LESSON 2: CONSOLIDATION: LEGAL

FRAMEWORK, SUBJECTS, METHODS

AND PROCESS.

1. The Concept of a Group for Accounting Purposes.

2. Regulatory framework.
3. Consolidation subjects and obligation to prepare
consolidated anual accounts.
4. Methods of consolidation.
5. Identifying the Group Structure.
6. Steps for Preparing a Consolidated Statement of
Financial Position.

1
Literature

Boned, J.L, Angla, J J. (2011).Consolidación de Estados Financieros. ACCID.

Profit Editorial.
Gonzalez Sainza, J. (2011). Normas de Consolidación: comentarios y casos
prácticos. CEF Madrid
Martín Rodríguez, J. G. y Aguilera J.J. (2011). Manual de consolidación contable y
fiscal. CISS Valencia
Pulido, A. (2010) Combinaciones de Negocios y preparación de las Cuentas
Anuales Consolidadas. Garceta Editorial.
RD 1159/2010, de 17 septiembre por el que se aprueban las Normas para la
Formulación de Cuentas Anuales Consolidadas y se modifica el PGC aprobado
por el RD 1514/2007, de 16 de noviembre y el PGC PyM aprobado por el RD
1515/2007, de 16 de noviembre.
PGC (Edición 2011)
NIIF-NIC

2
1- The concept of group for accounting purposes
GROUP: Set of companies that form an economic unit. Each of them
has its own legal personality, but they do not act individually. Decisions
and economic and financial policies are taken by one of the
companies, which holds the control over the other ones.

A
A controls B, C, D, E. The 5
companies make up a group.
70% 60%
Individual Annual Accounts are
B C not relevant, they do not give a
complete and suitable view of
60% the companies
need of
55%
group’s information

D E CONSOLIDATED ANNUAL
ACCOUNTS

3
 1- The concept of group for accounting purposes

Consolidated Annual Accounts give relevant information to the users

that want to evaluate the profitability and risk of a group.
Consolidated Annual Accounts give information about the group as a
whole, as a global economic unit.
Consolidated Annual Accounts can be defined as the financial
statements of a group presented as those of a single economic entity, are
therefore required in order to reflect the extended businessunit that
conducts the activities under the control of the parent.

Reasons:
a) Lack of information in the individual annual accounts. They
show:
 Transactions between companies, gains or losses
false fiew, distortion.
 Economic anf financial resources contolled by each company, but not by
the group.
 Individual profitability of the companies, not the benefit / loss of the
group.
b) The economic reality must be taken into consideration over the
juridical form of the business combination.

4
 External
transactions
A’s Financial
COMPANY A Statements:
COMPANY A Includes
transactions
Purchases
100% from
with B
Internal
transactions

B’s Financial
COMPANY B Statements:
COMPANY B Includes
transactions
with A
External
transactions
Consolidated Financial Statements
-Represent the business combination.
-Without the internal transactions.

5
 2- Regulatory Framework
 IASB’s regulatory framework adopted in Europe

 IFRS`3 Business Combinations

 IAS´27 (2011) Consolidated and Separate Financial Statements
 IFRS 10 (2011) Consolidated Financial Statements
 IAS´28 (2011) Investments in Associates and Joint Ventures
 IFRS´11 Joint Arrangements and IFRS’12 (2011) Disclosures in accordance.

 European Union’s regulatory framework

 7th Directive modified.

 Regulation (CE) 1606/2002 (Authorizes the adoption of the IASB Regulation).
 Regulation CE /1126/2008 (Adopts the IFRS).
 Regulation CE/494/2009: Modifies Regulation 1126/2008 about IAS 27.
 Regulation CE/495/2009: Modifies Regulation 1126/2008 about IFRS 3.
 Regulation CE/243/2010: Modifies Regulation 1126/2008 abou Goodwill (IFRS 36).
 Regulation CE/149/2011: Modifies Regulation 1126/2008 about IFRS3, IAS 27, 28
and 31.

