Consolidation of financial statements: Consolidation is a correlative accounting technique of the method of recording the equity interest, since while in the equity interest the parent company recognizes its participation in the stockholders' equity of the subsidiaries or associates, in the consolidation, it acknowledges its intervention in assets and liabilities.
Consolidation consists of substituting in the financial statements of the parent or holding company the value of the investment recorded in the “1205 Shares” account by the value of the assets and liabilities of the subsidiaries and associates.
Consolidated financial statements: Article 23 of the Colombian Accounting Statute (Decree 2649 of 1993), establishes that “Consolidated financial statements are those that present the financial situation, the results of operations, changes in equity and in the financial situation, as well like the cash flows of a parent-subordinate entity, or a dominant entity and the dominated ones, as if they were those of a single company ”.
According to Article 35 of the Colombian Commercial Code (Law 222 of 1995), the parent or controlling entity, in addition to preparing and presenting individual general purpose financial statements, must prepare and disseminate consolidated general purpose financial statements that present the financial situation, the result of operations and changes in the equity and in the cash flow of the parent or controlling company and its subordinates or dominated, as if they were those of a single entity.
The economic entity that owns more than 50% of the capital of other economic entities, must present, together with its basic financial statements, the consolidated financial statements, accompanied by their respective notes. Unconsolidated entities must be disclosed
Those subordinates that:
1- Its control by the parent entity is prevented or avoided in any way
2- The control is temporary
Now, according to Article 10 of IAS 27, the consolidation of financial statements of controllers is not required if and only if the following requirements are met:
- the parent is in turn a subsidiary of another parent and the other shareholders have been informed about it and there has been no objection.
- the holding company does not have shares or titles in the public stock market, - the parent has no intention of going to regulatory entities with a view to issuing financial instruments in the public market, and
- the ultimate parent (the parent of the entire group) presents consolidated financial statements available to the public.
Fundamental theories of consolidation methods: There are two theories to support the methods of integrating financial statements, namely: entity theory and property theory.
Entity Theory
This theory starts from the assumption that the consolidated financial statements make sense when it is determined that there is an expanded economic entity in which the shareholders that make up the non-controlling interest also own part of the net assets of the consolidated entity (Carvalho, 2006).
In the attempt to eliminate the capital with which the subsidiaries participate in the consolidation, an account of a creditor nature must be created that reflects that part of the assets and liabilities that are not under the control of the holding company. In the financial reporting standards, this portion has been given the name of Non-controlling interest, in exchange for its classic name of Minority Interests.
Property Theory
This theory assumes that the owners of the parent or controller are interested in making decisions based on the consolidated financial statements referring only to the part of the subsidiaries over which they have control and, therefore, it would be undesirable to include in the consolidated information the part corresponding to third parties. That is, the minority interest does not appear in this situation since the third-party owners of the subordinate have no participation in the parent (Carvalho, 2006). In international financial reporting standards, this theory remains valid for those cases related to jointly controlled investments in which there are two shareholders and each owns 50% of the entity to be consolidated. (Martínez, 2010)
Consolidation methods: According to External Circular 05 of 2000 of the Superintendency of Companies, there are two consolidation methods: the global integration method and the proportional integration method.
Global integration method
A global integration method is understood as one in which all the assets, liabilities, equity and results of the subordinate companies are incorporated into the financial statements of the parent or controllers, after elimination in the parent or controlling company, of the investment. effected by it in the equity of the subordinate and also of the reciprocal operations and balances existing at the cut-off date of the consolidated financial statements.
Proportional integration method
Proportional integration method is understood as the one in which the percentage of participation of each of the participants in the capital or in the decisions, after elimination in the parent or controlling company, of the investment made by her in the equity of the subordinate and also of the reciprocal operations and balances existing at the cut-off date of the consolidated financial statements.
Accounting principles underlying the consolidation: When preparing a consolidation, it will be taken into account as fundamental principles that an economic entity cannot own or owe itself, nor can it make profits or surpluses or losses from operations carried out with itself.
