how to handle the loss of control of a subsidiary - sap · year 2020 the 1st of ... the account...

How to handle the loss of control of a subsidiary with SAP® Financial Consolidation 10.0, Starter Kit for IFRS?

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TABLE OF CONTENTS

INTRODUCTION ............................................................................................................................................... 3

WHAT ARE THE REGULATION REQUIREMENTS? ...................................................................................... 4

PRESENTATION OF THE BUSINESS CASE .................................................................................................. 5

HOW TO HANDLE A LOSS OF CONTROL IN THE IFRS STARTER KIT? ................................................... 7 Reminder .......................................................................................................................................................... 7 Overview of the operating process ................................................................................................................ 7 Conversion rate table ...................................................................................................................................... 8 Consolidation scope ....................................................................................................................................... 8 Automatic journal entries ............................................................................................................................... 9 Manual journal entries..................................................................................................................................... 9 Retrieval of consolidated data ..................................................................................................................... 11

HOW DOES THE ACQUISITION AFFECT FINANCIAL STATEMENTS? .................................................... 14 Consolidated Statement of Financial position Audit trail ................................................................. 14 Consolidated statement of other comprehensive income Audit trail ............................................... 15 Statement of cash flows Audit trail .................................................................................................... 16 Statement of changes in equity ................................................................................................................... 17

How to handle the loss of control of a subsidiary with SAP® IFRS Starter Kits Consolidation Practical Guide N°9– June, 2012

3

INTRODUCTION

This practical guide is part of a new series of seven guides dedicated to help deal with the most frequent consolidation M&A requirements when using the SAP® Financial Consolidation 10.0, starter kit for IFRS. A first series was published to help deal with those cases when using SAP® Planning and Consolidation 10.0, starter kit for IFRS, version for SAP NetWeaver.

In this paper the loss of control of a subsidiary is explained through a real use case scenario and presented in three steps:

what the IFRS text says,

how the business use case is handled in Financial Consolidation,

and what impact the CFO should expect on her/his company’s financial statements.

You can use this new paper to demonstrate SAP’s supremacy in addressing customers’ most complex and frequent business requirements.

SAP solutions for consolidation, part of SAP enterprise performance management (EPM) solutions, include SAP Financial Consolidation and SAP Business Planning and Consolidation. A starter kit for IFRS has been developed for each solution to perform, validate and publish a statutory consolidation in accordance with IFRS. These starter kits are based on a dynamic configuration easy to customize to specific requirement. They are provided with documentations.

To know more:

You will find further indications on how to deal with outgoing entities in the SAP® Financial consolidation 10.0, Starter kit for IFRS SP1 Operating guide.

To be kept informed of the most recent releases and new documentations:

Follow us on SAP Community Network

https://websmp209.sap-ag.de/~sapidb/011000358700000061492012E/FC10SP1_SK_IFRS_Operat_en.pdf

https://websmp209.sap-ag.de/~sapidb/011000358700000061492012E/FC10SP1_SK_IFRS_Operat_en.pdf

http://scn.sap.com/blogs/financialclose.starterkits


4

WHAT ARE THE REGULATION REQUIREMENTS?

The loss of control of a subsidiary is a transaction or another event in which a parent company sells its controlling interest in a subsidiary to another party. This case study will focus on a loss of control where the parent doesn’t retain any interest in the subsidiary. When a parent company loses its controlling interest on a subsidiary:

It derecognizes the assets (including goodwill), liabilities and non-controlling interests of the former subsidiary

It recognizes the fair value of consideration received, any distribution of shares to owners,

It reclassifies to profit and loss any amounts previously recognized in OCI (i.e. fair value reserve, hedging reserve and foreign currency translation reserve)

It recognizes the resulting difference in its profit or loss, as calculated hereafter:

Individual statement level Consolidated statement level

Sale proceeds

Cost of investment

Parent's gain or loss on sale of investment at individual statement level

Sale proceeds

Carrying value of NCI

Net goodwill at the date of disposal

Acquiree recycling of OCI (hedging, fair value for AFS, CTA)

