how to handle a step acquisition - sap · how to handle a step acquisition with sap® ifrs starter...

How to handle a step acquisition

with SAP® Financial Consolidation 10.0, Starter Kit for IFRS?

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TABLE OF CONTENTS

INTRODUCTION ............................................................................................................................................... 3

WHAT ARE THE REGULATION REQUIREMENTS? ...................................................................................... 4

PRESENTATION OF THE BUSINESS CASE .................................................................................................. 5

HOW TO HANDLE A STEP ACQUISITION IN THE IFRS STARTER KIT? .................................................... 7 Reminder .......................................................................................................................................................... 7 Overview of the operating process ................................................................................................................ 7 Conversion rate table ...................................................................................................................................... 8 Consolidation scope ....................................................................................................................................... 8 Automatic journal entries ............................................................................................................................... 8 Manual journal entries..................................................................................................................................... 9 Retrieval of consolidated data ..................................................................................................................... 11

HOW DOES THE STEP ACQUISITION AFFECT FINANCIAL STATEMENTS? .......................................... 14 Consolidated Statement of Financial position ........................................................................................... 14 Consolidated statement of other comprehensive income ........................................................................ 15 Statement of cash flows................................................................................................................................ 16 Statement of changes in equity ................................................................................................................... 17

How to handle a step acquisition with SAP® IFRS Starter Kits Consolidation Practical Guide N°12 – November, 2012

3

INTRODUCTION

This practical guide is part of a new series of seven guides dedicated to help deal with the most frequent consolidation M&A requirements when using the SAP® Financial Consolidation 10.0, starter kit for IFRS. A first series was published to help deal with those cases when using SAP® Planning and Consolidation 10.0, starter kit for IFRS, version for SAP NetWeaver.

In this paper a business combination achieved in stages (step acquisition) is explained through a real use case scenario and presented in three steps:

what the IFRS text says,

how the business use case is handled in Financial Consolidation,

and what impact the CFO should expect on her/his company’s financial statements.

You can use this new paper to demonstrate SAP’s supremacy in addressing customers’ most complex and frequent business requirements.

SAP solutions for consolidation, part of SAP enterprise performance management (EPM) solutions, include SAP Financial Consolidation and SAP Business Planning and Consolidation. A starter kit for IFRS has been developed for each solution to perform, validate and publish a statutory consolidation in accordance with IFRS. These starter kits are based on a dynamic configuration easy to customize to specific requirement. They are provided with documentations.

To know more:

You will find further indications on how to deal with scope changes in the SAP® Financial consolidation 10.0, Starter kit for IFRS Operating guide.

To be kept informed of the most recent releases and new documentations:

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4

WHAT ARE THE REGULATION REQUIREMENTS?

Step acquisition refers to business combinations achieved in stages. In this business case, we will focus on an associate becoming a subsidiary.

A step acquisition is similarly treated as if the interest in the associate was disposed of and a controlling interest in a subsidiary was acquired.

Therefore, the different stages are the following:

Disposal of the associate

Derecognize the net share of assets (including goodwill) of the former associate

Recognize in profit and loss:

The difference between the carrying amount and the fair value at the acquisition date of the previously held interest in the associate

Any amounts previously recognized in OCI (i.e. fair value reserve, hedging reserve and foreign currency translation reserve). (see Practical guide Case #2)

Acquisition of the subsidiary

Apply the acquisition method to the controlling interest acquired (see Practical guide Case #1)

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5

PRESENTATION OF THE BUSINESS CASE

This business case is included in the set of data provided with the IFRS starter kit SP3 available by the end of 2012. It is possible to retrieve it using the following settings:

- CATEGORY: A- ACTUAL,

- DATA ENTRY PERIOD: 2021.12,

- CONSOLIDATION CURRENCY: USD

- SCOPE: CASE5,

- VERSION: IFRSYTD,

- REPORTING UNIT: P5, S5

Year Y2019

Parent company P5 (USD) purchased a 40% interest in associate S5 for USD40 000. S5 Fair value of net assets is USD80 000.

Goodwill calculation on the 40%:

Year Y2020

S5’s net income = USD19 000 S5’s available-for-sale (AFS) fair value change = USD 1 000 ____________

S5’s comprehensive income = USD20 000

Year 2021

P5 acquired a further 35% equity interest for cash consideration of USD55 000.