Article 122 of the Accounting Statute establishes that “the minority interest in subordinate entities must be disclosed separately and classified immediately before the equity section”, however, IAS 27 (paragraph 33) requires the presentation of the uncontrolled participation, previously known as minority interest, in the net equity within the consolidated balance sheet, but separated from the net equity items of the parent.
From the IFRS conceptual framework, consolidation must be based on the entity principle and the accrual accounting hypothesis.
Principle of the economic entity
The economic entity is the company, that is, the economic activity organized as a unit, with respect to which the control of resources is preached. The entity must be defined and identified in such a way that it is distinguished from other entities.
In terms of capital and decisions, when consolidated, the holding company and its subsidiaries form an economic unit and decision center without its own legal status and independent from other entities. Consequently, for the readers of the financial statements it is of primary interest to know the relationships of the controlling company and its subsidiaries with third parties, as well as its effects. For this communication to be adequate, the financial statements are required to include all the rights, obligations, restrictions, equity and results of operations of the controlling company and its subsidiaries, since it is a single company, which is achieved with the consolidated financial statements and their disclosures.
Accounting accrual hypothesis
Accrual refers to what should be considered an event that can be measured when a transaction occurs and therefore must be reflected in financial statements. The effects of transactions and other events are recognized when they occur and not when money or another cash equivalent is received or paid. Likewise, they are recorded in the accounts and reported on in the financial statements of the years to which they relate.
The operations and other events that the accounting quantifies are recognized accrued when:
1- they have affected transactions with other economic entities
2- internal transformations have taken place that modify the structure of the resources or their sources
3- external economic events have occurred to the entity or derived from its operations and the effect of which can be reasonably quantified in monetary terms.
Accounting process of the consolidation: The Superintendency of Companies in External Circulars 05 and 06 of 2000 has established as a procedure, the content of External Circular 02 of 1998 of the Superintendency of Securities. The logical order of the process to follow to carry out a consolidation is as follows:
1- Obtaining the individual financial statements
The consolidation must be done based on the financial statements cut on the same date. If this is not possible, statements with an age of not more than three months may be used, in which case, this situation must be reported by means of notes to the financial statements indicating their effect on the resulting information.
When entities belonging to the financial and non-financial sector exist in a business group, they must be initially consolidated separately. These consolidated statements serve as the basis for the preparation of the total consolidated, which may be prepared at group level (two digits)
Exercise: Compañía Molinares SA owns 65% of the shares of Compañía Solivanes SA (130 shares), which it has acquired for the sum of CU5,460,000 (thousands of pesos). At the end of the 20XX year, the Molinares controller (Molin SA) and the Solivanes controller (Solin SA) have the following information:
You should start by verifying the application of the equity participation method in the investments of the subordinate companies.
If the parent and the subsidiaries use different accounting bases for similar transactions and events in similar circumstances, the financial statements of the companies must be adjusted in work papers specially prepared for this purpose. If the adjustments are not important, they may be omitted but with the disclosure in corresponding notes.
If there are subordinates abroad, in addition to standardizing the accounting bases, the financial statements must be converted into Colombian pesos.
In the event that it is necessary to restate one or more financial statements in compliance with the respective IFRS, the most common thing is to restate the individual financial statements and then start the consolidation process.
The general rule is that all subsidiaries must be consolidated, however, there are particular cases in which the power of the parent to govern the operating and financial policies of some subsidiaries has been lost or is seriously limited and, therefore, justifies the exclusion of such subsidiaries in the consolidation.
It should be verified that the subordinates who are in the second and third levels of consolidation have consolidated their financial statements with the corresponding subordinates.
