Principles of Group Accounting under IFRS

Transcription

1 Principles of Group Accounting under IFRS

2 Principles of Group Accounting under IFRS by Andreas Krimpmann

3 This edition first published John Wiley & Sons, Ltd Registered office John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom For details of our global editorial offices, for customer services and for information about how to apply for permission to reuse the copyright material in this book please visit our website at www. wiley.com. The right of the author to be identified as the author of this work has been asserted in accordance with the Copyright, Designs and Patents Act All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher. Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at For more information about Wiley products, visit Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners. The publisher is not associated with any product or vendor mentioned in this book. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. It is sold on the understanding that the publisher is not engaged in rendering professional services and neither the publisher nor the author shall be liable for damages arising herefrom. If professional advice or other expert assistance is required, the services of a competent professional should be sought. Library of Congress Cataloging-in-Publication Data Krimpmann, Andreas, Principles of group accounting under IFRS / by Andreas Krimpmann. pages cm Includes bibliographical references and index. ISBN (pbk.) 1. Accounting--Standards. 2. Financial statements, Consolidated. I. Title. HF5626.K dc Cover Design & Image: Wiley Set in 11/12.3pt, Times New Roman MT Std by Laserwords Private Ltd, Chennai, India Printed in Great Britain by TJ International Ltd, Padstow, Cornwall, UK

4 To my family

5 Contents List of figures List of tables Preface Introduction to the book xvii xxiii xxvii A The case study 1 xxix 1. About the group 2 2. Allocation of examples 4 B Legal requirements for consolidated financial statements 9 1. IFRS standards Transition to the new consolidation suite (IFRS 10 to IFRS 12, IAS 27 and IAS 28) from IAS 27 rev Dependencies between IFRS 3 and IFRS Accounting transition of joint ventures Exemptions Local accounting standards Taxation Definitions 41 C Definition of Groups The control concept Joint control Loss of control Group compositions Special cases Structured entities Limited partnerships Deemed separate entities 71 D Preparation of Consolidated Financial Statements and Annual Reports Lifecycle of subsidiaries Structures Accounting in group structures Shared services 80 vii

6 viii Contents 2.3. Accounting structures Reporting structures The preparation process Communication Subsidiaries Reporting The parent The group Organization 110 E Initial consolidation Basics Valuation levels The opening balance sheet Mergers and acquisitions The acquirer s view The group s view Purchase price allocation The acquirer The acquisition date Consideration transferred (purchase price) Acquired assets recognition and measurement General requirements on recognition and measurement Existing assets and liabilities Non-accounted assets and liabilities Goodwill and non-controlling interests Business vs. assets and liabilities Other aspects of purchase price allocations Cash flow statements Disclosures Consolidation techniques The parent s view The group s view Step one preparation for consolidation 203

7 Contents ix Step two consolidation Bargain purchases Special cases Reverse acquisitions Acquisitions achieved in stages Obtaining control in special situations Obtaining control without an acquisition or consideration Exchange of equity interests Mutual entities Multi-component contracts Regular employment contracts Share-based payments as non-controlling interests Share-based payment exchanges Pre-existing relationships Reacquired rights Shares of the parent company Non-material subsidiaries 241 F Subsequent consolidation Basics Preparation mechanics Tasks & timing Subsidiary preparation Equity consolidation Consolidation requirements Consolidation techniques Special cases Debt consolidation Intercompany relationships Consolidation techniques Differences Preventative activities Organizational aspects Simple settlement Netting 284

8 x Contents 5. Consolidation of income and expenses Intercompany relationships Consolidation techniques Profit & loss statement by function Profit & loss statement by nature Consolidation differences Unrealized profits Profit calculation Purchased assets Self-constructed assets Transfer pricing Basics Profit and cost determination Documentation and compliance Application in group accounting Consolidation techniques Non-controlling interests Allocation of profit and loss Consolidation techniques Special cases Group-level transactions Valuation adjustments and remeasurements Impairments Basics Impairment steps Cash-generating units Other issues Netting Reclassifications Special cases Intercompany dividends Basics Ordinary profit distributions Profit transfer agreements 379

