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Consolidations 101

Agenda

Why Companies Consolidate
Consolidation Considerations
Currency Conversions
Inter-company Eliminations
Partially Owned Subsidiaries
Adjustments for GAAP

joint ventures. .Why do companies consolidate? Legal requirements Understand business performance Analyze impact of investments. etc.

What do consolidators have to consider? Basics  Data from wholly owned subsidiaries  Management/Legal hierarchies for consolidation Added complexities  Prior period adjustments  Currency conversions  Inter-company transactions  Investments in other companies (not wholly owned)  Adjustments for varying GAAP requirements (US GAAP vs. IFRS) .

ownership structures.What is important to consolidators? Transparency: Ability to track where every adjustment comes from Accuracy: It is critical that the calculations are accurate every time Ease of maintenance: Ease of changing rules. . etc.

IM Investments IM International Factories East US Italy Canada Great Britain France .The basics International Motors. Inc.

Added Complexities: Currency Conversions How do consolidators handle currency?  Average Rate: Typically applied to P&L and movement accounts  Ending Rate: Typically applied to Balance Sheet  Historical Rate: Applied to equity and other accounts where the exact translation rate is known Sound easy?  CTA: Currency Translation Adjustment  FX Gain/Loss: Gain/Loss due to Currency Translation  Transactions in currencies other than LC .

Currency Translation Adjustment How do I measure the gain/loss due to currency translation?  Net Income: Difference in YTD Net Income @ AVG Rate and END Rate  Historical Equity: Difference in Equity @ END Rate and HIST Rate  Some organizations take the out of balance amount in the Balance Sheet in USD and book this to CTA (assuming the LC Balance Sheet is in balance) .

Currency Translation Adjustment Demo .

which can either be specified line by line or summarized into a single line of the Cash Flow .Currency Translation Adjustment Effect on Cash Flow  Movements are typically calculated at the AVG Rate  But the opening/ending balance is translated at END Rate for the appropriate period  The difference becomes CTA.

Accounts Receivable  Revenue vs.Inter-company Eliminations Basic  Accounts Payable vs. Costs  Can include many to many. one to one. one to many. or many to one relationships More complex  Investment in Subsidiaries  Profit in Inventory .

Inter-company Matching How do companies go through the process today?  Typically happens during the close  Usually very manual & very time consuming  Usually requires corporate to be involved to resolve differences Is there a better way?  Many global companies moving to a “day by day” inter-company reconciliation process  IC information is loaded daily into the application so the reconciliation process is ongoing and can be completed prior to the month end close  Allows corporate to decentralize the process and allow subsidiaries to work out their own differences .

Cost of Sales .Inter-company Eliminations: Basic Can be setup using the “standard” IC Eliminations rules  IntCo Dimension  IntCo property on Entity  ElimAcc property on Account Use an Out of Balance Account to book differences  User defined & can exist anywhere in the account structure  Used to determine relationships between accounts Two examples in the standard demo  Accounts Payable vs. Accounts Receivable  Revenue vs.

000 cost of sales with Company A But….Inter-company Eliminations: Basic Company A records an inter-company sale of $5.000 with Company B Company B should have a $5.  Rarely does it work so nicely  Timing differences  Invoicing problems  Translation differences .

 When consolidating. This sits on the holding company’s books as an Asset (Investment in Subsidiary). This sits on the subsidiary’s books as Equity. I need to eliminate this transaction.  Subsidiary receives an investment from the parent company. .Inter-company Eliminations: Invest in Subsidiary Investment in Subsidiaries  Holding company makes an investment in a subsidiary. or we are overstating our assets/equity at a consolidated level.

Investment in Subsidiaries BPC handles investment in subsidiaries very nicely….IF we have all the information we need  Investment in Sub must be booked with an inter-company partner  We must be able to identify where the subsidiary has booked the investment on their books (stock.) . etc.

000 of parts to Company B Company B receives the $5.Inter-company Profit in Inventory Company A sells $5.000 profit (from Company A) in inventory (Company B) . but does not use these parts this month – the parts are received into inventory Company A had a Cost of Sales of $2.000 in parts sold to Company B At a consolidated level – we now have $3.000 on the $5.000 of parts.

IF we have all the relevant information  We must know how much profit is in inventory (this can be calculated based on a Gross Margin assumption. as they often lack the necessary detail to automate the process . if required)  Many customers elect to make a Journal Entry to resolve this.Inter-company Profit in Inventory BPC can handle this situation nicely….

the cost/equity method can be used.Consolidation of Partially Owned Entities How are wholly owned entities consolidated?  At 100%. the cost method is used  If 20 – 50% owned. according to the Wholly Owned (Global) method How are partially owned entities consolidated?  If < 20% owned. even if the ownership is < 20% . but equity is most common  NOTE: Joint ventures typically receive special treatment and utilize the equity method. the equity method is used  If > 50% owned.

the GL data for an entity that is < 20% owned is not required or utilized as part of the consolidation .Cost Method The cost method is used when the investor’s influence over the investee is insignificant (typically < 20%) Investment recorded at cost at the time of purchase No need for adjustments to the investment except for extinuating circumstances  Dividends declared exceed earnings of the company  Permanent decline in the value of the company Typically.

Equity Method The equity method is used whenever the investor has significant influence over the investee Typically 20-50% owned  Can make exceptions for < 20% or > 50%  Investment recorded at original cost Investment is increased with income and decreased with dividends from the subsidiary It is also common to have Purchase Differentials Goodwill: Difference in fair market value of assets and cost of the investment  Difference between fair market value of assets and book value  A company may or may not require/use GL Data from entities < 50% owned .

Majority Owned Majority Owned is used when the investor owns > 50% of an entity Majority Owned entities must be consolidated into the parent company’s consolidated financial results The part of the subsidiary’s income/balances not owned by the parent company are booked to minority interest  Minority Interest is typically an expense (right before Net Income) that reduces Net Income on the Income Statement (assuming a profitable subsidiary)  Minority Interest is typically a liability that increases the liabilities of the Consolidated Company on the Balance Sheet .

Adjustments for GAAP Different countries have different regulatory requirements These requirements may cause foreign entities to make adjustments to comply with local/US GAAP These are typically handled in a separate Data Source to keep visibility into adjustments made for a specific purpose These adjustments can be either manually made (JE) or automated .

The next logical question is: How do I setup these rules in BPC? We’ll be addressing this in a future session…stay tuned .More to come….