After verifying the application of the equity participation method and the homogenization of the accounting bases, we proceed to the analysis of the Income Statement leading to the preparation of the Trial Balance:
If in the accounting of the respective subsidiary the sale of a certain asset has been valued at book value while the parent has recorded the same purchase at fair value, or another type of value, the parent responsible for the consolidation must incorporate the corresponding adjustments to the financial statements of the subsidiary, only for consolidation purposes.
The parent must modify the Appraisals or Net Surplus of properties, or in its case, the Surplus or Comprehensive Appraisal for the period of the subsidiary, to recognize the effects in subsequent periods of said initial adjustments to its net assets.
Seat N ° 2: Recognition of acquired assets at fair value
The company M (Molinares SA) bought on credit, during the year 20XX, from the company S (Solivanes SA), a newly built building for the sum of $ 5,000,000. This building had a book value of $ 3,000,000. The parent company, or parent, recorded the acquisition at fair value of $ 6,000,000. The reconstruction of the corresponding seat was as follows:
The difference between the investment that a holding company makes to the associate to establish it, or to increase its equity and the consideration paid (Martínez, 2011), should be treated as follows;
a) Recognition of a Commercial Credit for the excess of the acquisition cost over the investment in the associate.
b) Recognition as recoveries of the expense for provisions for the excess of the investment value over the acquisition cost.
The following illustration exercises on the equity method will refer to the spin-off of the company Originaria SA, whose remaining parts, represented by a holding company that we will call Controversial SA (52%) and another associated portion that, if desired, for a better distinction, we could name Aparecida SA (48%).
Exercise: Suppose a) that on January 2, 20X1, the company Controversial SA acquired 520 shares of $ 90,000 per share of the company Originaria SA at $ 18,000 below its intrinsic value, paying the sum of $ 36,640,000 but that Even so, the fair value paid is below the market value of the shares. The company Aparecida SA undertakes the commitment of the subsequent capitalization of the accumulated profits. You are asked to make the seats concerned:
Errors and gaps in the records of reciprocal operations in the companies must be identified and the balance sheet and income statement accounts must be reconciled and the adjustments that present the differences must be made, in order to determine the figures that will be eliminated.
When recognizing reciprocal operations at the source, the figures are compared to adjust the lags and errors in the records of the entries of such transactions, thus:
Seat N ° 3: Company M sells facilities to Company S on credit for the amount of $ 1,400,000, acquired four years ago at a historical value of $ 2,000,000 and with a remaining useful life of 16 years.
The accounts of the consolidated financial statements are registered vertically, uniformly and consistently.
The balances of the accounts of the individual financial statements of each of the group companies are recorded horizontally.
The number of columns necessary to include the adjustments or eliminations derived from the consolidation is opened, as well as the figures corresponding to the non-controlling interest. At the end, the column in which the consolidated balances will be displayed is opened.
The eliminations required by the consolidation of the grouped companies are included from the adjusted Trial Balances of each of the grouped companies, as follows:
Seat A: Separation of the figures corresponding to the non-controlling interest
The separate distribution is shown like this:
The controller will determine the foreign property, which must be presented in the consolidated balance sheet separate from the liabilities and the stockholders' equity.
How to determine Non-controlling interest can be seen in the corresponding columns of the following Worksheet.
Obtain consolidated account balances
Classify the accounts in the consolidated financial statements
Prepare the consolidated financial statements
Based on the information prepared in the Worksheet, the accounts for obtaining the Financial Statements are classified as follows:
1- CARVALHO J. (2009). Statement of income. Medellín: University of Medellín
2- FIERRO A. (2011) Patrimony accounting. Bogotá: ECOE
3- HARGADON B. (1982). Accounting principles. Cali: Ed. Norma.
4- HARIED A., IMDIEKE L., SMITH R. (1985) Advanced accounting. New York: Wiley.
5- MARTINEZ A. (2011). Consolidation of financial statements. Mexico: McGraw Hill.
6- MINHACIENDA. Decree 2649 of 1993. General Accounting Regulations.
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8- ROJAS D. (1983) ABC of accounting. Bogotá: McGraw Hill.
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