translation methods in special circumstances. If the subsidiary s consolidation occurs in a period later than the date of the acquisition (no respect of the exemption rules for example), the historical rate used is the rate as of the start date of the period when the subsidiary is consolidated for the first time. PricewaterhouseCoopers Slide Preparation of the consolidation process 4.3. Translation of foreign currency statements Comparison of both translation methods Closing rate method Monetary / None-monetary method Company concerned Autonomous Non-autonomous Translation of the balance sheet - Monetary elements Closing rate Closing rate - Non monetary elements Closing rate Historical rate (except equity at the historical rate) Translation P&L accounts Average rate Historical rate / average rate(s) Allocation of CTA Equity Booked to P&L or according to the method adopted by the parent company PricewaterhouseCoopers Slide 110

56 4. Preparation of the consolidation process 4.3. Translation of foreign currency statements Distinction between monetary and non-monetary components of the financial statements Balance sheet rubric Monetary (closing rate) Non-monetary (historical rate) Formation expenses X Intangible fixed assets X Tangible fixed assets X Financial fixed assets X Long term receivables X Inventories and work in progress X Current receivable X Marketable securities X Cash and banks X Prepaid exp. & accrued income X X Capital X Additional paid-in capital X Revaluation surplus X Provisions X Retained earnings X Capital grants X Provisions for liabilities and charges X X Long term liabilities X Current liabilities X Deferred revenue and accrued expenses X X PricewaterhouseCoopers Slide Preparation of the consolidation process 4.4. Reconciliation of intercompany balances Before the elimination of intercompany balances, one has to ensure that all the intercompany balances are identified and reconciled (through intercompany confirmations). For example, adjustment of the intercompany balances for sales and intercompany invoicing in transit (invoices to be issued, invoices to be received, ). PricewaterhouseCoopers Slide 112

57 5. Consolidation process PwC 5. Consolidation process 5.1. Elimination of intercompany balances and transactions Elimination with or without impact on the consolidated retained earnings and net income Full or partial elimination and exemptions Examples: Elimination of intercompany assets & liabilities by consolidation methods Example : Intercompany margin included in inventories & WIP Example: intercompany sale of building Example: internal dividends 5.2. Elimination of equity and investments Principles First consolidation difference Acquisition date to be taken into account for the determination of goodwill/badwill First consolidation difference: Components Allocation of the first consolidation difference Goodwill and negative goodwill PricewaterhouseCoopers Slide 114

58 5. Consolidation process 5.1.Elimination of intercompany balances and transactions Eliminations with or without impact on the consolidated retained earnings and net income Without impact on the consolidated retained earnings or net income: - Intercompany Assets/liabilities accounts: off-setting; - Intercompany income/expense accounts: off-setting. With impact on the consolidated retained earnings and net income: - Sale of fixed assets within the group; - Sale of goods in inventories: If still included in the balance sheet of the buyer: elimination of the unrealised profit; If subsequently sold to a third party: no adjustment required. - Tax impact on internal transfers; - Internal provisions on investments, write-downs on intercompany receivables and tax-driven provisions or provisions not economically required ; - Internal dividends. PricewaterhouseCoopers Slide Consolidation process 5.1.Elimination of intercompany balances and transactions Full or partial elimination and exemptions A. Belgian rules for eliminations (art. 144, 146, 148, 149, 150, 151 R.D.30.I.2001) Method : Full elimination: Full consolidation: Full elimination Proportionate consolidation: Full elimination NB : assets and liabilities,..., the income and charges of joint ventures are included in the consolidated accounts pro rata the power held in their equity by the parent company and its subsidiaries. Equity method: Full elimination, but Applied only to the results from intercompany transactions that are included in the carrying amount of assets (as far as the necessary indications are known or accessible). PricewaterhouseCoopers Slide 116

