When carrying out the study of the financial audit, which should contribute to the accuracy of the accounting information presented in the financial statements, the subject of the consolidation of these statements should be analyzed, since these reflect the situation of the resources that owns and controls an entity, which in cases where it has a large amount of resources may have total or partial ownership of capital of another entity, which would become its subordinate and which should be included in the information of the resources that owns the womb. Also, due to the importance that the issue of the consolidation of financial statements has taken due to the determination of taxes in our country, some of the concepts and regulations related to the consolidation of financial statements should be studied.Below we will describe the rules and concepts regarding the consolidation of financial statements that according to our criteria should be studied in order to better understand the subject.
Definition
Consolidated financial statements are those that present the financial situation, the results of operations, changes in equity, as well as the cash flows of the parent or parent and its subordinates or dominated, as if they were those of a single economic entity.
Understanding by subordinate or dominated entity that which according to article 261 of the Commercial Code is found in the following cases:
- When more than 50% of the capital belongs to the parent, directly, or through or in concurrence with its subordinates. When they have the right to cast votes constituting the minimum decisive quorum in the shareholders' meeting, or in the assembly or board of directors. The related companies share 50% or more of the profits of the profits.
The consolidation of financial statements is regulated in external Circular No. 002 of 1998 issued by the Securities Superintendence.
Direct control and indirect control
Pursuant to article 260 of the Commercial Code, control may be direct or indirect according to the relationship exercised by the parent with the subordinate, then over the subsidiaries the parent or controlling party exercises direct control, and over the subsidiaries the parent or controller exercises indirect control.
Exclusive control and joint or shared control
According to article 261 of the Commercial Code, which establishes the possibility that control may be exercised by a singular number or by a plural number of people, then the first case is called exclusive control, and the second is called joint or shared control.
The parent company must present accounting information that describes the actual situation of the control exercised by the parent company over the subsidiaries. Accounting tools must be used for each case, since the forms of control, the resources and responsibilities disclosed, differ in one and the other.
What are the consolidated financial statements
These are understood to be those that make up the so-called basic financial statements established in article 22 of Decree 2649 of 1993, but referred to a parent or controlling entity and its subordinates or controlled entities, these are:
- Consolidated balance sheet, Consolidated statement of income, Consolidated statement of changes in equity, Consolidated statement of changes in financial position, and Consolidated statement of cash flows.
Methodology for the consolidation of financial statements
For the consolidation of financial statements, the re-expression rules of circular 002 of 1998 of the Securities Superintendence must be applied, in which it is established that each and every one of the items that compose them must be increased in the corresponding PAAG. The consolidated financial statements must be prepared and presented on the same dates that the individual financial statements are presented at the end of the year.
Taking into account the provisions of article 122 of Decree 2649 of 1993, in which "an economic entity cannot own or owe itself, nor can it make profits or surpluses or losses from operations carried out with itself", through the financial statements All the balances and reciprocal operations must be eliminated at the cut-off date and for the period to which they refer.
The presentation and design of the consolidated financial statements should be carried out in an orderly, harmonious and homogeneous manner, so the consolidated financial statements should not be limited to presenting the mathematical summation of similar items or to basic arithmetic calculations, without determining the nature of the components of each financial statement, in relation to the group of companies participating in the process.
The individual financial statements are the base component for the consolidation for this they must be purified with the eliminations for balances and reciprocal operations developed between the economic entities. These states must meet, as a minimum, the following requirements:
- Correspond to the same cut-off date and refer to the same accounting period, for the latter case not only in time, but also in its duration.Have been prepared under uniform accounting principles, policies, methods and procedures, regarding events and Similar transactions. For financial statements corresponding to entities located abroad, be converted to the functional currency and expressed in accordance with the accounting standards applicable in Colombia. Have reciprocal balances analyzed and reconciled.
Exceptions
There are some exceptions or limitations in the inclusion of individual financial statements for the formulation of the consolidated ones. Said limitations are established in article 122 of Decree 2649 of 1993, are applicable to the parent or controlling entities subject to the exclusive control of the Securities Superintendence, and are:
- Subsidiaries in which the control is only temporary, because its inclusion in the consolidation would distort the figures from one period to another. A temporary investment is considered to be one that is represented in easily disposable securities or documents on which the investor has the serious purpose of realizing the economic right that they incorporate with a third party outside the business group or with whom they do not maintain a subordination relationship, neither as parent or controlling entity or as subordinate, in a period not exceeding one calendar year, or with maturity or redemption period equal to or less than one calendar year, in both cases, counted from the balance cut-off date general in which they are revealed.Subsidiaries in which control has been lost due to having been intervened by the competent authority and such measure has this consequence, because it is in a state of liquidation, a concordant process, administrative liquidation, compulsory liquidation or any other process is being carried out. in pre-operative stage. Subsidiaries in other countries, where there are restrictions for the remittance of profits or monetary or political instability.