S5’s fair value of net assets = USD110 000

- Y 2019 equity (USD80 000)

- Y 2020 Comprehensive income (USD20 000)

- Y 2021 Revaluation of other PPE (USD10 000)

Y 2020 Y 2021

Parent P5 Parent P5

S5(Equity method)

40%

S5(Full consolidation)

75%

Consideration paid + 40 000

Share in S5 net assets - 32 000 80 000 x 40%

Goodwill = 8 000


6

Fair value of previously-held interest + 50 000 Y2019 cost of acquisition 40 000

Carrying amount under IAS28 - 48 000 Y2020 Comprehensive income 20 000 x 40% = 8 000

Recycling of fair value reserve (AFS) + 400 48 000

"Disposal" of S5 as an associate = 2 400

1 000 x 40%

S5 fair value of the 25% equity non controlling interests (NCI)= USD30 000

S5 previously held 40% equity interest fair value = USD50 000

Y2021: P5 individual accounts are as follows:

Y2021: S5 individual accounts are as follows:

(Reevaluation posted at consolidated level)

Calculation of the net gain/loss on “disposal” of the associate

Calculation of the new goodwill:

Before After

Investments in S5 40 000 95 000 Y2019 S5 Acquisition 40 000

Cash and cash equivalents 60 000 5 000 Y2021 S5 Acquisition 55 000

Assets 100 000 100 000 95 000

Issued capital 100 000 100 000

Retained earnings

Equity & Liabilities 100 000 100 000

Acquisition of 35%

PPE 80 000

Other non current financial assets 7 000

Cash and cash equivalents 20 000

Assets 107 000

Issued capital 50 000 Net assets Y2019 80 000

Fair value reserve (AFS) 1 000 Y2020 OCI 1 000

Retained earnings 49 000 Y2020 net income 19 000

Other current financial liabilities 7 000 100 000

Equity & Liabilities 107 000

S5 at

acquisition

date

Total P5 share NCI

Consideration paid for 35% in S5 + 55 000 55 000

Fair value of Non Controlling interests + 30 000 30 000

Fair value of previously-held interest + 50 000 50 000

Fair value of net assets of acquiree - 110 000 82 500 27 500

Goodwill = 25 000 22 500 2 500


7

HOW TO HANDLE A STEP ACQUISITION IN THE IFRS STARTER KIT?

REMINDER

The amounts stored in the database are identified thanks to a set of elements called dimensions.

The main dimensions are listed below:

The account dimension indicates which item of the balance sheet or P&L is impacted.

The flow dimension is used to identify and analyze the changes between the opening (flow F00) and closing (flow F99) balances.

The audit ID dimension identifies the origin of the data for input data, local adjustments, manual and automatic journal entries.

The in-built dimension (Journal entry number) provides a full audit trail as it retrieves the number of the manual or automatic journal entry. The use of this feature is illustrated in the chapter “How the step acquisition affects financial statements” where we show screenshots of the analysis reports that can be accessed by drill down from the financial statements.

OVERVIEW OF THE OPERATING PROCESS

The actions to perform to deal with an associate becoming a subsidiary are listed hereafter. A tick mark indicates which actions apply to case#5. In this business case, we will focus on year 2021.

Case

#5

Conversion rate table

Parent: Enter daily rate (spot rate) at the acquisition date if the parent company doesn’t report in the

consolidation currency

Package data entry

Use the date option for the acquisition on schedules PA2350 and PA2360 if the parent’s

currency is different from the consolidation currency

Account for the purchase price in schedules PA2100 and PA2300 P

Consolidation scope

Enter the new financial rate of the subsidiary P

Enter the new consolidation method (FC 100%) P

Manual journal entries:

Parent: Gain or loss on change of consolidation method audit ID INV31 (local currency) or INV32

(consolidation currency) using flows Y99 (P&L) and F02 (balance sheet)P

Subsidiary: Apply uniform accounting policies audit IDs ADJ91 or PACK11 on flow F03

Deferred taxes posting should use the same Audit ID as the one used to identify the base of the

deferred tax on flow F03

Fair value (recorded at 100 %) audit ID FVA11 on flow F03 P

Goodwill / bargain purchase audit ID GW01 on flow F03 P

Correct the effects of the change of consolidation method date (e.g. 6 months under equity

method and 6 months under full consolidation) audit IDs NCI11, CONS01

Correct intercompany eliminations with partners audit ID ELIM11, DIS11

Consolidation:

Run the consolidation processing P

Report navigator:

Validate the scope change accounting with several preconfigured reports P

If the change

occurs during

the period

Parent:


8

Company S5 is accounted for at equity (EM)at opening - 40% consolidation and interest rate

Company S5 is accounted for using full consolidation method (FC) at closing - 75% interest rate

Variation = +60% (consolidation rate) and +35% (financial interest rate)

(a)

(a)

(b)

(b)

(c)

(c)

CONVERSION RATE TABLE

By default, for any B/S account, flow F20-Increase/Purchase is converted using the average rate of the period. It is possible to perform a more accurate conversion based on the exact daily rate for the account/flow combination A1810-Investments in subsidiaries, JV and associates / F20,

This optional conversion process is based on:

An additional detail by date provided in the package in schedule PA2350,

Daily rates entered in the conversion rate table.

CONSOLIDATION SCOPE

In the consolidation scope, any entity accounted for using the equity method at opening and consolidated using full consolidation or proportionate method at closing is considered by the consolidation engine as a “Change in consolidation method”. This status triggers a specific process (see automatic journal entries below)

AUTOMATIC JOURNAL ENTRIES

When an entity has the status “change of method” in the scope, the consolidation engine reverses all the balance sheet data (assets, liabilities and equity) for this entity on flow F02 “old method” and loads the package data at opening (audit ID PACK01) on flow F03 “new method” using the new consolidation rate i.e. 100% here.

Opening Intercompany declarations and provisions are eliminated on flow F03 using audit IDs ELIM10 -Elimination of intercompany accounts, PRO10 - Elimination of internal impairment on investments, PRO20 - Elimination of internal provisions.

Investment elimination is posted at P5 on flow F20 “Increase” with counterpart in S5’s equity on flow F03 using audit ID INV10 - Elimination of investments

New goodwill is booked on flow F03 based on a manual declaration (see Manual journal entries hereafter) using audit ID GW10 - Booking of goodwill and bargain purchase

Allocation of equity between CI and NCI is posted on flow F03 according to the new interest rate

Accumulated other comprehensive income at opening is reclassified to retained earnings using audit ID FVA10 - Fair value for incoming entities on flow F03


9

(*) in the current version of Financial Consolidation, it is mandatory to specify a restriction on scope, variant or consolidation currency in order

to load a manual journal entry on an entity with a change of consolidation method .

(a) Posted on P5(b) Using dedicated audit ID INV31(c) Using a specific accouting scheme :

- credit account "P1615 - Gain or Loss on sale of share" for the result on the "disposal" of S5 calculated as follows Fair value of previously held interest +50 000Carrying amount under IAS28 - 48 000

Recycling of fair value reserve (AFS) + 400 - debit account "A1810 Investment in subsidiaries" on flow F02 for the difference between the fair value and the net book valueof the 40% interest in associate (50,000 – 40,000). This increase of the investment in P5 will trigger an increase of investment

elimination in S5 equity on flow F03- credit account "E1610 - retained earnings" on flow F02, which will neutralize the impact of the change of method on the

consolidated retained earnings on flow F02 (see screenshot below)

(a)

(b)(*)

(c)

At parent P5 At subsidiary S5

MANUAL JOURNAL ENTRIES

A manual journal entry (#17) posts the gain or loss on “disposal” of S5 as an associate, using audit ID INV31 – Adjustments on gain / losses on disposal of a subsidiary, JV or associate (local currency)


10





(a) Posted on S5(b) Using dedicated audit ID FVA11(c) in S5 currency (USD)

(d) Posted on flow F03 "Change of method - NEW"

(a)

(b)

(c)

(*)

(d)(d)

(a) Posted on S5(b) Using dedicated audit ID for goodwill declaration "GW01"(c) in S5 currency (USD)

(d) Posted on technical account for goodwill declaration "XA1310"(e) Posted on flow F03 "Change of method - NEW"(f) Split between P5 and TP-999 (full goodwill)

(*)

(a)

(b)

(c)

(d) (e)

(f)



(a) Posted on S5(b) Using dedicated audit ID for goodwill declaration "GW01"(c) in S5 currency (USD)

(d) Posted on flow F03 "Change of method - NEW"

(a)

(b)

(c)

(d)

(*)

A manual journal entry (#13) is posted at S5 to recognize new fair value adjustments on net assets of held company S5 using a dedicated audit ID FVA11 – Fair value for incoming entities (central)-Man

A manual journal entry (#14) is posted to declare the new goodwill using a dedicated audit ID

GW01 –Disclosure of goodwill (gross value and impairment) and bargain purchase – Man


