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Consolidation of Investments

Purpose
You can use this component to eliminate equity ownership in the consolidation units that
belong to the consolidation group.
Integration
Before performing consolidation of investments, you must first:
Customize the master data (organizational units, consolidation chart of accounts, and
so on
Collect the reported financial data
Collect the additional financial data
!ost standardizing entries
!erform currency translation
"alidate the standardized financial data (if necessary
Features
Consolidation of investments eliminates the parent#s investments (upper unit with its
proportionate share in the stoc$holders# equity of the subsidiary (investee.
%he following accounting techniques are available:
1. !urchase method
&n accounting technique of the consolidation of investments, which is used when the parent
unit of a consolidation group e'ercises a dominating influence over a specific investee unit.
(ominating influence e'ists if the parent unit:
directly or indirectly owns the ma)ority of the investee#s voting rights, or
is able to e'ercise such influence due to a contract, the articles of incorporation, and
so forth
2. *quity method
&n accounting technique used for consolidating affiliates, as well as subsidiaries or )oint
ventures (all of which are refered to as consolidation units that are not consolidated using the
purchase or proportional methods.
+eported financial data of an equity unit is not ta$en into account in the consolidated financial
statements. %herefore, you do not need to enter that data into the Consolidation system.
,nly changes in the stoc$holders# equity of the company are ta$en into consideration- these
affect, in particular, the investment value stated in the consolidated balance sheet.
%herefore, the term .valuation method. also applies here.
%he system supports the following activities
/irst consolidation
%he activity in which a consolidation unit is consolidated for the first time.
&ll consolidation methods are similar in that the boo$ values of the immediate upper units are
compared to their proportionate shares in the equity of the investee units. &ny resulting debit
differences are allocated to fair value ad)ustments (hidden reserves and goodwill, and any
minority interest is disclosed.
0ubsequent consolidation
& consolidation of investments activity that is triggered by internal financing (but not by
increases or reductions in capitalization.
1hen applying the purchase method or proportional consolidation, the activity ad)usts
minority interests to account for changes in investee equity. 1hen applying the equity method,
the activity updates the immediate investors# equity in earnings of affiliates (investment boo$
value to account for the changes of the proportional equity of the unit being consolidated.
Business practice deviates from the above and also refers to all consolidation activities that
succeed first consolidation as .subsequent consolidations..
(istribution of dividends
&mortization of goodwill
& reduction in the value of goodwill.
2oodwill is amortized (for e'ample, due to statutory regulations in one of the following ways:
By distributing the investment boo$ value over the periods of e'pected use
By performing an impairment test and then, if applicable, by posting an e'traordinary
amortization entry to reduce the investment boo$ value
3ncrease in capitalization
+eduction in capitalization
0tep acquisition
!artial transfer
%otal transfer
!artial divestiture
%otal divestiture
Change in indirect investment
1. 3ndirect transfer
%he system can use the totals database and4or additional financial data as the source of data
for changes in investments, changes in equity, and equity holdings ad)ustments. You can
record goodwill data as additional financial data.
Constraints
%he following accounting techniques are not yet available: proportional consolidation, mutual
stock method, and cost method.
%he activities increase in capitalization and reduction in capitalization are limited to rising or
constant percentages of ownership.
%he system currently does not support the following activities or functions: recording and
amortization of fair value adjustments; liquidation; reclassification of treasury stock;
amortization and writeup of investments; horizontal and vertical combinations; method
change; organizational change; push-down method; and investors not fully consolidated.
Business Background
%he following sections e'plain the business bac$ground behind consolidation of investments.
%his includes:
1hy consolidation of investments is necessary
5ow consolidation of investments adheres to 3/+0, 60 2&&! and 2erman 52B, and
what their 7utual and (isparate /eatures are
1hat special considerations there are in consolidation of investments in a multilevel
group
Why Consolidate Investments?
8et9s use this e'ample to illustrate why this type of consolidation is required:
%he balance sheet of model company & shows the following data:
&ll assets of company & are transferred a new operating company B. 3n turn, company &
receives stoc$ ownership in operating company B.
& corporate group is established by founding company B:
%he balance sheet data of both companies are tallied to produce an aggregated balance
sheet for the business entity of & and B.
3f you compare the aggregated balance sheet of & and B with the original balance sheet of &,
you see that combining individual statement data leads to a duplication of the assets,
liabilities and stoc$holders# equity.
3n reality, however, neither the assets nor the equity and liabilities of the two companies have
changed.
%he reason for this duplication is: &fter transferring its productive assets to B, company &
owns stoc$ at the value of B9s equity.
Conversely, B9s equity reflects the investment share held by its parent (&.
Consolidation of investments .neutralizes. the new investment relationship by eliminating the
investment (&9s investment in subsidiary against the equity of the subsidiary.