The special situations that motivate the exclusion of the individual financial statements of certain entities, in the formulation of the consolidated statements of the parent or controlling entity, must be disclosed in the notes to the financial statements.
Pre-consolidation requirements
Before consolidation, the following requirements must be taken into account:
- For the purposes of consolidating financial statements, the parent and its subordinates must prepare financial statements on the same date and for the same period. In any case, consolidated financial statements must be prepared, at the same cut-off date established for the individual financial statements at the end of. In exceptional cases and for reasons fully justified before the Securities Superintendence, financial statements prepared at different dates may be consolidated as long as these do not exceed three months and it is considered that said financial statements are not significantly affected subsequently. The information to be used in the consolidation of the financial statements must be expressed under the same accounting criteria and methods.This requirement may not be applicable when there are accounting provisions or accounting principles different from those standards and principles followed by the company. When this is presented, the corresponding adjustments must be made, affecting only the consolidated financial statements, except when the effect of said situation is not significant.. Consolidated financial statements must be prepared using uniform accounting policies for similar transactions and events in similar circumstances. If it is not practical to use uniform accounting policies in the preparation of the consolidated financial statements, this fact should be disclosed, together with the proportions for each of the major accounts, the items in the consolidated financial statements to which the accounting policies were applied. different.The parent company and its subordinates must uniformly apply accounting principles for similar transactions and events in similar circumstances. For example, all the companies that make up the consolidated financial statements must apply the same method for the valuation of their inventories, fixed assets, etc. In the case of financial statements that have been prepared on different bases from generally accepted accounting principles, they must Convert to these before consolidation. The financial statements of each of the companies to be consolidated must be signed by the respective legal representative and certified or audited by the statutory auditor. In the absence of a statutory auditor in any of the companies to be consolidated, the financial statements must be certified.Reciprocal transactions and balances must be reconciled in order to avoid the existence of differences at the time of their elimination.
Consolidation procedure
In order to prepare consolidated financial statements, in accordance with the provisions of circular No. 002 of 1998 of the Securities Superintendence, issuers of securities subject to the exclusive control of the Securities Superintendence must follow the following procedure:
- Determine which is the parent and which the subordinate companies Obtain the financial statements of the parent and the companies to Check the homogeneity of the accounting bases used by the companies to be consolidated. If differences are found and are significant, the corresponding adjustments must be made to the consolidated one. If there are subordinate companies abroad, their financial statements must be converted into Colombian pesos before starting the consolidation process. And they must be expressed in accordance with the accounting standards applied in Colombia. Check that the reciprocal balances between companies coincide. If they do not coincide, prepare the corresponding adjustments. Determine the type of connection, to establish the way to carry out the consolidation. If it's a direct link,the procedure consists of taking the financial statements of the parent and consolidating with its subordinates. If it is an indirect relationship, the process is carried out in stages, that is, the second and third level holding companies (or subgroups) are determined.) to consolidate at these levels and subsequently collect the consolidation of each subgroup and proceed to its consolidation with the final matrix of the group.When in a business group to be consolidated there are entities belonging to the financial sector and non-financial entities, they must be initially consolidated by Separate financial and non-financial entities. These subconsolidated serve as the basis for the preparation of the total consolidated, which can be prepared at the PUC group level (two digits). In this case,Both the total consolidated and the subconsolidated must be presented to the shareholders' meeting and the Superintendency of Securities, using the formats established for this purpose. Prepare the worksheet for consolidation. Balances and transactions between consolidated companies must be eliminated in its entirety.Determine the minority interest or the property of the controller, as the case may be in accordance with the provisions of numbers 6.3. and 6.4. of Chapter II of Title One of this External Circular, which must be presented in the consolidated balance sheet separate from liabilities and capital. Prepare the consolidated financial statements with their respective notes.using the formats established for this purpose. Prepare the worksheet for the consolidation. Balances and transactions between the consolidated companies must be eliminated in their entirety. Determine the minority interest or the non-controlling interest, as the case may be. with what is established in numerals 6.3. and 6.4. of Chapter II of the First Title of this External Circular, which must be presented in the consolidated balance sheet separate from liabilities and capital. Prepare the consolidated financial statements with their respective notes.using the formats established for this purpose. Prepare the worksheet for the consolidation. Balances and transactions between the consolidated companies must be eliminated in their entirety. Determine the minority interest or the non-controlling interest, as the case may be. with what is established in numerals 6.3. and 6.4. of Chapter II of the First Title of this External Circular, which must be presented in the consolidated balance sheet separate from liabilities and capital. Prepare the consolidated financial statements with their respective notes.as the case may be in accordance with the provisions of sections 6.3. and 6.4. of Chapter II of the First Title of this External Circular, which must be presented in the consolidated balance sheet separate from liabilities and capital. Prepare the consolidated financial statements with their respective notes.as the case may be in accordance with the provisions of sections 6.3. and 6.4. of Chapter II of Title One of this External Circular, which must be presented in the consolidated balance sheet separate from liabilities and capital. Prepare the consolidated financial statements with their respective notes.
