Consolidations 101

Agenda

Why Companies Consolidate

Consolidation Considerations
Currency Conversions
Inter-company Eliminations
Partially Owned Subsidiaries
Adjustments for GAAP

Why do companies consolidate?

Legal requirements
Understand business performance
Analyze impact of investments, joint ventures, etc.

What do consolidators have to consider?

Basics

Data from wholly owned subsidiaries

Management/Legal hierarchies for consolidation

Added complexities

Prior period adjustments

Currency conversions

Inter-company transactions

Investments in other companies (not wholly owned)

Adjustments for varying GAAP requirements (US GAAP vs. IFRS)

What is important to consolidators?

Transparency: Ability to track where every adjustment comes from

Accuracy: It is critical that the calculations are accurate every time
Ease of maintenance: Ease of changing rules, ownership structures, etc.

The basics

International Motors, Inc.

IM Investments

IM International Factories

East US

Italy

Canada

Great Britain
France

Added Complexities: Currency Conversions

How do consolidators handle currency?

Average Rate: Typically applied to P&L and movement accounts

Ending Rate: Typically applied to Balance Sheet

Historical Rate: Applied to equity and other accounts where the exact translation rate is known

Sound easy?

CTA: Currency Translation Adjustment

FX Gain/Loss: Gain/Loss due to Currency Translation

Transactions in currencies other than LC

Currency Translation Adjustment

How do I measure the gain/loss due to currency translation?

Net Income: Difference in YTD Net Income @ AVG Rate and END Rate

Historical Equity: Difference in Equity @ END Rate and HIST Rate

Some organizations take the out of balance amount in the Balance Sheet in USD and book
this to CTA (assuming the LC Balance Sheet is in balance)

Currency Translation Adjustment

Demo

Currency Translation Adjustment

Effect on Cash Flow

Movements are typically calculated at the AVG Rate

But the opening/ending balance is translated at END Rate for the appropriate period

The difference becomes CTA, which can either be specified line by line or summarized into a
single line of the Cash Flow

Inter-company Eliminations

Basic

Accounts Payable vs. Accounts Receivable

Revenue vs. Costs

Can include many to many, one to one, one to many, or many to one relationships

More complex

Investment in Subsidiaries

Profit in Inventory

Inter-company Matching

How do companies go through the process today?

Typically happens during the close

Usually very manual & very time consuming

Usually requires corporate to be involved to resolve differences

Is there a better way?

Many global companies moving to a day by day inter-company reconciliation process

IC information is loaded daily into the application so the reconciliation process is ongoing and
can be completed prior to the month end close

Allows corporate to decentralize the process and allow subsidiaries to work out their own
differences

Inter-company Eliminations: Basic

Can be setup using the standard IC Eliminations rules

IntCo Dimension

IntCo property on Entity

ElimAcc property on Account

Use an Out of Balance Account to book differences

User defined & can exist anywhere in the account structure

Used to determine relationships between accounts

Two examples in the standard demo

Accounts Payable vs. Accounts Receivable

Revenue vs. Cost of Sales

Inter-company Eliminations: Basic

Company A records an inter-company sale of $5,000 with Company B

Company B should have a $5,000 cost of sales with Company A
But.

Rarely does it work so nicely

Timing differences

Invoicing problems

Translation differences

Inter-company Eliminations: Invest in

Subsidiary
Investment in Subsidiaries

Holding company makes an investment in a subsidiary. This sits on the holding companys
books as an Asset (Investment in Subsidiary).

Subsidiary receives an investment from the parent company. This sits on the subsidiarys
books as Equity.

When consolidating, I need to eliminate this transaction, or we are overstating our

assets/equity at a consolidated level.

Investment in Subsidiaries

BPC handles investment in subsidiaries very nicely.IF we have all the information
we need

Investment in Sub must be booked with an inter-company partner

We must be able to identify where the subsidiary has booked the investment on their books
(stock, etc.)

Inter-company Profit in Inventory

Company A sells $5,000 of parts to Company B

Company B receives the $5,000 of parts, but does not use these parts this month
the parts are received into inventory
Company A had a Cost of Sales of $2,000 on the $5,000 in parts sold to Company B
At a consolidated level we now have $3,000 profit (from Company A) in inventory
(Company B)

Inter-company Profit in Inventory

BPC can handle this situation nicely.IF we have all the relevant information

We must know how much profit is in inventory (this can be calculated based on a Gross
Margin assumption, if required)

Many customers elect to make a Journal Entry to resolve this, as they often lack the
necessary detail to automate the process

Consolidation of Partially Owned Entities

How are wholly owned entities consolidated?

At 100%, according to the Wholly Owned (Global) method

How are partially owned entities consolidated?

If < 20% owned, the cost method is used

If 20 50% owned, the equity method is used

If > 50% owned, the cost/equity method can be used, but equity is most common

NOTE: Joint ventures typically receive special treatment and utilize the equity method, even if
the ownership is < 20%

Cost Method

The cost method is used when the investors influence over the investee is
insignificant (typically < 20%)
Investment recorded at cost at the time of purchase
No need for adjustments to the investment except for extinuating circumstances

Dividends declared exceed earnings of the company

Permanent decline in the value of the company

Typically, the GL data for an entity that is < 20% owned is not required or utilized as
part of the consolidation

Equity Method
The equity method is used whenever the investor has significant influence over
the investee
Typically 20-50% owned
Can make exceptions for < 20% or > 50%

Investment recorded at original cost

Investment is increased with income and decreased with dividends from the
subsidiary
It is also common to have Purchase Differentials
Goodwill: Difference in fair market value of assets and cost of the investment
Difference between fair market value of assets and book value

A company may or may not require/use GL Data from entities < 50% owned

Majority Owned

Majority Owned is used when the investor owns > 50% of an entity
Majority Owned entities must be consolidated into the parent companys consolidated
financial results
The part of the subsidiarys income/balances not owned by the parent company are
booked to minority interest

Minority Interest is typically an expense (right before Net Income) that reduces Net Income on
the Income Statement (assuming a profitable subsidiary)

Minority Interest is typically a liability that increases the liabilities of the Consolidated
Company on the Balance Sheet

Adjustments for GAAP

Different countries have different regulatory requirements

These requirements may cause foreign entities to make adjustments to comply with
local/US GAAP
These are typically handled in a separate Data Source to keep visibility into
adjustments made for a specific purpose
These adjustments can be either manually made (JE) or automated

More to come.

The next logical question is: How do I setup these rules in BPC?
Well be addressing this in a future sessionstay tuned