59 5. Consolidation process 5.1. Elimination of intercompany balances and transactions Full or partial elimination and exemptions A. Belgian rules for eliminations (art. 144, 146, 148, 149, 150, 151 R.D. 30.I.2001) (continued) Three possible exemptions : Exemption 1 : Possibility of a partial elimination in case of minority interest: (art. 146 R.D. 30.I.2001) Profits and losses included in the carrying amount of an asset in the consolidated balance sheet (example : fixed assets, inventories,...) Gains or losses realised on the internal sale of investments. These profits and losses can be eliminated proportionately in each subsidiary concerned using the group interest percentage. PricewaterhouseCoopers Slide Consolidation process 5.1.Elimination of intercompany balances and transactions Full or partial elimination and exemptions A. Belgian rules for eliminations (art. 144, 146, 148, 149, 150, 151 A.R. 30.I.2001) (continued) Exemption 2 : Possibility not to eliminate (art. 146 R.D. 30.I.2001) : Profits and losses included in the carrying amount of an asset in the consolidated balance sheet (example : fixed assets, inventory,...) Gains or losses realised on internal sales of assets other than investments These profits and losses can be maintained in consolidation if Conditions : Transactions are realised at normal market conditions and The elimination of those results would result in disproportionate costs for the parent company (e.g. information not available) and If applied this must be disclosed in the notes. PricewaterhouseCoopers Slide 118

60 5. Consolidation process 5.1.Elimination of intercompany balances and transactions Full or partial elimination and exemptions A. Belgian rules for eliminations (art. 144, 146, 148, 149, 150, 151 A.R. 30.I.2001) (continued) Exemption 3: Possibility not to eliminate (art. 149 R.D. 30.I.2001) If the amounts concerned are immaterial considering the true and fair view principle (art. 115 R.D. 30.I.2001) Except for Profits and losses realised on intercompany sales of investments Internal dividends Write-down of consolidated investments. => In these three cases, the elimination is mandatory PricewaterhouseCoopers Slide Consolidation process 5.1.Elimination of intercompany balances and transactions Full or partial elimination and exemptions B. IFRS elimination rules IFRS Full elimination of intercompany results is required PricewaterhouseCoopers Slide 120

61 5. Consolidation process 5.1.Elimination of intercompany balances and transactions Examples - Eliminations of intercompany assets & liabilities and consolidation methods 3 scenarios : A. Intercompany balances between two fully consolidated companies. B. Intercompany balances between a fully consolidated and a proportionately consolidated company. C. Intercompany balances s between two proportionately consolidated companies. PricewaterhouseCoopers Slide Consolidation process 5.1.Elimination of intercompany balances and transactions Examples - Eliminations of intercompany assets & liabilities and consolidation methods A. Intercompany balances between two fully consolidated companies Example : at the closing date of the accounting period = - Company F1 has a receivable of 3000 from company F2 - Company F2 has a payable of 3000 to company F1 Consolidation entry: Dt A/P 3000 Ct A/R 3000 PricewaterhouseCoopers Slide 122

62 5. Consolidation process 5.1.Elimination of intercompany balances and transactions Examples - Eliminations of intercompany assets & liabilities and consolidation methods A. Intercompany balances between two fully consolidated companies (continued) A/R A/P Link Accumulated accounts Company F Company F Elimination of intercompany balances: Company F Company F balanced balanced balanced PricewaterhouseCoopers Slide Consolidation process 5.1.Elimination of intercompany balances and transactions Examples - Eliminations of intercompany assets & liabilities and consolidation methods B. Intercompany balances between a fully consolidated company and a proportionately consolidated company The portion of the intercompany payable or receivable balance is proportionately maintained in the integrated accounts of the subsidiary and then eliminated. PricewaterhouseCoopers Slide 124

63 5. Consolidation process 5.1.Elimination of intercompany balances and transactions Examples - Eliminations of intercompany assets & liabilities and consolidation methods B. Intercompany balances between a fully consolidated company and a proportionately consolidated company (continued) Example: F is a wholly-owned subsidiary of M (parent company). F is fully consolidated C, another subsidiary of M, is jointly controlled by M and another group. M holds 30% of C and consequently C is proportionately consolidated. F lends an amount of to C. PricewaterhouseCoopers Slide Consolidation process 5.1.Elimination of intercompany balances and transactions Examples - Eliminations of intercompany assets & liabilities and consolidation methods B. Intercompany balances between a fully consolidated company and a proportionately consolidated company (continued) M 100% 30% F C (full) Lend (proport.) PricewaterhouseCoopers Slide 126