9 Contents xi 9.2. Intercompany sale of non-current assets Consolidation of multi-level groups Characteristics of multi-level groups Consolidation techniques Special cases 415 G Associated companies Basics The equity method Preparation of and presentation in financial statements Consolidation techniques Initial consolidation Purchase price allocation Consolidations Issues around the initial consolidation Subsequent consolidation Adjustments Equity accounting Debt consolidation Unrealized profits and income & expense consolidations Disposals / Deconsolidation The parent s view The group s view IFRS 5 and disposals of associated companies Treatment of losses Impairments Special cases Associates and cash-generating units Partnership as associate Non-material associate becomes material 476 H Joint arrangements Basics Accounting and consolidation Joint operations Joint ventures 494

10 xii Contents 2.3 Interests in joint arrangements without joint control Disposals / Deconsolidation Joint operations The parent s view The group s view Joint ventures The parent s view The group s view IFRS 5 and disposals of joint arrangements 500 I Changes in control Basics The parent s view Increase in investments Financial investment to associate Financial investment to joint venture Financial investment to subsidiary Associate to joint venture Associate to subsidiary Joint venture to subsidiary Decrease in investments Associate to financial investment Joint venture to financial investment Joint venture to associate Subsidiary to financial investment Subsidiary to associate Subsidiary to joint venture Acquisitions and disposals without changes in control Financial investment Step acquisitions Partial disposals Associate Acquisitions and increases in capital Partial disposals and decreases in capital Joint venture 556

11 Contents xiii Retirement of parties Acceptance of new parties Subsidiary Step acquisition Partial disposals Special cases Discontinued operations Deemed disposals Other constitutions of control 567 J Disposals and deconsolidation Basics Transitional consolidation without external involvement Control Deconsolidation techniques The parent s view The group s view Calculation of gains and losses Asset and liability elimination Goodwill Other comprehensive income Consolidation tasks Journal entries Special cases Statement of cash-flow Fixed asset schedule Group-internal transactions Multiple arrangements and misuse Discontinued operations Step 1 IFRS 5 Check Step 2 The decision date Step 3 Measurement Measurement scheme and timing Individual assets Disposal groups 616

12 xiv Contents Impairment losses Step 4 Life as a discontinued operation Presentations Subsequent measurement Step 5 Sale of discontinued operations Step 6 Deconsolidation Special cases Distributions to owners Changes to sales plan, criteria not any longer met Purchase of subsidiary for immediate sale Disposal groups without any non-current assets 629 K Special areas Currency translation of foreign operations Basics Translation to the functional currency Monetary items Non-monetary items Translation tasks and techniques Changes in the functional currency Special cases Translation to the presentation currency The exchange rate Currency translations in practice Taxation Special cases Goodwill and non-controlling interests Currency effects of intercompany relationships Disposal of foreign operations Currency translation in multi-level groups Classifications of balance sheet items for translations Deferred taxes in groups Basics The temporary concept Accounting for deferred taxes Recognition 658

13 Contents xv Accounting for deferred taxes Measurement Differences Inside basis differences I Inside basis differences II Outside basis differences Special cases Intangible assets and goodwill Unused tax credits and tax losses Foreign currency translation Tax groups Partnerships Associates Restructuring Tax reconciliation Classification of deferred tax elements Cash flow statements Basics Group effects Changes in the group composition Consolidation Foreign currency translations Associates companies and joint ventures Other effects Preparation techniques Classification of cash flow elements Partnerships Restructuring of groups Basics Types of restructuring Restructuring methods Sales Mergers Splits Special case: Shareholder initiated restructurings 707

14 xvi Contents L Management consolidation Basics Business units Projects and cost units Projects Cost units Consolidation tasks and techniques Dependency between management consolidations and consolidated financial statements 730 M Consolidated financial statements The basics Statements Notes & group disclosures Structure of notes Accounting policies and group disclosures Disclosures Other disclosures Preparation process Management report 746 N Appendix I: Fair value measurement History Definition Measurement Market approach Cost approach Income approach Measurement techniques for selected assets and liabilities 758 Appendix II: IFRS US-GAAP comparison 760 Appendix III: IFRS List of IFRS IFRIC and SIC interpretations 768 Reference list 771 Glossary 773 Index 779