6
 2- Regulatory Framework
 Spanish regulatory framework
 Arts. 42-49 C.Com. that introduced the Law Ley 19/1989
“Presentación de las cuentas de los grupos de sociedades”, de
25 de julio.
 RD 1815/1991, de 20 de diciembre (old Consolidation Norms).
 Ley 62/2003, de 30 de diciembre. New definition of group up
1/1/2005. Only for companies in the stock exchanges. Modified
the C.Com.
 Ley 16/2007, de 4 de julio, de reforma y adaptación de la
legislación mercantil en materia Contable para su armonización
internacional con base en la normativa de la UE.
 RD 1514/2007, de 16 de noviembre, por el que se aprueba el
PGC. Includes the NV 19 (business combinations) and the
2008-2009

consideration of group, multigroup or associates to elaborate

consolidated accounts (NECA 13).
 NOTA del ICAC (Noviembre, 2008). Requirements to elaborate
consolidated financial statements according the Commercial
Code up 1. January 2008.

7
2- Regulatory Framework

Spanish regulatory framework up 1 /1/ 2010

 Código de Comercio art. 42-49 “Presentación de las cuentas de los grupos
de sociedades”.
 NOFCAC, Real Decreto 1159/2010, de 17 de septiembre, por el que se
aprueban las Normas para la Formulación de Cuentas Anuales
Consolidadas y se modifica el PGC 2007 y el PGCPYMES 2007.
 PGC 2007 modificado.
 NRV 19ª Combinaciones de negocios.
 NRV 20ª Negocios Conjuntos.
 NRV 21ª Operaciones entre empresas del grupo.
 NECA 13 EGMA en presentación CA, incorporada en la III parte PGC.
 Otras:
 Inmovilizado Material ( 2.2 Deterioro de valor).
 Inmovilizado intangible (6.c. Fondo de comercio).
 Instrumentos financieros (9.2.5. Inversiones en el patrimonio de empresas
del grupo, asociadas y multigrupo).
 Diferencias de cambio en moneda extranjera (14.2 Conversión de cuentas
anuales a la moneda de presentación).

8
2- Regulatory Framework

Spain:
Two concetps of group:
 To elaborate consolidated financial statements : art.42
C.Com. y arts. 1 y 2 NOFCAC: CONTROL
(subordination or vertical groups)
 Which are group companies: Wide concept:
MANAGEMENT UNIT (coordination or horizontal
groups) NECA 13 PGC.

9
2- Regulatory Framework

Spanish regulation:

Accounting Quoted/Non Applicable regulation

Subjects quoted companies
Consolidated Quoted IAS/IFRS
Group Accounts
Non quoted IAS/IFRS
Spanish Norms*
(NOFCA, RD
1159/2010)
Individual annual Quoted Spanish Norms*
accounts Non quoted (PGC 2007,
RD 1514/2007),
modificado
* Spanish regulation compatible with the IFRS

10
OBLIGATION TO PREPARE CONSOLIDATED
ACCOUNTS
SPANISH REGULATION

Control relationships
between companies SPANISH OR
INTERNATIONAL
REGULATION
Definition of group of
companies

CONSOLIDATION
Obligation to prepare
consolidated accounts

Consolidation GROUP
YES method STRUCTURE
NO

11
3- Basic Concepts: GROUP

NOFCAC art. 1.
Group is a parent and all its subsidiaries.

Parent company: An entity that has one or more subsidiaries.

An entity that controls one or more entities.

Control: The power to govern the financial and operating

policies of an entity so as to obtain benefits from its activities.

12
SUBORDINATION GROUP- COORDINATION

Entity without consolidation obligation / Person

Subordination group:
90% 80% Parent E
Subsidiary D
E C
60% 40%
Coordination or
20% horizontal group:
D F All companies
E, D, C, F

13
 SUBORDINATION GROUP- COORDINATION
Subordination /vertical Coordination /
Groups horizontal Groups

A Physical persons or
entities without obligation
to consolidate accounts

B
A1 A2

C Non obliged to elaborate

consolidated annual accouts
Obliged to elaborate
consolidated annual accouts
Though, consolidated financial
statements must inform about this
relationships of management unit, in
accordance with NECA 13 PGC.
14
SUBORDINATION GROUP- COORDINATION
NECA nº 13: One company belongs to a group when between two entities exists a, direct or
indirect, control relationship. In this case, the group must elaborate consolidated financial
statements.
- Same obligation for the subordination groups of companies, in accordance with art.
42 CC.

