Group Consolidation and Control

Consolidation of Group Accounts and Auditing

In this series, we will discuss consolidation procedures, and desirable group-wide controls.

  1. EP Holding Co.

a. EP Holding Co. procures raw material from overseas, manufactures and packages products.

b. Sold exclusively to EP Distribution Co.

c. Rents space from EP Property for office and factory use.

  1. EP Distribution Co.

a. It procures finished goods from EP Holding Co. and keeps inventories of these items.

b. Distributes products in Asia including Singapore, Korea, and Taiwan.

Provides warehousing and logistics services.

c. Rents out office and factory space from EP Property.  

  1. EP Property

a. EP Property owns and rents property in Singapore.

b. Sublets factory space and office spaces to EP Distribution Co. and EP Holding Co.

  1. Subsidiaries (Retail outlets)

Singapore, Korea and Taiwan have retail stores and sell finished goods to local end users.

Let’s examine the consolidation process

Assumption

  • All subsidiaries were incorporated as EP Holding having 100 percent direct equity interest (ordinary shares).
  • All Entities under the Group have the same financial year end.
Step 1 Obtain the financial statements, trial balances, for the parent and its subsidiaries;

Review

  • Subsidiaries must have the same reporting policies
  • Uniform accounting policies for the parent and the subsidiaries;
  • Review additional need for fair value adjustments at subsidiaries level.

When the accounting policies of a subsidiary differ from those of the parent, adjustments are made during consolidation.

Step 2  Translate the foreign subsidiary’s financial statement into the group’s currency.

  • Balance sheet translated at year end rate.
  • Profit and loss at average rate.
  • Cash flow statement at year end rate except average rate for non-cash flow.
Step 3 Set up working Excel sheet for parent and subsidiaries for;

  1. Balance sheet
  2. Profit or Loss statement
  3. Cash flow statement
  4. Schedules like Property, plant and equipment, Taxation, related parties transactions, etc.
Step 4 Eliminate inter-company indebtedness;

  • Intra-group receivables and payables need to be cancelled out and they should be matching.
  • Intra-group loans;
    • The matching asset and liability for the loan needs to be removed.
    • Accrued interest payable at the borrower needs to be cancelled out with the matching interest receivable at the lender.

Eliminate inter-company transactions:

  • Eliminate sales and purchases (reverse the seller’s revenue and the buyer’s COGS by the same amount).
  • Eliminate interest paid and received (reverse the payer’s interest paid and the payee’s interest received).
  • Dividends from the subsidiary to the parent company are reversed because that is an intra-group transfer.
  • Eliminate unrealised profit from stocks (sold between the parent and the subsidiary).

Hence, the consolidated financial statements only reflect external transactions and balances.

Step 5 Elimination of inter – company investment

  • Parent company investment – subsidiaries share capital & pre acquisition reserves = either positive, negative or nil goodwill.

Note that only the parent company’s share capital is included if the share capital of the subsidiary have not changed.

Step 6 Combine all assets, liabilities, equity, income, and expenses of the parent company and its subsidiaries into one entity.
Step 7 Reconciliations of the movements in:

  • Reserves (like foreign translation reserves);
  • Non-controlling interests (if any);
  • Investments; and
  • Deferred tax
Step 8 Final review of the consolidated accounts as a whole

Prepare consolidated financial statements in accordance with the applicable financial reporting standards.

Other Consolidation adjustments to consider

Adjustments
  • At acquisition
  • Step acquisition
  • Change in degree of control
  • Fair value adjustment post acquisition
  • Goodwill computation
  • Non-controlling interest (minority interest)

Let look at desirable Group Wide Controls of the above Group of Companies

Group-wide controls may include a combination of the following:

Accounting system
  • IT and accounting systems are centrally controlled by the main office via a cloud-based system.
  • Processes and controls centrally coordinated, including shared service environments.
  • Monitor the timeliness, accuracy, and completeness of financial information received from subsidiaries.
Review performance
  • Monitoring subsidiaries’ performance, including regular evaluations, cash management, reconciliation of banks, trade balance, reports, and the ability to take appropriate action based on budgets.
  • Subsidiaries management authority and responsibility.
  • Reviewing performance and discussing business developments between management of the group and subsidiaries.
Management’s risk assessment / fraud prevention
  • In this process, risk is identified, analyzed, and managed (such as outstanding collections, inventories, cash flows, manpower strength, and tax matters).
  • Management overrides, fraud prevention, detection, and mitigation procedures.
  • Group-wide fraud prevention programs and codes of conduct.
Intercompany transaction / balances
  • Monitoring, controlling, reconciling, and eliminating intra-group transactions and unrealized profits, and intra-group account balances at the group level.
Group financial statements
  • Consistent policies and procedures, including a group financial reporting procedures manual.

If you require assistance in navigating the Consolidation of your Group, contact us for a personalised session today.

Disclaimer: The information provided is general in nature and is not intended as professional advice. The information contained in this blog was collated as at October 2021 based on information available at that time.

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