15 List of figures Fig. A 1 Business unit structure Flexing Cables 2 Fig. A 2 Group legal structure Flexing Cables 3 Fig. B 1 Overall transition procedure to apply IFRS Fig. B 2 Application options of IFRS 3 and IFRS Fig. B 3 Retrospective handling as a subsidiary based on a purchase price allocation and its subsequent accounting 17 Fig. B 4 Retrospective handling as an associate based on a purchase price Fig. B 5 allocation and its subsequent accounting 19 Retrospective handling as a financial investment based on fair value and its subsequent accounting 19 Fig. C 1 Structure of rights and interests 46 Fig. C 2 Workflow in determining joint control 58 Fig. C 3 Dependency between types of investment and their control 66 Fig. C 4 Typical example of a limited partnership structure 70 Fig. D 1 Lifecycle of a subsidiary in a group 74 Fig. D 2 Typical structure of an accounting corporate centre 79 Fig. D 3 Environment of a shared service centre 81 Fig. D 4 Example of an account structure of the split-account method 84 Fig. D 5 Example of an enhanced group chart of accounts 86 Fig. D 6 Accounting standard conversion at group level 87 Fig. D 7 Accounting standard conversion on reporting level 87 Fig. D 8 Accounting standard conversion at local level 88 Fig. D 9 Implementation in accounting systems 89 Fig. D 10 Closing process of the group 102 Fig. E 1 Lifecycle of a corporation: Initial consolidation 114 Fig. E 2 Accounting steps of the integration of a new subsidiary in the group 116 Fig. E 3 Accounting hierarchy in a group 117 Fig. E 4 Accounting step: IFRS conversion to prepare the opening balance sheet 120 Fig. E 5 Timing of the IFRS conversion during the initial consolidation 121 Fig. E 6 Accounting step: Purchase price allocation 136 Fig. E 7 Embedded purchase price allocation as part of the initial consolidation 137 Fig. E 8 Possible acquisition dates 141 Fig. E 9 Measurement period and its related accounting 149 Fig. E 10 Treatment of asset with no further use 155 Fig. E 11 Measurement period Adjustment of assets acquired and liabilities assumed 156 Fig. E 12 Workflow to initially account for intangible assets 162 Fig. E 13 Lease matrix 172 Fig. E 14 Goodwill calculation, purchased goodwill method 183 xvii

16 xviii List of Figures Fig. E 15 Goodwill calculation, full goodwill method 184 Fig. E 16 Workflow during measurement period 188 Fig. E 17 Example of a reconciliation schedule 195 Fig. E 18 Accounting step: Adjustments and consolidation 198 Fig. E 19 Reverse acquisitions: accounting allocations 218 Fig. E 20 Allocation scheme for unvested share-based payment 230 Fig. E 21 Classification of pre-existing relationships 232 Fig. E 22 Calculation scheme for the accounting of contractual pre-existing relationships 235 Fig. E 23 Non-material parent company 243 Fig. F 1 Lifecycle of a corporation: Subsequent consolidation 246 Fig. F 2 Preparation mechanics of consolidated financial statements 248 Fig. F 3 Required process tasks in subsequent consolidations 250 Fig. F 4 Timing of business transaction 272 Fig. F 5 Intercompany reconciliation matrix for debts 277 Fig. F 6 Structure of offset differences 278 Fig. F 7 Types of cut-off differences 281 Fig. F 8 Simple settlement process 283 Fig. F 9 Netting process 285 Fig. F 10 Example of multi-currency netting 286 Fig. F 11 Base transaction for immediate sale by external supply 288 Fig. F 12 Base transaction for immediate sale by inventory use 288 Fig. F 13 Base transaction for later sale 289 Fig. F 14 Base transaction for later sale in the subsequent year 289 Fig. F 15 Base transaction for own use 290 Fig. F 16 Transactions for own consumption 291 Fig. F 17 Underlying business model of profit & loss statement by nature 300 Fig. F 18 Intercompany reconciliation matrix for profit & loss 309 Fig. F 19 Unrealized profit scheme 310 Fig. F 20 Cost allocation scheme for transactions for later sale 314 Fig. F 21 Cost allocation scheme for transactions for own use 315 Fig. F 22 Dependency between transfer pricing and group accounting 316 Fig. F 23 Valuation chain in groups 318 Fig. F 24 Group loans 325 Fig. F 25 Basic guarantee applications 327 Fig. F 26 Tax dependencies 332 Fig. F 27 Reporting structure for transfer pricing purposes 336 Fig. F 28 Workflow of the impairment test 350 Fig. F 29 Dependency between nominal rate and real rate 357 Fig. F 30 Discount rate gross-up 359 Fig. F 31 Discount formula of value in use 360 Fig. F 32 Workflow of impairment test of a cash-generating unit considering corporate assets 365 Fig. F 33 Example of cash-generating units structure 366 Fig. F 34 Calculation of disposed goodwill 367