Some common deletions
According to circular No. 002 of 1998 of the Securities Superintendence, among some eliminations that are made in the consolidation of Financial Statements are:
- a) The investment in shares should be eliminated against the equity of the lab) Merchandise sales, cost of sales, expenses and dividends between the consolidated companies c) The profit or loss on the sale of fixed assets between consolidated companies.d) The balances receivable and payable that the companies have among themselves a) The income and expenses that for any other concept have been recorded during the respective accounting period between the consolidated entities f) Any other transaction or operation between the entities to be consolidated that implies its duplication at the time of presenting the financial statements
Integration methods
Preparing consolidated financial statements could be reduced to the aggregation of the individual of all the subsidiaries to those of the parent or parent company by homogeneous items within each financial statement. But because control over the subordinate's resources is not always exclusive, in the event that shared or joint control is exercised, the proportion in which the entity exercises said control must be revealed. Making the revealed information reflect the power that a person has to dispose of the resources of another as if they were their own and thus provide better elements of judgment to the user of said information.
Then, any parent or parent issuer of securities subject to the exclusive control of the Securities Superintendence that, with respect to another economic entity, exercises exclusive control, must prepare the consolidated financial statements under the global integration method, while for the case joint or shared control, you must use the proportional integration method, as indicated in the following paragraphs.
1. Global integration method
It is the one through which all the assets, liabilities, equity and results of the subordinate companies are incorporated into the financial statements of the parent or controlling company, after elimination, in the parent or controlling company, of the investment made by it in the Equity of the subordinate, as well as the reciprocal operations and balances existing as of the cut-off date of the consolidated financial statements.
Thus, the consolidated financial statements adequately reveal the magnitude of the resources under exclusive control, with which, in addition, it is possible to establish an approximate factor of the economic level of responsibility that is the responsibility of the parent or controlling company.
2. Proportional integration method
It is the one by which the percentage of assets, liabilities, equity and results, which corresponds to the proportion in which the parent exercises control over the subordinate, prior to elimination, in the parent or controlling, of the investment made by her in the assets of the subordinate, as well as of the balances and reciprocal operations existing on the court date.
To determine the proportion in which each parent or controller subject to the exclusive control of the Securities Superintendence must consolidate its financial statements with those of its subordinates or controlled companies, when it must use the proportional integration method, the following procedure shall be followed:
- Determine the number of controllers. Determine the percentage of participation of each of the controllers, in the capital or in the decisions of the assembly or board of partners. In the cases in which the controlling company participates both in the capital and in the decisions of the shareholders' meeting or assembly, the highest of the percentages must be taken. Total the percentages determined in accordance with the previous literal. Establish the proportion that over the total referred to in the previous literal, represents the percentage determined in literal b). When the percentage of controllers' participation cannot be determined in the decisions of the general shareholders' meeting or partners' meeting, the proportion will be determined by dividing one hundred percent by the number of being able to prove the participation of at least one of the controllers,that of the others will be established by dividing the remaining percentage by the number of controllers whose proportion is to be determined.
In any case, it may be proved to the Superintendency of Securities that the proportion that, over the total, corresponds to each of them, is different from that provided in the previous paragraph, in which case, the integration will be made in the percentage proven by each controller.
The difference between the proportion referred to in this numeral and the percentage of ownership of each controller must be disclosed as minority interest or property other than the controller, as the case may be. For this purpose, if the percentage of ownership or participation of third parties is greater than that corresponding to the parent or controlling entity, such participation must be disclosed as property other than the controlling entity. Otherwise, it will be a minority interest.