When companies are jointly controlled by one or more entities through a

management unit,
COORDINATION or VERTICAL GROUP

 No obligation to elaborate consolidated annual accounts.

 Obligation to inform in the notes to the financial statements.
 The company with greater assets value has to inform about:
 Composition of the group
 Reason of the management unit
 Agregate sum ( assets liabilities, Equity, business combination and results)
 Other companies:
 Membership of the group
 Company with greater asset.

15
 3- Basic Concepts: TYPES OF GROUP
Direct control A over B Indirect control A over C

A Parent A Parent
100% 80%

B Subsidiary B Subsidiary
70%

C Subsidiary
Mutual control A over B
Triangular control A over B
A
60%
20% 80% A C
B 50% 25%

Circular control B
20%
A C C: Minority
A C shareholder / nterest
50% 60% 80% 15%
16
B B
 3- Basic Concepts: GROUP

 Participation percentaje: Percent over the total amount of shares that

the investor has over the investee.
 Control percentaje: Grade in which one entity controls an investee
and has a significant influence over the decissions of the subsidiary.
 Real participation: Shareholders rights.

PARTICIPATIONS TYPES (Control percentajes):

0% < X < 10% Simple
10% < X < 20% Relevant
20% < X < 50% Significant
50%< X Control

17
3- Basic Concepts: GROUP

SOLUTION Participation Control Real

GRUPO I Percentaje percentaje participation
A
A in B 70 70 70
70% 60%
A in C 60 60 60
30%
B C A in D - Direct - -
Indirect 60 (70x60)/100 =
Total 60 42
60% 25%
A in E 30 Direct 30 30
Indirect 25 (60x25)/100=15
Total 55 45
D E
B in D 60 60 60

C in E 25 25 25

18
3- Basic Concepts: GROUP

A
Control Percentaje:

E 55%
A

Grade in which one entity
70% 60% controls an investee and
has a significant influence
over the decissions of the
B C subsidiary (Sum of the
voting rigths).
60% 25%
30% Real Participation:

E 45%
A

D E Shareholders rigths

A
parent of
B, C, D, E

19
PRESUMPTION OF CONTROL
 Art. 2 NOFCA
 Control exists when a company, call parent, with regard to
another entity, call subsidiary, is in any of the following
situations:
a) It has the mayority of voting rights*
*All voting rights, including the potencial ones (for example, options to purchase
shares).
b) It has the faculty to appoint the mayority of members of the Board
of directors.
c) It can have the mayority of voting rights because of agreements
with third parties.
d) It can decide with its votes, the mayority of the members of the
Board of directors that have to sign the consolidated annual
accounts during the period when they are members of the Board
of directors and during two years before.
(Cases a, b and c are more important than d).

20
PRESUMPTION OF CONTROL

A
Control percentaje:
A

E 70%
60% “Has or can have”
70% Art. 3.3
Puchaseo
B option C
30% E 40%

A
control over
B, C, E
E

21
SPECIAL PURPOSE ENTITIES

A A controls E when A can

over B:
-Decide the economic and
financial policies in E.
-Has the posibility to
obtain economic benefits
B from its activities.
1%

99%
Circunstances to analyze:
-Activities from E are conducted in accordance
E with the needs from A.
- A obtains benefits or other advantages from
E: Special purpose entity the transactions from E
(Art. 2.2.) -A can decide in E.
-A has the right to obtain the mayority of E’s
benefits and, therefore, overtakes the mayority
of risks from its activities.

22
SPECIAL PURPOSE ENTITIES

A Entities created for

specific objectives ( for
example, to contract a
leasing, investment
property…)

B
1%

99%
SPE in ENRON:
Enron created a complex set of instrumental
E
companies, that where supposedly,
independent.
E: Special purpose entity But ENRON indirectly controlled them.
(Art. 2.2.) They were used to: Hide liabilities, protect
assetes or hide them, create fictious benefits
…

23
 SPECIAL PURPOSE ENTITIES. Example:
Asset

Company
rents assets SPE
to the SPE purchases the
asset
Loan to the
Pays the rent SPE

COMPANY SPE BANK

Pays the loan

• The company avoids recognising the liability in its

balance sheet.