64 5. Consolidation process 5.1.Elimination of intercompany balances and transactions Examples - Eliminations of intercompany assets & liabilities and consolidation methods B. Intercompany balances between a fully consolidated company and a proportionately consolidated company (continued) Amounts included in the consolidated accounts : - company F fully consolidated: loan of company C proportionately consolidated: borrowing of x 1/3 = 360 The portion of the loan belonging to the third party for an amount of 840 is kept in the consolidated accounts. PricewaterhouseCoopers Slide Consolidation process 5.1.Elimination of intercompany balances and transactions Examples - Eliminations of intercompany assets & liabilities and consolidation methods B. Intercompany balances between a fully consolidated company and a proportionately consolidated company (continued) Consolidation entry : Dt A/P 360 Ct A/R 360 PricewaterhouseCoopers Slide 128

65 5. Consolidation process 5.1.Elimination of intercompany balances and transactions Examples - Eliminations of intercompany assets & liabilities and consolidation methods B. Intercompany balances between a fully consolidated company and a proportionately consolidated company (continued) Loan Third party Loan Interco Borrowing Interco Accumulated accounts Company F Company C (30%) 360 Link Interco Elimination of intercompany accounts Company F Company C Intercompany loan balance Balanced intercompany accounts PricewaterhouseCoopers Slide Consolidation process 5.1.Elimination of intercompany balances and transactions Examples - Eliminations of intercompany assets & liabilities and consolidation methods C. Intercompany balances between two proportionately consolidated companies The lower amount of intercompany receivables and payables included in the consolidation has to be eliminated. Example: Companies C1 and C2, both jointly controlled by M and other groups, have intercompany receivables/payables of PricewaterhouseCoopers Slide 130

66 5. Consolidation process 5.1.Elimination of intercompany balances and transactions Examples - Eliminations of intercompany assets & liabilities and consolidation methods C. Intercompany balances between two proportionately consolidated companies (continued) M C1 30% 40% C2 (proport.) interco (proport.) accounts PricewaterhouseCoopers Slide Consolidation process 5.1.Elimination of intercompany balances and transactions Examples - Eliminations of intercompany assets & liabilities and consolidation methods C. Intercompany balances between two proportionately consolidated companies (continued) The payable of C1 is included as follows: 2000 x 30% = 600 The receivable of C2 is included as follows: 2000 x 40% = 800 The elimination is limited to 600 and a third party receivable of 200 remains in C2. Consolidation entry: Dt A/P 600 Ct A/R 600 PricewaterhouseCoopers Slide 132

67 5. Consolidation process 5.1.Elimination of intercompany balances and transactions Examples - Eliminations of intercompany assets & liabilities and consolidation methods C. Intercompany balances between two proportionately consolidated companies (continued) Third party Interco Interco Interco receivable receivable payable link Accumulated accounts Company C1 (30%) x 600 Company C2 (40%) x 800 Elimination of intecompany accounts Company C Company C Intercompany receivable balance Balanced Intercompany accounts PricewaterhouseCoopers Slide Consolidation process 5.1.Elimination of intercompany balances and transactions Example - Intercompany margin included in inventories & WIP A. Example 1 «M» holds 80% of «F» Internal result N N+1 M F M F Sales to "F" Receivable from "F" Inventory from "M" Payable to "M" Gross margin 30% 30% Tax impact not taken into account PricewaterhouseCoopers Slide 134

68 5. Consolidation process 5.1.Elimination of intercompany balances and transactions Example - Intercompany margin included in inventories & WIP (continued) Period N N DT/CT 1 DT CT ACCOUNT Sales Costs of sales Sales elimination DT CT DT CT 3 DT CT Suppliers Clients Elimination of intercompany balances Stock movement Stock Stock margin elimination (5.000 x 30%) PricewaterhouseCoopers Slide Consolidation process 5.1.Elimination of intercompany balances and transactions Example - Intercompany margin included in inventories & WIP (continued) Period N+1 - With consolidation General Ledger (automated consolidation) N DT/CT ACCOUNT DT 4 DT 30/34 Inventories 600 CT 609/71 Inventory movement (( ) x 30%) CT 600 PricewaterhouseCoopers Slide 136