17 List of Figures xix Fig. F 35 Workflow of recording an impairment loss of a cash-generating unit 370 Fig. F 36 Timing of impairment loss and its reversal 372 Fig. F 37 Timing of profit distribution 376 Fig. F 38 Profit transfer options 377 Fig. F 39 System of group internal sale of non-current assets 381 Fig. F 40 Level II components of intercompany sales 384 Fig. F 41 Typical structure of multi-level groups 390 Fig. F 42 Treatment of non-controlling interests in multi-level groups 392 Fig. F 43 Structure of a chain consolidation 393 Fig. F 44 Calculation scheme of adjustments to non-controlling interests 394 Fig. F 45 Calculation scheme of goodwill and level III adjustments 394 Fig. F 46 Timing of acquisitions in multi-level groups 395 Fig. F 47 Structure of a simultaneous consolidation 405 Fig. F 48 Shareholder matrix 408 Fig. F 49 Multi-parent structures in groups 416 Fig. F 50 Reciprocal interests 419 Fig. F 51 Associates as parents 423 Fig. G 1 Purchase price allocation scheme of the initial consolidation of associates 433 Fig. G 2 Auxiliary calculation for the investments in associates 441 Fig. G 3 Adjustments as part of the subsequent consolidation of an associated company 444 Fig. G 4 Upstream and downstream transactions 452 Fig. G 5 Timing of associate disposal 459 Fig. G 6 Accounting for full disposals 462 Fig. G 7 Accounting and allocation of an associated company due to IFRS 5 for partial disposals 468 Fig. G 8 Auxiliary calculation for the investments in partnerships 476 Fig. H 1 Fig. H 2 Scope check of IFRS 11 to determine joint ventures and joint operations 481 Examples of contractual agreements on voting rights and the impact on joint control 484 Fig. H 3 Business transactions with joint operations 491 Fig. I 1 Lifecycle of a corporation: Transitional consolidation 502 Fig. I 2 Typical acquisition structure of step acquisitions 506 Fig. I 3 Timing of partial disposals of associates 528 Fig. I 4 Calculation of remaining book value 530 Fig. I 5 Calculation of remaining book value 535 Fig. I 6 Calculation of remaining book value 539 Fig. I 7 Timing of purchases of financial investments 546 Fig. I 8 Changes in joint ventures and their accounting 557 Fig. I 9 Fig. I 10 Calculation of attributable non-controlling interests based on percentages 561 Calculation of attributable non-controlling interests based on fair values 561