3. Provisions common to both methods
The interest of the owners of the subordinates, different from that of the parent or controlling company, must be disclosed in a separate item after the liability and before equity, called minority interest.
When the parent or controlling company does not have participation in the capital of the subordinate, the elimination of the balances and reciprocal operations existing at the cut-off date of the consolidated general purpose financial statements will proceed. In this case, the assets of the controlled company will be presented, in the consolidated financial statements, as property other than the controlling company.
Work papers
Work papers must be drawn up in which the calculations made in the procedures for the consolidation of financial statements are related. Such work papers must be designed in such a way that they are functional, easy to understand and to consult, even by people who have not intervened in its elaboration.
For the work papers to comply with the objective of supporting the results obtained in the application of accounting methods or procedures for this case in the consolidation of financial statements, they must contain at least:
- The individual financial statements of each and every one of the economic entities involved in the consolidation and / or the consolidated financial statements that serve in turn for the formulation of those of the parent or controlling entity. The adjustments made to the individual financial statements of the Subordinate entities, originated in the homologation to the accounting principles and practices used by the parent or controlling company.The conversion of the financial statements corresponding to economic entities located abroad, indicating the methods used for the effect and the exchange rate used. operations carried out between the economic entities involved in the consolidation, during the year to which the consolidated financial statements refer.The reconciliations of the reciprocal balances of the entities to be consolidated. The eliminations of the balances and reciprocal operations between the entities subject to consolidation. The elimination of the investment owned by the parent or controlling company in the equity of the subordinates. The determination of the proportion to be used for the integration of the financial statements of the subordinates with those of the parent or controlling company, when the proportional integration method must be used. The determination of the minority interest and of the property not belonging to the controlling company in each and every one of the entities subordinates.The consolidated financial statements.The elimination of the investment owned by the parent or controlling company in the equity of the subordinate companies. The determination of the proportion to be used for the integration of the financial statements of the subordinate companies with those of the parent company or controlling company, when the method of proportional integration. The determination of the minority interest and the ownership of the controlling party in each and every one of the subordinate entities. The consolidated financial statements.The elimination of the investment owned by the parent or controlling company in the equity of the subordinate companies. The determination of the proportion to be used for the integration of the financial statements of the subordinate companies with those of the parent company or controlling company, when the method of proportional integration. The determination of the minority interest and the ownership of the controlling party in each and every one of the subordinate entities. The consolidated financial statements.The consolidated financial statements.The consolidated financial statements.
Associated disclosures
The notes to the consolidated financial statements must disclose at least:
- The name, the corporate purpose, the domicile, the nationality, the geographical area where it carries out its activities and the date of incorporation, both of the parent or controlling company and of the subordinate companies included in the consolidation. The proportion in which it participates, direct or indirectly, the parent or controlling company in each of the subordinates it consolidates, the consolidation method used in each case and the total value of the assets, liabilities and results for the year, both of the parent or controlling company and of the subordinate companies. or controlled companies not included in the consolidation, the name, corporate purpose, domicile, nationality, the geographical area where they carry out their activities and the date of incorporation of each of them must be disclosed, together with the proportion in which they participate, directly or indirectly,the parent or controller, indicating the reasons why they are not included in the consolidation. In the case of joint control, the name of the economic entities with which it is shared and the percentage of participation of each of them must be disclosed. The value of the consolidated liabilities whose residual duration is greater than five (5) years, as well as that of the liabilities with guarantees granted by entities included in the consolidation, revealing their nature and conditions. The consolidated amount of the pension obligations. The number of persons employed during the year by the parent or controlling company and its subordinates, classified among management and trust employees and others, and the personnel expenses generated for each of these categories.credits and guarantees granted to the administrators and to the members of the supervisory bodies of the parent company or its subordinates, by it or by its subordinates, indicating the essential conditions and the interest rate. financial statements of any of the subordinates differs from the date of consolidation, such situation must be disclosed, indicating the cut used and the significant events that occurred in the non-coincident period.A summary of the practices and policies used for each of the concepts surveyed in the consolidated financial statements. A report that succinctly but clearly and completely reveals the effect of the consolidation on the assets, liabilities, equity and results of the parent or controlling company.
A clear and detailed explanation of the adjustments made in order to unify the accounting procedures and standards, indicating their effects on the consolidated financial statements, insofar as they are representative, revealing the procedures used.
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