Parent's gain or loss on sale of investment at consolidated statement

Net assets derecognized


5

PRESENTATION OF THE BUSINESS CASE

This business case is included in the set of data provided with the IFRS starter kit SP2. It is possible to retrieve it using the following settings:

- CATEGORY: A- ACTUAL,

- DATA ENTRY PERIOD: 2021.12,

- CONSOLIDATION CURRENCY: USD

- SCOPE: CASE2,

- VERSION: IFRSYTD,

- REPORTING UNIT: P2, S2

Year 2020

The 1st of January, parent company P2 (USD) acquires 100% interest of subsidiary S2 (EUR) for USD 95 000 in cash. S2 net value of the identifiable assets and liabilities is EUR 87 500

Goodwill calculation = EUR 7 500 (x rate: 1 USD = 1 EUR)

S2 profit for the year = EUR 10 000 (average rate for 2020: 1 USD =0,80 EUR)

On December 31st, the exchange rate is 1 USD =0,85 EUR

Year 2021

S2 goodwill impairment = EUR 4 000; S2 profit for the year = EUR 15 000

The 1st of December P2 sells its 100% controlling interests in S2 for USD 100 000. The average rate from January 1st to December 1st is 1 USD = 0,75 EUR. The spot rate on December 1st is 1 USD = 0,80 EUR

Note: For a matter of simplification, the case study is displayed on two years even if it is not fully relevant from an IFRS perspective (e.g. IFRS5)

S2 net assets at the disposal date is EUR 112 500 (87 500 + 10 000 + 15 000).

Y 2020 Y 2021

Parent P2 Parent P2

Subsidiary S2

100%


6

P2 individual accounts are as follows:

S2 individual accounts converted in USD and including goodwill are as follows:

Calculation of the net gain/loss on disposal

12/31/2020 12/31/2021

(after sale)

Investment S2 95 000 0

Cash 0 100 000

Total assets 95 000 100 000

Issued capital 95 000 95 000

Retained earnings 5 000

Total Equity & liabilities 95 000 100 000

12/31/2020 12/01/2021

(before sale)

Goodwill 8 824 4 375

Cash 114 706 140 625

Total assets 123 529 145 000

Retained earnings 107 500 122 167

Currency translation adjustment 16 029 22 833

Total Equity & liabilities 123 529 145 000

At individual statement

level

At consolidated statement

level

Difference

Sale proceeds + 100 000 Sale proceeds + 100 000

Cost of investment in S2 - 95 000 Net assets derecognized - 140 625

Goodwill on consolidation - 4 375

Recycling of Other

Comprehensive Income

+22 833

(a) Gain in individual

statements

=5 000

(b) Loss in consolidated

statements

=-22 167 -27 167

(a) Total net assets converted at disposal rate (EUR 112 500 / 0,8) 140 625

(b) Gross goodwill at disposal rate (EUR 7 500 /0,8) 9 375 4 375

Goodwill impairment at disposal rate (EUR 4 000 / 0,8) -5 000

(c) Currency translation adjustment at the date of disposal 22 833

(d) Correction of the result between loss in consolidated statements -22167 -27 167

- Gain in individual statements -5000

(a)

(b)

(c)

(d)


7

HOW TO HANDLE A LOSS OF CONTROL IN THE IFRS STARTER KIT?

REMINDER

The amounts stored in the database are identified thanks to a set of elements called dimensions.

The main dimensions are listed below:

The account dimension indicates which item of the balance sheet or P&L is impacted.

The flow dimension is used to identify and analyze the changes between the opening (flow F00) and closing (flow F99) balances.

The audit ID dimension identifies the origin of the data for input data, local adjustments, manual and automatic journal entries.

The in-built dimension (Journal entry number) provides a full audit trail as it retrieves the number of the manual or automatic journal entry. The use of this feature is illustrated in the chapter “How the loss of control affects financial statements” where we show screenshots of the analysis reports that can be accessed by drill down from the financial statements.