24
24
JOINT VENTURES
 JOINT VENTURES: companies that are jointly controlled by
two ore more parties by explicit agreement to share control
(Art. 4.1).

Joint control: when statutory or contractual arrangements exists and

because of them, economic and financial policies must be taken with
the mutual agreement of all companies that control another one (Art.
4.2)

A C
50% 50%

B Joint venture

Joint managed by two or

more companies or groups
of companies

25
JOINT VENTURE
 Categories of joint control (NRV 20):
+ Joint business carried out by independent entities
Consolidated Accounts

 Joint business not carried out by independent

financial structures of the participants:
 Business controled jointly: activities that
involve the use of assets and other
resources property of the participants
 Assets controled jointly: assets that
belong together to all participants or are
jointly controled by them
Individual Annual Accounts of the
participants in each participation
percentaje

26
 ASSOCIATE COMPANY
 ASSOCIATE COMPANY: is a company in which a group of companies
has a substantial stake, but not outright control. This usually means
more than 20% but less than 50%.
 Companies not included in the consolidation process, but over them,
one or more companies of the group have a significant influence in its
management (art. 5 NOFCAC).

Requiremets:
- One or more companies in the group participate in the associate company
- The investor can take part in financial and operating policies decissions, but cannot
control them and cannot control the together with another company.

General rule: significant influence is presumed to exist when an investor holds, directly
or indirectly through subsidiaries, 20% or more of the voting power of the investee

Indicators:
- Representation on the board of directors or equivalent governing body of the investee.
- Participation in policy-making processes, including participation in decisions about
dividends or other distributions.
- Material transactions between the investor and the investee.
- Interchange of managerial personnel; or
27
- provision of essential technical information.
ASSOCIATE COMPANY

A
20%

B Associate
Company in which a group of
companies has a substantial stake
and wants to have it over a long
period of time, but not outright
control.

28
OBLIGATION TO PREPARE CONSOLIDATED
ANNUAL ACCOUNTS
 REQUIREMENTS TO PREPARE CONSOLIDATED
FINANCIAL STATEMENTS:
Parents should prepare consolidated financial statements in
which they consolidate their investments in subsidiaries (art. 6
NOFCAC).

Parent companies are

obliged to prepare
consolidated annual
accounts, including
those ones that are
also subsidiaries from
another parent entity.

29
EXEMPTION FROM THE REQUIREMENTS TO
PREPARE CONSOLIDATED FINANCIAL
STATEMENTS

 EXEMPTION FROM THE REQUIREMENT TO

PREPARE CONSOLIDATED FINANCIAL
STATEMENTS (art. 7 NOFCAC)

 Size: Small groups.

 Cetain Subgroups: when the parent of a subgorup is also
the subsidiary of another parent in the European Union.
 When the parent participes only in subsidiaries that
are not important to show the true and fair view of the
group as a whole.

30
OBLIGATION TO PREPARE CONSOLIDATED
ANNUAL ACCOUNTS
 EXEMPTION FROM THE REQUIREMENT TO PREPARE
CONSOLIDATED FINANCIAL STATEMENTS (art. 8)

 Size: Small groups.

 When the set of companies, in the last two annual accounts, does
not exceed two of the following limits to present an abbreviate
Income Statement in accordance with the Spanish regulation (Ley
de Sociedades de Capital) :
* Total asset < 11.400.000 €;
* Net income < 22.800.000€;
* Employees < 250
Except for quoted companies in the European Union.

(If information is not homogeneized, asset volume and net income

must be increased in 20%: 13.680.000 and 27.360.000
respectively).