18 xx List of Figures Fig. J 1 Lifecycle of a corporation: Deconsolidation 570 Fig. J 2 Types of loss of control 574 Fig. J 3 Transfer of control 574 Fig. J 4 Goodwill calculation on disposal 586 Fig. J 5 IFRS 5 disposal timing and the decision date 609 Fig. J 6 Measurement scheme for disposal groups and discontinued operations 611 Fig. J 7 IFRS 5 Timing of valuation adjustments 612 Fig. J 8 Sample balance sheet including the presentation of discontinued Fig. J 9 operations 620 Sample profit & loss statement including the presentation of discontinued operations 621 Fig. J 10 Costs to sell as part of business combinations 629 Fig. K 1 System of currency translations 633 Fig. K 2 Translation scenarios 635 Fig. K 3 Exchanges differences due to different exchange rates 649 Fig. K 4 Example of temporary differences 657 Fig. K 5 System of deferred taxes 658 Fig. K 6 Deferred tax matrix 659 Fig. K 7 Inside basis differences - scheme 661 Fig. K 8 Outside basis differences of the parent 666 Fig. K 9 Outside basis differences of the group 666 Fig. K 10 Tax group fully integrated into a group 671 Fig. K 11 Tax group partially integrated into a group 671 Fig. K 12 Timing of tax groups 673 Fig. K 13 Combinations of temporary differences of partnerships 674 Fig. K 14 Preparation scheme of cash flow statements 687 Fig. K 15 Group restructuring: New parent 695 Fig. K 16 Group restructuring: Reallocation of subsidiary 696 Fig. K 17 Group restructuring: Mergers 697 Fig. K 18 Group restructuring: Splits 698 Fig. K 19 Group restructuring: Transactions under common control 698 Fig. K 20 Upstream merger 701 Fig. K 21 Downstream merger 701 Fig. K 22 Sidestream merger 702 Fig. K 23 Company dispersion 705 Fig. K 24 Company split-off 705 Fig. K 25 Company spin-off 705 Fig. L 1 Typical structure of a group 713 Fig. L 2 Group structure example Fig. L 3 Group structure example Fig. L 4 Example of an improper cost allocation 718 Fig. L 5 Example of a correct cost allocation 718 Fig. L 6 Data quadruple required for consolidation 718 Fig. L 7 Data multiple required for consolidation 718 Fig. L 8 Cost centre aggregation 719

19 List of Figures xxi Fig. L 9 Cost centre aggregation using more details 720 Fig. L 10 Elimination between two companies 721 Fig. L 11 Elimination with one hosting company 722 Fig. L 12 Elimination with two hosting companies 722 Fig. L 13 Intercompany consolidation matrix 723 Fig. L 14 Consolidation sheet for the determination of cost units for group purposes 730 Fig. M 1 Example of consolidated statement of changes in equity 737 Fig. M 2 Schedule of gains / losses generated due to divestitures 741 Fig. M 3 Schedule of net assets of a discontinued operation 742

20 List of tables Tab. A 1 List of examples 8 Tab. B 1 The group accounting suite: Division of work 13 Tab. B 2 Dependency between IFRS 3 and IFRS Tab. B 3 Calculation of investment in joint ventures 23 Tab. B 4 Calculation of retained earnings 33 Tab. B 5 General definitions 41 Tab. C 1 History of the control concept 44 Tab. C 2 Steps in determining control 54 Tab. C 3 Steps in determining joint control 56 Tab. E 1 Steps of the purchase price allocation 138 Tab. E 2 Auxiliary criteria in determining an acquirer 139 Tab. E 3 Tasks to separate financing costs from acquisition-related costs 148 Tab. E 4 Steps of identifying and measuring acquired assets and assumed liabi lities within purchase price allocations 153 Tab. E 5 Measurement bases of assets and liabilities 154 Tab. E 6 List of exceptions to the fair value principle 158 Tab. E 7 List of existing assets and liabilities subject to revaluation 159 Tab. E 8 List of non-accounted assets 165 Tab. E 9 List of potential contingent liabilities that may arise in business combinations 177 Tab. E 10 Goodwill calculation scheme, purchased goodwill method 184 Tab. E 11 Goodwill calculation scheme, full goodwill method 184 Tab. E 12 Checklist for bargain purchases 186 Tab. E 13 Steps in preparing the initial equity consolidation 205 Tab. E 14 Recommendation of additional IFRS accounts 207 Tab. E 15 Steps of the initial equity consolidation applying the purchased goodwill method 211 Tab. E 16 Steps of the initial equity allocation applying the full goodwill method 213 Tab. E 17 Accounting treatment of selected balance sheet items in reverse acquisitions 219 Tab. E 18 Parameter required in computing earnings per share 219 Tab. E 19 Checklist of employment contracts subject to business combinations 228 Tab. F 1 Execution order of subsidiary preparations 256 Tab. F 2 Equity reconciliation 268 Tab. F-3 Summary of consolidation entries applying P&L by function 299 Tab. F 4 Summary of consolidation entries applying P&L by nature 307 Tab. F 5 Reasons for business restructurings 322 Tab. F 6 Allocation of business transaction subject to transfer pricing to relationships and group transactions 328 Tab. F 7 Calculation scheme for balances of non-controlling interests 342 xxiii