69 5. Consolidation process 5.1.Elimination of intercompany balances and transactions Example - Intercompany margin included in inventories & WIP (continued) B. Example 2 Inventories and WIP stock margin Stock at closing date bought by subsidiary «F» from parent company «M» in the period N Stock at closing date of accounting period N+1 1 st alternative nd alternative Gross margin 20% Tax rate 40% PricewaterhouseCoopers Slide Consolidation process 5.1.Elimination of intercompany balances and transactions Example - Intercompany margin included in inventories & WIP (continued) With consolidation General Ledger Period N N DT/CT ACCOUNT DT 1 DT 60 Cost of sales CT 30/34 Inventories Elimination of intercompany margin ( x 20%) 2 DT 41 Deferred tax asset CT 67 Tax credit Tax impact - 40% of the adjustment above CT PricewaterhouseCoopers Slide 138

70 5. Consolidation process 5.1.Elimination of intercompany balances and transactions Example - Intercompany margin included in inventories & WIP (continued) Case 1: inventories have increased at closing date Period N+1 N DT/CT ACCOUNT DT 3 DT 60 Cost of sales CT 30/34 Inventories Elimination of intercompany margin ( ) x 20% CT DT CT 41 Deferred tax asset 67 Tax credit Tax impact - 40% of the adjustment above PricewaterhouseCoopers Slide Consolidation process 5.1.Elimination of intercompany balances and transactions Example - Intercompany margin included in inventories & WIP (continued) Case 2: inventories have decreased at closing date Period N+1 N DT/CT ACCOUNT DT 3 DT 30/34 Inventories CT 609/71 Cost of Sales (P&L) Elimination of intercompany margin ( ) x 20% CT DT CT 67 P&L tax expense 41 Deferred tax asset Tax impact - 40% of the adjustment above PricewaterhouseCoopers Slide 140

71 5. Consolidation process 5.1.Elimination of intercompany balances and transactions Example - intercompany sale of a building «M» holds 100% of «F» On 31 December 20-Y «M» sells a building to «F» for EUR In the books of «M» the net book value of the building is composed of: EUR - Cost of acquisition Accumulated depreciation (75.000) The building was acquired by M on 1 January 20-Y-5. The depreciation rate used by «M» was 10% per year using the straight-line method => the accumulated depreciation in the books of «M» amounts to: x 10% x 6 = The gain on sale made by «M» is = EUR (taxable at 40%). PricewaterhouseCoopers Slide Consolidation process 5.1.Elimination of intercompany balances and transactions Example - intercompany sale of a building (continued) On 20-Y+1, the subsidiary «F» reported the depreciation expense of the building based on its residual life (4 years) and the cost of acquisition as per local books (EUR x 25% = EUR ). Situation as at 31/12/20-Y Accounts Gross book Accumulated Net book Sale's Tax Gain on sale value depreciation value revenue expense Parent company "M" Subsidiary "F" PricewaterhouseCoopers Slide 142

72 5. Consolidation process 5.1.Elimination of intercompany balances and transactions Example - intercompany sale of a building (continued) Accounting entries as at 31/12/20-Y in the books of «M» DT/CT ACCOUNT DT CT DT 40 Intercompany account of the subsidiary «F» DT 229 Accumulated depreciation DT 67 Tax expense CT 22 Buildings CT CT 763 Gain on sale of fixed assets 45 Tax accrual Booking of the sale of the building PricewaterhouseCoopers Slide Consolidation process 5.1.Elimination of intercompany balances and transactions Example - intercompany sale of a building (continued) Accounting entries as at 31/12/20-Y in the books of «F» DT/CT ACCOUNT DT CT DT 22 Buildings CT 44 Intercompany account Parent company «M» Booking of the purchase of the building PricewaterhouseCoopers Slide 144