31
OBLIGATION TO PREPARE CONSOLIDATED
ANNUAL ACCOUNTS

 EXEMPTION FROM THE REQUIREMENT TO PREPARE

CONSOLIDATED FINANCIAL STATEMENTS(Art. 8)
Size: Small groups Example: Group A, B, C

A is not obliged to prepare consolidated

A accounts when
- A, B and C do not exceed two of the three
limits
--Neither A, B or C are quoted companies.
B
To find out the limits:
a) Consolidate Net Income:
b) Sum up net incomes or assets value + 27.360.000
Assets: 13.680.000
C 20% + employees 250

32
OBLIGATION TO PREPARE CONSOLIDATED
ANNUAL ACCOUNTS
 EXEMPTION FROM THE REQUIREMENT TO PREPARE
CONSOLIDATED FINANCIAL STATEMENTS (Art. 9)
- For subgroups:
- When the parent obliged to elaborate consolidated statements is also
subsidiary from another parent inside the European Union. Only when
10% of the minority interest do not require, six month before the
closing date of the economic period, the elaboration of the
consolidated financial statements.

Requirements:
a) The subgorup is part of another group and its parent belongs to the
European Union.
b) The company who is except to elaborate consolidated accounts
must refer this in its annual accounts, and must also indicate the name
of the parent and its address.
c) The consolidated annual accounts must be deposited in the
Company House (Registro Mercantil) of the company excepted from
elaborating consolidated annual accouts.
d) The company except from elaborating consolidated accounts is
not a quoted companyin the European Union.

33
OBLIGATION TO PREPARE CONSOLIDATED
ANNUAL ACCOUNTS

 EXEMPTION FROM THE REQUIREMENT TO PREPARE

CONSOLIDATED FINANCIAL STATEMENTS (art. 9)
For subgroups

B is except from elaborating consolidated

A financial statements if
- A is Spanish or from the European Union.
- A has more than + 50% of the stockholder’s capital
from B.
- B is not a quoted company.
B - 10% of the minority interests have not require
Spanish
consolidated annual statements.

C - B,C are integrate in the consolidated annual

Spanish accounts from A.
- Consooidated Annual Accounts from A must be
deposited in the Company House from B.

34
Case 1
A
London (UK)

92%
B (92%)
Barcelona

Information:
100% 52% 40%
a) 10% of C’s minority
interests have required
V C D the elaboration of
Italy Granada Valencia
consolidated annual
80%
accounts.
98% 99%
b) D is a quoted company
E F G and subsidiary from B.
Seville Madrid France

35
OBLIGATION TO PREPARE CONSOLIDATED
ACCOUNTS
SPANISH REGULATION

Control relationships
between companies SPANISH OR
INTERNATIONAL
REGULATION
Definition of group of
companies

CONSOLIDATION
Obligation to prepare
consolidated accounts

Consolidation GROUP
YES method STRUCTURE
NO

36
 4- CONSOLIDATION METHODS
 CONSOLIDATION METHODS (art. 10 NOFCA)
 Global consolidation method
Group`companies (without exceptions)

 Proportional consoldiation method
Joint ventures (optional)*

 EQUITY METHOD
or participation method (art.12) Associate companies

(* Joint ventures can decide whether to use proportional consolidation

method or equity method. The method chosen must be the same for all
companies in the same situation)

(If one subsidiary is held for sale, it must be integrate in the consolidated
financial statements by the global consolidation method and the consolidated
balance sheet will present all its assets in the “non current assets held for sale”,
the liabilities in the liabilities linked to “non current assets held for sale” and the
result as interrupted result).

37
4- CONSOLIDATION METHODS

 Consolidation methods
 Global consolidation method: Add to the balance sheet of the parent company
the whole wealth of the subsidiaries, to the income statement and to the statement of
changes in equity of the parent company, all revenues and expenses of the
subsidiaries and to the statement of cash flow of the parent company, all financial flows
of the subsidiaries, after realizing the pertinent homogeneizations and eliminations.
 Proportional consolidation method: Add to the balance sheet of the parent
company the proportion of the wealth of the businesses joint together, to the income
statement and to the statement of changes in equity of the parent company, the
proportion of the revenues and expenses of the businesses joint together and to the
statement of cash flow of the parent company, the proportion of the financial flows of
the businesses joint together, after realizing the pertinent homogeneizations and
eliminations.
 Equity method: Replace the book value of the investment that appears in the
annual accouts of a company of a group, by the amount of the real participation in the
investee.

