Financial reporting standard B-8 "Consolidated or combined financial statements" establishes:
E tates consolidated financial statements - are those financial statements present the financial position, results, changes in stockholders ' equity and cash flows on a consolidated basis of an economic entity formed by the controlling entity and its subsidiaries.
Controller - is the entity that controls one or more subsidiaries.
Subsidiary - is an entity over which another entity exercises control; the subsidiary may have a legal form similar or different to that of the parent; for example, it can be a corporation, a civil society, a trust, an association, a Specific Purpose Entity (EPE), etc.
Control - is the power to decide the financial and operating policies of an entity, in order to obtain benefits from its activities.
Control is presumed to exist when an entity owns, directly or indirectly through subsidiaries, more than half the voting power of another entity, unless under exceptional circumstances it is clearly demonstrable that such ownership does not constitute control. Control also exists when the entity owns half or less of an entity's voting power but:
- It has power over more than half of the voting rights by agreement with other investors; It has power to govern the financial and operating policies of an entity, established in laws, regulations, statutes, or, through some agreement; It has power to appoint or remove the majority of the members of the board of directors or equivalent governing body, when control of the entity is exercised through it; has the power to decide the majority of the votes in the meetings of the board of directors or body equivalent government, when control of the entity is exercised through it.
Consolidation procedure:
- Add the financial statements of the parent and subsidiaries, Eliminate accounts receivable against intercompany accounts payable, Eliminate the effects of intercompany operations (profits or losses) Eliminate investments in subsidiaries against stockholders' equity in the latter. non-controlling interest (portion of the stockholders' equity of a subsidiary that belongs to owners other than the parent).
Practical case
Initial balances of the parent and subsidiary companies, the former owns 98% of the shares of the latter.
B A L A N CE GENERAL 2015 A CTIVO | Controller
Balance initial |
S ubsidiary
Balance initial |
|
A ctive CIRCULANTE:
Cash and cash equivalents |
$ 20,000 | $ 15,000 | |
Accounts receivable | 0 | 60,000 | |
Accounts receivable from affiliates | 0 | 0 | |
Inventories | 300,000 | 0 | |
Total current assets | 320,000 | 75,000 | |
INVESTMENT IN SHARES | 49,000 | ||
T otal active | 369,000 | 75,000 |
P A S IVO
CIRCULATING P A S IVO:
Providers | 84,000 | 15,000 |
Accounts payable to affiliates | 0 | 0 |
Total liabilities | 84,000 | 15,000 |
C A P ITAL ACCOUNTING:
Social capital | 160,000 | 50,000 |
Retained earnings | 125,000 | 10,000 |
Net profit | 0 | 0 |
Total stockholders' equity | 285,000 | 60,000 |
T otal liabilities and stockholders ' equity $ 369,000 $ 75,000
Operations between parent and subsidiary companies.
- Holding company sells merchandise on credit to subsidiary company for $ 200,000 at a cost of $ 100,000 (50% profit margin). Subsidiary company sells merchandise on credit to an independent third party for $ 62,500 at a cost of $ 50,000 (25% profit margin).
Accounting record in holding company (without tax effects).
GENERAL BALANCE SHEET 2015 Controlling Controller
Balance Operations Balance Initial Initial DH final CIRCULATING ASSETS:
Cash and cash equivalents $ 20,000 $ 20,000
Accounts receivable 0 0
Accounts receivable from affiliates 0 1 150,000 150,000
Inventories 300,000 100,000 1 200,000
Total current assets 320,000 370,000
INVESTMENT IN SHARES 49,000 49,000
Total assets 369,000 419,000
PASSIVE
CURRENT LIABILITIES:
Providers | 84,000 | 84,000 |
Accounts payable to affiliates | 0 | 0 |
Total liabilities | 84,000 | 84,000 |
STOCKHOLDERS 'EQUITY:
Social capital | 160,000 | 160,000 | ||
Retained earnings | 125,000 | 125,000 | ||
Net profit | 0 | 100,000 | 150,000 | 50,000 |
Total stockholders' equity 285,000 335,000
Total liabilities and stockholders' equity $ 369,000 250,000 250,000 $ 419,000
COMPREHENSIVE INCOME STATEMENT 2015 | Controller | Controller | |||
Balance | Or perations | Balance | |||
Initial | DH | final |
Net sales $ 0 150,000 1 $ 150,000
Cost of sales 0 1 100,000 100,000
Net income $ 0 100,000 150,000 $ 50,000
Accounting record in a subsidiary company (without tax effects).