11

RETRIEVAL OF CONSOLIDATED DATA

After running the consolidation, the consolidated balance sheet is as follows:

(a) Flow F00 shows the opening consolidated balance sheet of the group with S5 under equity method

(b) Flow F02 shows the change in consolidation method of S5 (reversal of equity method)

(c) Flow F03 shows the change in consolidation method of S5 (apply full consolidation)

Flow F03 is balanced

(d) Gain on"disposal" of S5

(e) Purchase price of 35% of S5

Cash outflow

Clearing accounts used to post investment elimination are balanced

The flow F02 (old method) should balance with the P&L account (P1615 - Gains or losses on sale of shares)

Figure 1- Report C31-05: Balance Sheet by flow

(a) (b) (c)

(d)

(e)

(e)


12

Figure 2- BS by flow and audit ID (extract)

(a) S5 package data

Opening data (F00) reversed on f low F02 (reversal of equity method)

S5 new consolidation method (full) applied on f low F03

(b) S5 package data allocation to NCI

On flow F02 (reversal of equity method)

On flow F03 (new consolidation method)

(c) Manual JE posted by P5 (see consequence of accounting for the difference betw een fair value and net book value of previously held investment on point h)

Gain on the change in consolidation method = 2 400

Transfer of S5 net income previously held (19 000 x 40% = 7 600 )

(d) Reclassif ication of fair value reserve at opening to retained earnings

(e) New fair value manual JE

(f) Allocation to NCI of audit ID FVA10 and FVA11

(g) Reversal of opening goodw ill (F02) and new goodw ill posting (F03)

(h) Investment elimination

Fair value of 40% previously held interest 50,000

Y2021 cash consideration paid 55,000 (+35%)

(a)

(a)

(a)

(b)

(b)

(b)

(b)

(b)

(c)

(e)

(d)

(d)

(b)

(f)

(f)

(f)

(f)

(g)

(h)

(g)

The equity movements are explained below:


13

Figure 3- Report C32-05: General Ledger by audit ID, share, JE number

(a) Automated entries processed by the consolidation engine

(b) Manual journal entries New fair value (CENTRAL - 13)

Gain on sale (CENTRAL - 17)

(c) Automated entries processed by rules (entry number + code of the rule + share detail)

Reclassification of OCI to retained earnings (AUTOCO - 2 )

Allocation to NCI (AUTOCO - 8 & AUTOCO - 9 )

Goodwill (AUTOCO - 4) with share detail

investment elimination (AUTOCO - 6 & AUTOCO - 7) with share detail

(a)

(a)

(b)

(b)(b)

(a)

(c)

(c)

(c)

Analysis of account E1610 Retained earnings


14

Figure 4- Report C11-05: Statement of Financial Position

Figure 5- Report C32-05: General Ledger by audit ID, partner, JE number (Flows)

As stated previously, the change in consolidation method (from equity method to full consolidation) impact the following accounts:

(a) the non-current assets(b) the cash(c) the equity

You can drill down from any item of the statement of financial position to the detail by account, flows, audit ID and journal entry

(a)

(b)

(c)

HOW DOES THE STEP ACQUISITION AFFECT FINANCIAL STATEMENTS?

CONSOLIDATED STATEMENT OF FINANCIAL POSITION


15

Figure 6- Report C11-15: Statement of Other Comprehensive Income

Figure 7- Report C23-05: Statement of Other Comprehensive Income breakdown

You can drill down to the breakdown by account and flow and check that the comprehensive income attributable to owners of parent is due to:- the gain on "disposal" of S5 (+ 2 400)

- the reversal of the group share in S5's fair value reserve at opening (-400)

CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME


16

STATEMENT OF CASH FLOWS

Figure 8- Report C11-25: Statement of Cash Flows

Figure 9 – Report C23-10: Statement of Cash Flows breakdown

Figure 4- Report C11-05: Statement of Financial Position

You can drill down to the breakdown by account and flow and check that the cash outflow is due to:- the acquisition of 35% of S5 (USD -55 000)

- S5 cash incoming due to the consolidation method (USD20 000)


17

Figure 10- Report C11-30: Statement of changes in equity

As expected, the changes in equity come from:(a) the gain on "disposal" of S5 as an associate (USD 2 400)(b) the reversal of S5's fair value reserve at opening (USD -400)

(c) the 25% ingoing NCI measured at fair value (USD 30 000)

(a)

(c)

(b)

STATEMENT OF CHANGES IN EQUITY

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