38
 Case 2: Global consolidation method

Company A Company B Consolidation

Non current 1.000 500 1.500

assets
Cash (Bank) 1.200 2,000 3.200
Financial 800
inverstment in B
(100%)
Total Asset 3.000 2.500 4.700
Stockholder’s 2.000 800 2.000
Capital
Long term 1.000 1.700 2.700
liabilities
Total Liabilities 3.000 2.500 4.700
+ Equity

39
 Case 3: Proportional consolidation method

Company A Company B 50% Consolidation

Company
B
Non current 1.000 500 250 1.250
assets
Cash (Bank) 1.200 2.000 1.000 2.200
Financial 400
inverstment in
B (50%)
Total Asset 2.600 2.500 1.250 3.450
Stockholder’s 2.000 800 400 2.000
Capital
Long term 600 1.700 850 1.450
liabilities
Total Liabilities 2.600 2.500 1.250 3.450
+ Equity

40
 Case 4: Equity method

Company A Company B Consolidation

Non current 1.000 500 1.000

assets
Cash (Bank) 1.200 2.000 1.200
Financial Replace the book
160 160
inverstment in value of the
B (100%) investment that
Total Asset appears in the
2.600 2.500 2.600
annual accouts of a
Stockholder’s 2.000 800 2.000 company of a group,
Capital
by the amount of the
Long term 600 1.700 600 real participation in
liabilities the investee. Not
Total Liabilities 2.600 2.500 2.600 real consolidation
+ Equity method.

41
5-IDENTIFYING CONSOLIDATION STRUCTURE

 GROUP : Parent and all subsidiaries by global consolidation

method.

 CONSOLIDAT ION SET: Group plus joint ventures, if aply

proportional consolidation method to them (art 11).

 CONSOLIDATION STRUCTURE: companies that belong to

the consolidation set plus the ones that must be integrated by
the equity method (art. 13).

42
Case 5 (I)
 Company J has following participations in the following
companies F, MG, A.
 J controls F and has 90% of the voting rights.
 J controls, together with two other companies, MG, and has 30% of
the voting rights.
 J has a significant influence over A, and has 25% of the voting
rights.

Inverstments in F, MG and A were made on the 31/12/200X.

Identify group, consolidation set and consolidation structure.

Balance sheets of every company are in the next slide.

43
Case 5 (II)
J F MG A
Non Current 100 70 40 85
Assets
Current Assets 80 90 60 105
Investment in F 90
Investment in MG 24

Investment in A 35
Total Assets 329 160 100 190
Capital 120 100 70 120
Reserves 54 10 20
Minority F
Liabilities 155 60 20 50
Total Equity + 329 160 100 190
Liabilities

44
Case 5 Solution (I)

 Option I.
 Group: J+F
 parent J Global consolidation mathod
 subsidiary F method
- Consolidation set : J + F +MG
- joint venture MG ----------- Proportional consolidation method
- Consolidation structure: J+F+MG+A
- associate A (equity method)

 Option II
 Group: J+F (Global consolidation method)
 Consolidation set = Group = J+F
 Consolidation structure = J+F+MG+A
 Joint venture MG ------------------ Equity method

45
Case 5 Solution (II)
Option 1

J F MG A J+F
Non Current 100 70 40 85 170
Assets
Current Assets 80 90 60 105 170
Investment in F 90
Investment in 24 24
MG
Investment in A 35 35
Total Assets 329 160 100 190 399
Capital 120 100 70 120 120
Reserves 54 10 20 54
Minority F 10
Liabilities 155 60 20 50 215
Total Equity + 329 160 100 190 399
Liabilities

46
 Case 5 Solution (III)
Option 1

J F MG A J+F J+F+ 30%MG

+A
Non Current 100 70 40 85 170 182
Assets
Current Assets 80 90 60 105 170 188
Investment in F 90
Investment in 24 24
MG
Investment in A 35 35 35
Total Assets 329 160 100 190 399 405
Capital 120 100 70 120 120 120
Reserves 54 10 20 54 54
Minority F 10 10
Liabilities 155 60 20 50 215 221
Total Equity + 329 160 100 190 399 405
Liabilities