OVERVIEW OF THE OPERATING PROCESS

The actions to perform to deal with an outgoing reporting unit (RU) are listed hereafter. A tick mark indicates which apply to case#2 (entity outgoing during the period). In this business case, we will focus on year 2021.

Case #2

Conversion rate table

Outgoing RU: Enter specific RU conversion rate to translate the balance sheet and the P&L at the date of disposalP

Package data entry

Loss of control at the opening no package creation required

Loss of control during the year create a package to collect local data until the date of loss of controlP

Parent: Book the investment disposalP

Consolidation scope

Loss of control

at the opening:

Declare the RU as not consolidated at the closing

Declare the RU as not consolidated at the closing P

Enter an intermediate data entry periodP

Enter an intermediate financial rate (if needed)

Manual journal entries:

Parent: Gain or loss on sale of investment audit ID INV31 (local currency) or INV32 (consolidation currency)P

Partners: Reverse the previous internal gains or losses elimination accounted for audit ID DIS11

Consolidation:

Run the consolidation processingP

Report navigator:

Validate the scope change accounting with dedicated preconfigured reportsP

Outgoing RU:

Loss of control

during the year:


8

CONVERSION RATE TABLE

When a foreign entity exits the scope, specific exchange rates should be entered for this reporting unit, using the RU-specific rates functionality. In this business case, we use a year-to-date data conversion (not the periodic data conversion) and the exchange rate table should be entered as follows:

CONSOLIDATION SCOPE

In the consolidation scope, any entity consolidated at opening and not consolidated at closing is considered as exiting the scope. By default, it is considered as exiting at the beginning of the period, except if you enter an intermediate data entry period. The data entered in this field is used by the consolidation engine to identify which package must be loaded in the consolidation. In this case, the subsidiary is disposed of in December and therefore, you will enter 2021.12 in that field.

If subsidiary S2 had been sold on July 15th, you should have loaded the data entry package at the end of

June for the consolidation of December and entered 2021.06 in this field.

Rate used to convert the opening balance sheet of S2 (F00) -

same as for the other european entities

Rate used to convert the profit of S2 (F10) - average rate from

Jan 1st to Dec 1st

Rate used to convert the outgoing balance sheet of S2 (F98) -

rate at Dec 1stst

Subsidiary S2 consolidated at the opening and outgoing at the closing (december 2021)


9

AUTOMATIC JOURNAL ENTRIES

When an entity exits the scope, the consolidation engine reverses all the balance sheet data (assets, liabilities and equity) for this entity.

For an entity outgoing at opening, the reversal is triggered on flow F98 based on the opening position (flow F00) for package data, manual journal entries without restrictions, and automatic journal entries.

For an entity outgoing during the period, the reversal is triggered on the same flow F98, but based on the opening position (flow F00) plus the movements of the period.

The eliminations of reciprocal transactions are reversed when an entity or its counterpart exits the consolidation scope.

The eliminations of internal provisions that were booked towards an entity that exits the scope are also reversed automatically.

Automatic elimination of investment is automatically reversed.

MANUAL JOURNAL ENTRIES

A first manual journal entry has been posted to declare the goodwill impairment of the year using a dedicated audit ID GW01 –Disclosure of goodwill (gross value and impairment) and bargain purchase - Man

The following automatic journal entry is triggered by this first manual journal entry.

a. posted on S2

b. Using dedicated audit ID for goodwill declaration "GW01"

c. in S2 currency (EUR)

d. on flow F25 (increase in depreciation)

e. declared toward P2

a

b

c

d

e

5 333 EUR = 4000 USD / 0.75


10

A second manual journal entry posts the difference between the individual and the consolidated statements gain or loss on sale of S2, using audit ID INV31 – Adjustments on gain / losses on disposal of a subsidiary, JV or associate (local currency)

a. posted on P2

b. Using dedicated audit ID for gain / loss on sale of

investment "INV31"

c. in P2 currency (USD)

d. on dedicated P&L account

(P1615) vs retained earnings

e. using flow F98 for retained

earnings

f. declared toward S2d

a

b

c


11

RETRIEVAL OF CONSOLIDATED DATA

After running the consolidation, the consolidated balance sheet is as follows:

Figure 1- Report C31-05: Balance Sheet by flow

a. Flow F00 shows the opening consolidated balance position for P2 and S2

b. Flow F10 shows the net income of the year for P2 and S2:

- P2 consolidated loss on sale of S2: -22 167- S2 net income 20 000- S2 impairment of the goodwill - 5 233

c. F80 shows the currency translation adjustment of the period. It is always balanced.

d. F98 shows the derecognition of S2's balance sheet accounts. There is no impact for accounts E1110- issued capital and E1610 - Retained earnings

e. Clearing accounts that are used to post investment eliminations are balanced.

a

b

c d

e


12

The equity movements are explained below:

Figure 2- Report C31-12: Balance Sheet by flow, audit ID and reporting unit

a. P2 net income- Gain on sale of S2 at package level stored on PACK01 audit ID- Correction of the gain at consolidated level using INV31 audit ID

b. S2 net income- Package net income (PACK01)- Goodwill impairment (GW10)

c. Flow F80 shows S2 exchange difference of year 2021- CTA10 handles the CTA on the equity (except goodwill)- GW20 handles the CTA on goodwill

d. F98 shows the outgoing of S2's on all audit IDs

a

b

a

b

c

c

c d

a

d

d


13

Analysis of account E1610 Retained earnings

Figure 3- Report C32-05: General Ledger by audit ID, share, JE number

This screenshot shows all the manual and automatic journal entries posted on E1610 Retained earnings. The upper part shows the total of account E1610 - retained earnings whereas the detail by share is provided in the second part of the report.

a. Automating postings processed by the consolidation engine

b. Manual journal entry #19 posted at P2

c. Automated entries processed by rules

- Goodwill impairment (AUTO 3) triggered by the declaration posted in manual journal entry #22- Reclassification of CTA on the equity on flow F80 (AUTO 6)

d. Flow F80 and flow F98 are equal to zero in retained earnings.

a

c

c

b

a

b

d


14

HOW DOES THE ACQUISITION AFFECT FINANCIAL STATEMENTS?

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AUDIT TRAIL

The loss of control of S2 impacts the goodwill, the cash and the equity.

You can drill down from an item (e.g. other reserves) to the detail by account, entity, and code / description of the automatic or manual journal entry. See next page.

Figure 4- Report C11-05: Statement of financial position

(a)

(a)

(a)

The loss of control impacts the goodwill, the cash and the equity. You can drill down to the detail by account, entity and code / description of the automatic or manual journal entry.

You can drill down to the automatic journal entry CTA-110 - Currency translation adjustment on equity


15

CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME AUDIT TRAIL

Figure 5- Report C11-15: Statement of Other Comprehensive Income

Figure 6- Report C23-05: Statement of Other Comprehensive Income breakdown

As stated before, the comprehensive income is impacted by:- the operating profit (-USD7 000- the gains (losses) on exchange differences on translation, before tax = USD6 804- the reclassification adjustments on exchange difference translation, before tax = -USD22 833


16

STATEMENT OF CASH FLOWS AUDIT TRAIL

Figure 6- Report C11-25: Statement of Cash Flows

Sales proceed at P2: 100 000 b. NBV: 95 0000 c. Loss on sale of S2 at

consolidated level: -22 167

d. Adjustment: 27 167

a. S2 profit of the year

e. Cash of S2 outgoing: -140 625

a

b

c

d

e


17

STATEMENT OF CHANGES IN EQUITY

Figure 7- Report C11-30: Statement of Changes in Equity

As expected, the changes in equity come from:- the net income of the yer (-USD7 500)- the CTA (-USD16 029)

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