21 xxiv List of Tables Tab. F 8 Profit allocation in profit & loss statement 343 Tab. F 9 List of assets and liabilities subject to valuation adjustments at group level 346 Tab. F 10 Calculation of valuation adjustment demand 347 Tab. F 11 Indicators for the execution of an impairment test 352 Tab. F 12 List of cash flows subjects 358 Tab. F 13 Table of assets and debts allocable to cash-generating units 364 Tab. F 14 Indicators for the reversal of an impairment loss 372 Tab. F 15 Calculation scheme of shares in subsidiaries using series 406 Tab. F 16 Calculation scheme of shares in subsidiaries with multiple ways 406 Tab. F 17 The shareholder matrix in a matrix formula (the initial matrix) 408 Tab. F 18 The inverse matrix 408 Tab. F 19 Series for multi-parent structures 417 Tab. F 20 Initial matrix for multi-parent structures 417 Tab. F 21 Inverse matrix for multi-parent structures 418 Tab. F 22 Series for reciprocal interests 421 Tab. F 23 Initial matrix for reciprocal interests 422 Tab. F 24 Inverse matrix for reciprocal interests 422 Tab. G 1 Calculation of the carrying amount of an investment in associates 427 Tab. G 2 Steps of the initial consolidation of associates 431 Tab. G 3 Steps of the purchase price allocation of associates 434 Tab. G 4 Comparison of calculation schemes between subsidiary and associate 437 Tab. G 5 Initial allocation of the auxiliary calculation scheme 441 Tab. G 6 Calculation of unrealized profit in upstream transactions 452 Tab. G 7 Calculation of unrealized profit in downstream transactions 453 Tab. G 8 Gain / loss of the sale of an associate, the parent s view 457 Tab. G 9 Gain / loss from the sale of an associate, the group s view 461 Tab. G 10 Gain / loss from the sale of an associate, the parent s view 461 Tab. G 11 Deconsolidation tasks upon the disposal of associates 464 Tab. G 12 Order of tasks regarding the treatment of losses 469 Tab. G 13 Execution order of impairments of associates 471 Tab. G 14 Calculation scheme for profits and capital of partnerships 474 Tab. H 1 Checklist of typical content of contractual agreements 483 Tab. H 2 Criteria on contractual terms 486 Tab. H 3 Calculation of unrealized profit in upstream transactions 491 Tab. H 4 Gain / loss of the disposal of a joint operation, the parent s view 498 Tab. H 5 Gain / loss of the sale of a joint venture, the parent s view 500 Tab. I 1 Matrix of changes in control 503 Tab. I 2 Tab. I 3 Tab. I 4 Calculation of the carrying amount in subsidiaries for a sales activity, Increase of investment 504 Calculation of the carrying amount in subsidiaries for a sales activity, decrease of investment 504 Execution order of step acquisitions by the parent for financial investments to associates 507