73 5. Consolidation process 5.1.Elimination of intercompany balances and transactions Example - intercompany sale of a building (continued) Consolidation entries Period 31/12/20-Y N 1 DT/CT DT DT ACCOUNT 22 Buildings 763 P&L - Gain on sale of fixed assets DT CT CT 229 Accumulated depreciation Restor the value of the building back to its original costs for the group, including the corresponding accumulated depreciation as at the transfer date 2 DT CT 41 Asset - Deferred taxes 67 P&L - Tax credit Tax impact - 40% of the on above adjustment PricewaterhouseCoopers Slide Consolidation process 5.1.Elimination of intercompany balances and transactions Example - intercompany sale of a building (continued) Consolidation entries Period 31/12/20-Y+1 N 3 DT/CT DT CT ACCOUNT 229 Accumulated depreciation 63 Depreciation expense Write back of depreciation expense Correction of the depreciation expense ( ) DT CT DT 67 P&L - Tax expense CT 45 Liabilities - Deferred taxes Tax impact - 40% of the adjustment above PricewaterhouseCoopers Slide 146

74 5. Consolidation process 5.1.Elimination of intercompany balances and transactions Example - internal dividends M holds 80% of F Period N: - Profit of F : Proposed dividend : 80 Period N+1: payment of the dividend 80 Period N N DT/CT ACCOUNT 1 DT Share of minority interests net income CT 9913 Minority interests Minority interests net income Period N+ 1 DT CT 2 DT DT 9913 Minority interests 75 Financial income CT 9910 Consolidated retained earnings 80 PricewaterhouseCoopers Slide Consolidation process 5.1.Elimination of intercompany balances and transactions Example - internal dividends (continued) N M F Total E.C. C Assets (others) "F" investment (160) (160) 400 Capital (200) 160 Reserves Profit carried forward (30) (230) 330 Minority interests (160) 400 Result (30) 170 Minority interest = 350 x 20% = 70 PricewaterhouseCoopers Slide 148

75 5. Consolidation process 5.1.Elimination of intercompany balances and transactions Example - internal dividends (continued) N + 1 M F Total E.C. C1 E.C. C2 Other assets (1) "F" investments (160) (160) Capital (200) Reserve (2) 120 (30) 90 (3) Profit carried forward (4) (64) (230) Minority interest (5) (16) 54 (6) (160) Results (4) (64) - (1) 350 (N) - 80 (Dividend) = 270 (2) 150 (N) - 80 (Dividend) = 70 (3) 170 (N) 80 of dividends not included (4) Dividend received from "F" (5) to deduct : dividend 16 (20% x 80) paid to the minorities (6) 54 = 20% x 270 (equity of "F") PricewaterhouseCoopers Slide Consolidation process 5.2. Elimination of equity and investments Principles Full consolidation (art. 136 to 149 R.D. 30.I.2001) The book value of the shares owned by the group is off-set against the corresponding share (based on the holding percentage) in the net assets of the subsidiary. The share of the net assets belonging to minority shareholders is recorded as a liability under the caption «minority interests». Determination of the first consolidation difference. PricewaterhouseCoopers Slide 150

76 5. Consolidation process 5.2. Elimination of equity and investments Principles (continued) Equity of the subsidiary Group s share Minority interests Book value of the investment Negative consolidation difference PricewaterhouseCoopers Slide Consolidation process 5.2. Elimination of equity and investments Principles (continued) Equity of the subsidiary Group s share Minority interests Book value of the investment Positive consolidation difference PricewaterhouseCoopers Slide 152

77 5. Consolidation process 5.2. Elimination of equity and investments Principles (continued) Negative net assets of the company acquired? - Do accumulated losses exceed share capital? The share of minority shareholders in the negative net assets is zero since the loss can not exceed their contribution to the share capital. Consequently, accumulated losses exceeding share capital are fully recognized by the majority shareholders (goodwill increase). PricewaterhouseCoopers Slide Consolidation process 5.2. Elimination of equity and investments First consolidation difference Examples A. Acquisition at book value Acquisition of 80% of F by M during the current period at the book value Share in net asset at the date of acquisition: Share capital 400 Retained earnings 200 Profit carried forward 80 80% 544 = group s share % 136 = minority share Profit made since the date of acquisition: 60 80% 20% 48 = group s share 12 = minority share PricewaterhouseCoopers Slide 154