BALANCE SHEET 2015 Subsidiary Subsidiary
Balance Operations Balance initial ASSET final DH CURRENT ASSETS:
Cash and cash equivalents $ 15,000 $ 15,000
Accounts receivable 60,000 2 62,500 122,500
Accounts receivable from affiliates 0 0
Inventories 0 1 150,000 50,000 2 100,000
Total current assets 75,000 237,500
INVESTMENT IN SHARES 0
Total assets $ 75,000 $ 237,500
PASSIVE
CURRENT LIABILITIES:
Providers | 15,000 | 15,000 | |
Accounts payable to affiliates | 0 | 150,000 | 1 150,000 |
Total liabilities | 15,000 | 165,000 |
STOCKHOLDERS 'EQUITY:
Social capital | 50,000 | 50,000 | ||
Retained earnings | 10,000 | 10,000 | ||
Net profit | 0 | 50,000 | 62,500 | 12,500 |
Total stockholders' equity 60,000 72,500
Total liabilities and stockholders' equity $ 75,000 262,500 262,500 $ 237,500
COMPREHENSIVE INCOME STATEMENT 2015 | Subsidiary | Subsidiary | |||
Balance | Operations | Balance | |||
initial | DH | final | |||
Net sales $ 0 | 62,500 | two | $ 62,500 |
Cost of sales 0 2 50,000 50,000
Net income $ 0 50,000 62,500 $ 12,500
Procedure for the consolidation of financial statements:
- The financial statements of the parent company and subsidiaries are added (98% of the parent company). CxC vs CxP between the parent company and subsidiary company are eliminated. Effects of intercompany operations are eliminated (Profit in inventories and / or cost of sales if sold to a third) Permanent investments in subsidiaries are eliminated Determine non-controlling interest (For this example 2% of the stockholders' equity of the subsidiary).
Balance Sheet 2015 Controlling Subsidiary On Balance
Ba l a nza | Ba l a nza | Eliminations | general | |||||
A C TIVO | final | Final | Subtotal | DH | Consolidated | |||
CIRCULATING A C TIVE: | ||||||||
Cash and cash equivalents | $ 20,000 | $ 15,000 | $ 35,000 | $ 35,000 | ||||
Accounts receivable | 0 | 122,500 | 122,500 | 122,500 | ||||
Accounts receivable from affiliates | 150,000 | 0 | 150,000 | 150,000 | B | 0 | ||
Inventories | 200,000 | 100,000 | 300,000 | 33,333 | C | 266,667 | ||
Total current assets | 370,000 | 237,500 | 607,500 | 424,167 | ||||
I N VE R SI ON IN ACTIONS | 49,000 | 0 | 49,000 | 49,000 | D | 0 | ||
T otal active | 419,000 | 237,500 | 656,500 | 424,167 |
P A SIV O
P A SIV O CIRCULATING:
Providers | 84,000 | 15,000 | 99,000 | 99,000 | ||||||
Accounts payable to affiliates | 0 | 150,000 | 150,000 | B 150,000 | 0 | |||||
Total liabilities | 84,000 | 165,000 | 249,000 | 99,000 | ||||||
C A PI T A L ACCOUNTING:
Social capital |
160,000 | 50,000 | 210,000 | D , E 50,000 | 160,000 | |||||
Retained earnings | 125,000 | 10,000 | 135,000 | E 200 | 134,800 | |||||
Net profit | 50,000 | 12,500 | 62,500 | 150,250 | 116,667 | 28,917 | ||||
Controlling interest | 335,000 | 72,500 | 407,500 | 323,717 | ||||||
noncontrolling interest | 0 | 0 | 0 | 1,450 | E 1,450 | |||||
Total stockholders' equity | 335,000 | 72,500 | 407,500 | 325,167 | ||||||
T otal liabilities and stockholders ' equity | $ 419,000 | $ 237,500 | $ 656,500 | 350,450 | 350,450 | $ 424,167 | ||||
E sta do of Comprehensive 2015 | C ontroller | S ubsidiary | TO | E sta DO | ||||||
Ba l a nza | Ba l a nza | The im i nations | int result. | |||||||
f i nal | f i nal | S ubtotal | DH | C I ONSOLIDATED | ||||||
V and net SWTR | $ 150,000 | $ 62,500 | $ 212,500 | C 150,000 $ 62,500 | ||||||
C ost of sales | 100,000 | 50,000 | 150,000 | 116,667 C 33,333 | ||||||
Ut ili ty net | $ 50,000 | $ 12,500 | $ 62,500 | 150,000 116,667 $ 29,167 | ||||||
Ut ili ty net attributable to: | ||||||||||
Controlling interest
noncontrolling interest |
28,917
E 250 250 |
|||||||||
250 0 29,167
Checking effect on balance sheet and income statement.