22 List of Tables xxv Tab. I 5 Calculation scheme for determining consolidation gain/ losses financial investments to associates 509 Tab. I 6 Calculation scheme of deemed costs 509 Tab. I 7 Execution order of step acquisitions by the parent for financial investments to subsidiaries 511 Tab. I 8 Calculation scheme for determining consolidation gain/ losses financial investments to subsidiary. 513 Tab. I 9 Calculation of goodwill / badwill 515 Tab. I 10 Execution order of step acquisitions by the parent for investments in associates 516 Tab. I 11 Calculation scheme for determining consolidation gain/ losses Tab. I 12 associated company to subsidiary, option Calculation scheme for determining consolidation gain/ losses associated company to subsidiary, option Tab. I 13 Calculation of goodwill / badwill 521 Tab. I 14 Scenarios of changes in joint ventures 526 Tab. I 15 Execution order of partial disposal of an associate 528 Tab. I 16 Accounting scenarios of remaining interests in associate 529 Tab. I 17 Gain / loss from a partial sale of an associate, the group s view 530 Tab. I 18 Gain / loss from a partial sale of an associate, the parent s view 531 Tab. I 19 Deconsolidation tasks upon the partial disposal of associates 531 Tab. I 20 Accounting scenarios of remaining interests in subsidiaries: financial investments 535 Tab. I 21 Gain / loss due to transition from subsidiary to financial investment applying the direct method, the group s view 537 Tab. I 22 Gain / loss due to transition from subsidiary to financial investment applying the indirect method, the group s view 537 Tab. I 23 Accounting scenarios of remaining interests in subsidiaries: associates 538 Tab. I 24 Gain / loss due to transition from subsidiary to associate applying the direct method, the group s view 540 Tab. I 25 Gain / loss due to transition from subsidiary to associate applying the indirect method, the group s view 541 Tab. I 26 Gain / loss due to transition from subsidiary to joint venture applying the direct method, the group s view 544 Tab. I 27 Gain / loss due to transition from subsidiary to joint venture applying the indirect method, the group s view 544 Tab. I 28 Gain / loss on partial disposal of financial investment 547 Tab. I 29 Calculation of new non-controlling interests 561 Tab. I 30 Calculation of equity movement in a purchase transaction of non-controlling interests 562 Tab. I 31 Calculation on non-controlling interests based on historical movements 562 Tab. I 32 Calculation of equity movement in a sales transaction of non-controlling interests 564 Tab. I 33 Application matrix of IFRS 5 on changes in control 566

23 xxvi List of Tables Tab. J 1 Gain / loss from the sale of subsidiaries, the parent s view 576 Tab. J 2 Gain / loss from the sale of subsidiaries using the adjusted direct method, the group s view 580 Tab. J 3 Gain / loss from the sale of subsidiaries using the adjusted indirect method, the group s view 580 Tab. J 4 Example of calculation scheme considering non-controlling interests 581 Tab. J 5 Gain / loss from the sale of subsidiaries using the non-controlling interests direct method, the group s view 581 Tab. J 6 Gain / loss from the sale of subsidiaries using the non-controlling interests indirect method, the group s view 582 Tab. J 7 Steps to adjust the statement of cash flows for disposals 599 Tab. J 8 Asset types as defined in IFRS Tab. J 9 Deconsolidation tasks by considering IFRS Tab. J 10 List of non-current assets requiring a different measurement base than IFRS Tab. J 11 Assets subject to an impairment test 613 Tab. J 12 Example of determining gains / losses from the sale of disposal group using the direct method 625 Tab. K 1 Indicators in determining the functional currency of a subsidiary 634 Tab. K 2 Translation steps of the conversion into a functional currency 639 Tab. K 3 Translation steps of the conversion into a presentation currency 646 Tab. K 4 Matrix of reclassifications of exchange differences from other comprehensive income to profit & loss 653 Tab. K 5 Classification of balance sheet items for foreign currency translations 656 Tab. K 6 Steps in preparing deferred taxes 662 Tab. K 7 Steps in recording deferred tax assets as part of business combinations 669 Tab. K 8 ABC of elements of tax reconciliations 677 Tab. K 9 ABC of deferred tax elements 678 Tab. K 10 List of adjustments in cash flow statements applying the indirect method 680 Tab. K 11 ABC of cash flow statement elements 690 Tab. K 12 Step-up tasks of assets and liabilities to be distributed to shareholders 710 Tab. M 1 Preparation order of notes to consolidated financial statements 745 Tab. N 1 List of assets subject to fair value measurement 752 Tab. N 2 Fair value hierarchy 754 Tab. N 3 Measurement methods for selected assets and liabilities 759

