Consolidations 101

AgendaWhy Companies ConsolidateConsolidation ConsiderationsCurrency ConversionsInter-company EliminationsPartially Owned SubsidiariesAdjustments for GAAP

Why do companies consolidate?Legal requirementsUnderstand business performanceAnalyze impact of investments, joint ventures, etc.

What do consolidators have to consider?BasicsData from wholly owned subsidiariesManagement/Legal hierarchies for consolidationAdded complexitiesPrior period adjustments Currency conversionsInter-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 fromAccuracy: It is critical that the calculations are accurate every timeEase of maintenance: Ease of changing rules, ownership structures, etc.

The basics

Added Complexities: Currency ConversionsHow do consolidators handle currency?Average Rate: Typically applied to P&L and movement accountsEnding Rate: Typically applied to Balance SheetHistorical Rate: Applied to equity and other accounts where the exact translation rate is known Sound easy?CTA: Currency Translation AdjustmentFX Gain/Loss: Gain/Loss due to Currency TranslationTransactions in currencies other than LC

Currency Translation AdjustmentHow 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 RateSome 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 AdjustmentEffect on Cash FlowMovements are typically calculated at the AVG RateBut the opening/ending balance is translated at END Rate for the appropriate periodThe difference becomes CTA, which can either be specified line by line or summarized into a single line of the Cash Flow

Inter-company EliminationsBasicAccounts Payable vs. Accounts ReceivableRevenue vs. CostsCan include many to many, one to one, one to many, or many to one relationshipsMore complexInvestment in SubsidiariesProfit in Inventory

Inter-company MatchingHow do companies go through the process today?Typically happens during the closeUsually very manual & very time consumingUsually requires corporate to be involved to resolve differencesIs there a better way?Many global companies moving to a day by day inter-company reconciliation processIC information is loaded daily into the application so the reconciliation process is ongoing and can be completed prior to the month end closeAllows corporate to decentralize the process and allow subsidiaries to work out their own differences

Inter-company Eliminations: BasicCan be setup using the standard IC Eliminations rulesIntCo DimensionIntCo property on EntityElimAcc property on AccountUse an Out of Balance Account to book differencesUser defined & can exist anywhere in the account structureUsed to determine relationships between accounts Two examples in the standard demoAccounts Payable vs. Accounts ReceivableRevenue vs. Cost of Sales

Inter-company Eliminations: BasicCompany A records an inter-company sale of $5,000 with Company BCompany B should have a $5,000 cost of sales with Company ABut.Rarely does it work so nicelyTiming differencesInvoicing problemsTranslation differences

Inter-company Eliminations: Invest in SubsidiaryInvestment in SubsidiariesHolding 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 SubsidiariesBPC handles investment in subsidiaries very nicely.IF we have all the information we needInvestment in Sub must be booked with an inter-company partnerWe must be able to identify where the subsidiary has booked the investment on their books (stock, etc.)

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

Inter-company Profit in InventoryBPC can handle this situation nicely.IF we have all the relevant informationWe 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 EntitiesHow are wholly owned entities consolidated?At 100%, according to the Wholly Owned (Global) methodHow are partially owned entities consolidated?If < 20% owned, the cost method is usedIf 20 50% owned, the equity method is usedIf > 50% owned, the cost/equity method can be used, but equity is most commonNOTE: Joint ventures typically receive special treatment and utilize the equity method, even if the ownership is < 20%

Cost MethodThe cost method is used when the investors influence over the investee is insignificant (typically < 20%)Investment recorded at cost at the time of purchaseNo need for adjustments to the investment except for extinuating circumstances Dividends declared exceed earnings of the companyPermanent decline in the value of the companyTypically, the GL data for an entity that is < 20% owned is not required or utilized as part of the consolidation

Equity MethodThe equity method is used whenever the investor has significant influence over the investeeTypically 20-50% ownedCan make exceptions for < 20% or > 50%Investment recorded at original costInvestment is increased with income and decreased with dividends from the subsidiaryIt is also common to have Purchase DifferentialsGoodwill: Difference in fair market value of assets and cost of the investmentDifference between fair market value of assets and book valueA company may or may not require/use GL Data from entities < 50% owned

Majority OwnedMajority Owned is used when the investor owns > 50% of an entityMajority Owned entities must be consolidated into the parent companys consolidated financial resultsThe part of the subsidiarys income/balances not owned by the parent company are booked to minority interestMinority 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 GAAPDifferent countries have different regulatory requirementsThese requirements may cause foreign entities to make adjustments to comply with local/US GAAPThese are typically handled in a separate Data Source to keep visibility into adjustments made for a specific purposeThese 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