- Net sales in the statement of comprehensive income correspond to sales of the parent and subsidiary with third parties. The cost of sales in the statement of comprehensive income corresponds to the cost of sales with third parties, just as if the sale had been made by the controlling company. That is, the cost of sales from the sale to the third party includes a 50% profit (sale of the parent company to a subsidiary), so the cost of the sale to the third party of $ 50,000, we eliminate the profit margin of $ 16,667 ($ 50,000 / 1.5), resulting in a consolidated cost of sales of $ 33,333. In the balance sheet, the inventory excludes the proportional profit on sale of the controlling company to a subsidiary company of $ 33,333, therefore we eliminated the profit margin of $ 33,333($ 100,000 / 1.5), resulting in an inventory of $ 66,667 plus $ 200,000 of inventory in the parent, results in a consolidated inventory of $ 266,667. If we add the profit margin we eliminate in points 2 and 3 above, for $ 16,667 and $ 33,333; respectively, results in $ 50,000, which is the profit on sale of inventory of the controlling company to the subsidiary.
How would the financial statements have turned out without the sale to a third party?
Balance Sheet 2015 Subsidiary Controlling Company A
Ba l to nce Balance Deletions
A C TIVO final final Subtotal DH Consolidated CURRENT ASSETS:
Cash and cash equivalents $ 20,000 $ 15,000 $ 35,000 $ 35,000
Accounts receivable 0 60,000 60,000 60,000
Accounts receivable from affiliates 150,000 0 150,000 150,000 B 0
Inventories 200,000 150,000 350,000 50,000 C 300,000 Total current assets 370,000 225,000 595,000 395,000
I N VE R SI ON IN SHARES 49,000 0 49,000 49,000 D 0
T otal active 419.000 225.000 644.000 395.000
P A SIV O
P A SIV O CIRCULATING:
Providers | 84,000 | 15,000 | 99,000 | 99,000 | ||
Accounts payable to affiliates | 0 | 150,000 | 150,000 | B 150,000 | 0 | |
Total liabilities | 84,000 | 165,000 | 249,000 | 99,000 | ||
C A PI T A L ACCOUNTING:
Social capital |
160,000 | 50,000 | 210,000 | D , E 50,000 | 160,000 | |
Retained earnings | 125,000 | 10,000 | 135,000 | E 200 | 134,800 | |
Net profit | 50,000 | 0 | 50,000 | 150,000 | 100,000 | 0 |
Controlling interest | 335,000 | 60,000 | 395,000 | 294,800 | ||
noncontrolling interest | 0 | 0 | 0 | 1,200 | E 1,200 | |
Total stockholders' equity | 335,000 | 60,000 | 395,000 | 296,000 |
T otal liabilities and stockholders ' equity $ 419.000 $ 225.000 $ 644.000 350.200 350.200 $ 395.000
Statement of Comprehensive Income 2015 C ontroller | S ubsidiary | TO | E sta DO | |
Ba l a nza | Ba l a nza | Eliminations | int result. | |
final | final | Subtotal | DH | Consolidated |
V e SWTR net $ 150,000 $ 150,000 $ 0 C 150,000 $ 0
C ost of sales 100,000 0 100,000 100,000 C 0
Ut ili ty net $ 50.000 $ 0 $ 50.000 150.000 100.000 $ 0
Final thoughts.
According to the financial reporting standards, the investment in shares in the Holding Company must be valued by the equity method. For the purposes of this case study, said investment is valued at its acquisition cost, having no effect at the level of consolidated financial statements, but individually in the financial statements of the holding company.
CPC Roberto Ruiz Velázquez
September 2016
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