24 Preface Group accounting is often named as the flagship discipline of accounting. This is because group accounting is more than just financial accounting. It combines several disciplines under one umbrella: Financial accounting, management and cost accounting, taxation, law, organization and similar disciplines. Group accounting will even be complicated as there is often not only one jurisdiction to be considered. As a consequen ce, it may become a complex and challenging task to apply group accounting and to prepare consolidated financial statements. The challenge that needs to be mastered is not limited to large groups. Even small and medium-sized groups face the same or similar issues large groups have. To cope with these challenges, group accountants have to have not only an in-depth accounting knowledge but also knowledge on adjacent disciplines that are required for group accounting. Literature that deals with group accounting can be found everywhere. The typical literature often focuses on general and theoretical aspects of groups. Literature that deals with practical problems is rarer to find. But group accounting literature that deals with practical problems in an international environment is virtually not present. This is where this book starts. Inspired by the daily problems of clients in preparing consolidated financial statements both, in a local and an international environment and the feedback gained in group accounting trainings, this book was written not only to systematically introduce to group accounting but also to present solutions on dedicated group issues. Therefore, this book provides a mixture of theoretical aspects and practical solutions on group accounting and adjacent areas. It not only explains theoretical aspects of dedicated accounting tasks in preparing consolidated financial statements, it also provides answers on typical recurring problems group accountants are confronted with. Solutions presented are comprehensive down to journal entry level. As these problems do not exclusively apply to accounting topics, the book does not stick to pure accounting issues. It tries to present an integrated view on group accounting and to catch group issues by its entirety. The various accounting topics and the solutions provided may predestine this book as a compendium for practitioners who seek answers for their accounting issues. Due to the international focus of group accounting, group accounting subjects presented in this book are based on International Financial Reporting Standards. Even if several consolidation tasks and techniques are independent from any accounting standards, they are embedded in the examples to visualize their application under IFRS. A special emphasis is given to the new consolidation suite, IFRS 10 to IFRS 12. While this suite impacts the composition of the group, the companies to be consolidated and the way selected companies are consolidated are discussed in detail. I would appreciate if this book appeals to readers and group accounting pra ctitioners. The book in its current form is the result of long discussions on group accounting presentations, of discussions with clients and auditors regarding their most concerns on group accounting and the practical challenges groups face. In this context I would like to say thank you to my colleagues who are auditors, consultants and professors for their critical review of this book. Berlin, August 2014 Andreas Krimpmann xxvii

25 Introduction to the book This book is designed as a handbook for practitioners, written by a practitioner. It does not only introduce in group accounting and the tasks that are necessary to prepare consolidated financial statements, it also provides answers and solutions to selected group accounting issues. Due to the intention of this book, it has to be assumed that the reader of this book has appropriate knowledge on accounting as the book does not introduce in general accounting topics. Even if this book will give an overview of group accounting and discusses various aspects in preparing consolidated financial statements, the book should not be seen as the ultimate reference for all accounting details in applying IFRS on groups. Therefore, it is strongly recom men ded to apply the latest IFRS and refer to them when preparing consolidated financial statements. Only this official source offers the full set of ac coun ting and disclosure requirements. The structure of the book is based on the lifecycle of a company (regardless if it is a subsidiary, a joint venture or an associate) that is part of the group. General topics like accounting and legal requirements, definitions and organizational issues of groups are discussed upfront followed by the lifecycle of a company. The lifecycle itself is divided into the main stages of a company in the group: the initial and subsequent accounting, changes in the status of the company and finally the disposal from the group. General and special issues that impact the company and its accounting along the whole lifecycle complement the previous chapters. The preparation of consolidated financial statements, management consolidations, foreign currency translations, taxation and similar issues can be found in this area. As a practitioner s handbook, examples are presented for selected topics to visualize the accounting treatment. These examples are taken from the consolidation of a midsize group. They represent one possible option to deal with accounting issues. Nevertheless, other options are available to cope with accounting issues. Therefore, the examples presented should not be understood as the one and only or ultimate solution. Which solution is feasible depends on the group, its accounting structure and the accounting problem to be solved. To simplify the reading of this book, a set of conventions is used throughout the book. The following conventions are used in the book: Journal entries are presented using the Anglo-Saxon format. The structure of the balance sheet is based on the nature and liquidity of assets. All amounts presented in examples are in '000s of EUR unless otherwise mentioned. The presentation of figures in trial balances and calculations is following the accounting sign convention: Debits are presented as positive numbers and credits are presented as negative numbers. xxix