78 5. Consolidation process 5.2. Elimination of equity and investments First consolidation difference (continued) Balance sheet M F M+F Elimination Conso Investment (M) (544) - Share capital (F) (400) (400) Retained earnings (F) (200) (200) Profit carried forward (F) (140) (140) 92 (48) Minority interests (148) (148) * 544 (740) (196) - (196) Profit and loss accounts Result since the date of acquisition (60) (60) 12 (48) (*) 740 x 20% = 148 PricewaterhouseCoopers Slide Consolidation process 5.2. Elimination of equity and investments First consolidation difference (continued) B. Positive consolidation difference Acquisition of 80% of F by M during the current period for 900 Group s share in equity : Share capital 400 Retained earnings 200 Profit carried forward x 80% = 544 Positive first consolidation difference : - Cost of acquisition Group s share in net assets Positive first consolidation difference 356 PricewaterhouseCoopers Slide 156

79 5. Consolidation process 5.2. Elimination of equity and investments First consolidation difference (continued) Balance sheet M F M+F Elimination Conso Investment (M) (900) - Positive first conso difference Share capital (F) (400) (400) Retained earnings (F) (200) (200) Profit carried forward (F) (140) (140) 92 (48) Minority interests (148) (148) 900 (740) Profit and loss accounts Result since the date of acquisition (60) (60) 12 (48) PricewaterhouseCoopers Slide Consolidation process 5.2. Elimination of equity and investments First consolidation difference (continued) C. Negative consolidation difference Acquisition of 80% of F by M during the current period for 400 Group s share in equity : Share capital 400 Retained earnings 200 Profit carried forward x 80% = 544 Negative first consolidation difference : - Cost of acquisition Group s share in net assets Positive first consolidation difference (144) PricewaterhouseCoopers Slide 158

80 5. Consolidation process 5.2. Elimination of equity and investments First consolidation difference (continued) Balance sheet M F M+F Elimination Conso Invetsment (M) (400) - Share capital (F) (400) (400) Retained earnings (F) (200) (200) Profit carried forward (F) (140) (140) 92 (48) Negative first consolidation difference (144) (144) Minority interests (148) (148) 400 (740) (340) - (340) Profit and loss accounts Result since the date of acquisition (60) (60) 12 (48) PricewaterhouseCoopers Slide Consolidation process 5.2. Elimination of equity and investments Acquisition date to be taken into account for the determination of goodwill/badwill (art. 139 R.D. 30.I.2001) A. First consolidation at acquisition Equity as at the date of acquisition (acquisition date of the investment or closing date). B. First consolidation after acquisition First consolidation Equity at the beginning of the first consolidated financial statements accounting period Entrance into consolidation scope Equity at the beginning of the accounting period in which the entrance into consolidation scope occurs PricewaterhouseCoopers Slide 160

81 5. Consolidation process 5.2. Elimination of equity and investments Acquisition date to be taken into account for the determination of goodwill/badwill (art. 139 R.D. 30.I.2001) (continued) C. Successive share purchases - No information provided by R.D.of 30.I th directive : date at which a company becomes subsidiary = date of control take-over (however, no further indication in case of successive share purchases). - France : date of effective control take-over or date of acquisition of the first block of shares if target is a control take-over. This date corresponds: Generally : to the date of the first acquisition lot allowing control take-over; In specific cases, at a date prior to the first acquisition lot, contractually foreseen or resulting from facts. - Anglo-Saxon countries : at each acquisition date or, if blocks of shares are not significant, at last purchase date. - IFRS 3 R / IAS 27 R: each significant operation is treated separately for the determination of assets and liabilities «fair values». PricewaterhouseCoopers Slide Consolidation process 5.2. Elimination of equity and investments First consolidation difference: Components Positive difference: Understatement of assets / Overstatement liabilities; Profit generating capacity; Premium paid in return of control take-over benefits; Bad deal. Negative difference: Allowance for bad profitability; Good deal. PricewaterhouseCoopers Slide 162

82 5. Consolidation process 5.2. Elimination of equity and investments Allocation of the first consolidation difference (art. 140 A.R. 30.I.2001) A. Allocation to subsidiary s assets and liabilities of: Identifiable tangible elements; Identifiable intangible elements that benefit from a true legal protection; NB: in Belgium, recognition and booking of the minority interests share in the assets and liabilities restatements (art. 140 R.D. 30.I.2001, 4) => see example below. B. Balance not allocated = consolidation difference Positive : asset => Goodwill Negative : liability => Badwill PricewaterhouseCoopers Slide Consolidation process 5.2. Elimination of equity and investments Allocation of the first consolidation difference (art. 140 A.R. 30.I.2001) (continued) A. Allocation of the first consolidation difference Assessment of value to be allocated FAIR VALUE Examples: Land and property: expert valuation; Plant and equipment: - To be held and used: replacement cost; - To be disposed of: realisation value. Intangible assets: estimated value; Inventories: - Finished goods: sales price cost to sell margin; - Raw materials: replacement cost. Receivables: net cash to receive; Provisions: amounts enabling the company to fulfil its obligations. PricewaterhouseCoopers Slide 164

83 5. Consolidation process 5.2. Elimination of equity and investments Allocation of the first consolidation difference (art. 140 A.R. 30.I.2001) (continued) A. Allocation of the first consolidation difference (continued) Share of the parent company or total amount? M acquires 60% of F for 180 Equity of F at acquisition date : 200 First consolidation difference : 180 (200 X 60%) = = 60 Property - Book value 10 - Expert valuation 110 Tax impact excluded! SOLUTION (art. 140 R.D. 30.I.2001, 4) : Property booked at x100 = Minority interest of 100 x 40% = 40 (liability) Recognition of the minority share in the assets and liabilities restatement PricewaterhouseCoopers Slide Consolidation process 5.2. Elimination of equity and investments Allocation of the first consolidation difference (art. 140 A.R. 30.I.2001) (continued) A. Allocation of the first consolidation difference (continued) Accounting entry for first consolidation difference: DT Property 100 CT First consolidation difference 60 CT Minority interests 40 PricewaterhouseCoopers Slide 166

84 5. Consolidation process 5.2. Elimination of equity and investments Allocation of the first consolidation difference (art. 140 A.R. 30.I.2001) (continued) A. Allocation of the first consolidation difference (continued) Cost of acquisition 180 Net book value (200 X 60%) 120 First consolidation difference 60 Allocation to property (100) Minority interests share in allocation 40 Consolidation difference 0 PricewaterhouseCoopers Slide Consolidation process 5.2. Elimination of equity and investments Goodwill and negative goodwill Nature: - Intangible assets with no legal protection; - True goodwill («badwill»); - Premium paid for take-over control; - Good or bad deal. Positive or negative: - No off-setting; - EXCEPT if relating to the same subsidiary => mandatory. PricewaterhouseCoopers Slide 168

85 5. Consolidation process 5.2. Elimination of equity and investments Goodwill and negative goodwill (continued) Treatment of positive difference (goodwill): - Amortisation; - Amortisation plan based on estimated useful life: If more than 5 years: disclosure in notes (IFRS : No depreciations => Assessment for impairment). - Exceptional amortisation or impairment charge: If asset is not economically justified anymore. - Amortisation should be disclosed under an specific P&L heading (operating or financial expense depending on the nature of activities). PricewaterhouseCoopers Slide Consolidation process 5.2. Elimination of equity and investments Goodwill and negative goodwill (continued) Treatment of negative difference (badwill): - Kept on B/S => Cannot be booked to P&L; - Exception: If difference results from anticipated losses of subsidiary: booked to P&L as losses occur. PricewaterhouseCoopers Slide 170

86 6. Subsequent consolidations PwC 6. Subsequent consolidations 6.1. Unchanged holding percentage 6.2. Subsequent change in the holding percentage 6.3. Deconsolidation 6.4. Subsequent changes to the acquisition cost as a result of the occurrence of future events 6.5. Identification or change in value of assets and liabilities in the subsidiary s financial statements subsequent to the acquisition 6.6.Revaluation of an investment PricewaterhouseCoopers Slide 172