47
 Case 5 Solution (IV)
Option 2
J F MG A J+F+MG+A
Non Current 100 70 40 85 170
Assets
Current Assets 80 90 60 105 170
Investment in F 90
Investment in MG 24 24
Investment in A 35 35
Total Assets 329 160 100 190 399
Capital 120 100 70 120 120
Reserves 54 10 20 54
Minority F 10
Liabilities 155 60 20 50 215
Total Equity + 329 160 100 190 399
Liabilities

48
 Case 6
Identify group, consolidation set and consolidation structure in the following figure:

E D 80% B
10% 55%
30%
75% 20%
J

25% 20%
H
I C

20% 30%
15%
25%

55%
A G F

49
6- CONSOLIDATION PROCESS

CONSOLIDATION PROCESS.
Set of accounting transactions that allow to establish financial
statements of a group as those of a single economic entity.
The process starts with the individual financial statements of
each single company included in the consolidation structure.
(Group accounting does not exists)

50
6. CONSOLIDATION PROCESS

SPANISH REGULATION

Control relationships
between companies SPANISH OR
INTERNATIONAL
REGULATION
Definition of group of
companies

CONSOLIDATION
Obligation to prepare PROCESS
consolidated accounts

Consolidation CONSOLIDATION
YES method
NO STRUCTURE

51
Phases in the consolidation process

CONSOLIDATION
STRUCTURE

CONSOLIDATED
INDIVIDUAL
FINANCIAL
FINANCIAL
STATEMENTS
STATEMENTS

HOMOGENIZATION AGGREGATION ELIMINATIONS

Uniformity in the Aggregation

Avoid
accounting of individual
duplicities
language information

52
HOMOGENIZATION

 PURPOSE: To unify accounting criteria in all companies

that are going to be consolidated.

 UNIFICATION:
 In time
 Valuation criteria
 Because of internal transactions
 To aggregate

(Adjustmets between companies that consolidate in the

same group)

53
HOMOGENIZATION IN TIME
GENERAL RULE:
Consolidated financial statements must be estalish at the
same date as the company obliged to consolidate establishes
its individual annual accounts.

SPECIAL CIRCUNSTANCES:
 When the closing date of any company included in the consolidation
process differs over three months of the closing date of the parent
company, the first one must elaborate intermediate financial statements
refer to the closing date of the parent (Art. 16)

 If the closing date differs in less then three months, annual accounts will
be taken into the consolidation process as they are. Adjustments must be
done only if something important has happened.

 If a subsidiary starts being part of the group at a different date as the

starting date of the economic period, only the Income Statement will be
include in the consolidated financial statements, and only for the part of the
period that it has been part of the group.

54
HOMOGENIZATION IN TIME
Subsidiarie’s closing date

Same as the Different to the

parent parent

Less than More than

three months three months

With Without
important important Specific annual
transactions transactions accounts

Account them

CONSOLIDATION

55
HOMOGENIZATION OF THE VALUATION CRITERIA
 Assets, liabilities, revenues and expenses that take part into the
consolidation process must be valued according to the same valuation
criteria.

 If any of them have been valued using not the same valuation
criteria as the ones that the other companies included in the
consolidation process have used, it will have to be revaluated
according to the same valuation criteria. Only if the result of using
the other valuation method does not affects to the true and fair view of
the group, the company can avoid revaluating it (Art. 17).

 Examples:
 Use of different amortization criteria for similar non current assets.
 Use of different valuation criteria for calculating the ending value of the
inventories.

56
 HOMOGENIZATION BECAUSE OF INTERNAL
TRANSACTIONS

 When the values of internal transactions are not similar between

two companies or if one company included into the consolidation
process has not account one transaction that appears in the
individual accounts of another one, adjustments must be done to
allow the eliminations between mutual transactions (art. 18
NOFCAC).

 Examples:
 Payments/ cashing intergroups that have not been accounted
because of no information from the bank at the closing date,
 Purchases/ sales intergroups that have not been accounted by
the acquirer because of invoices not issued.

57
HOMOGENIZATION TO AGGREGATE

 If the structure of the individual financial statements of any

company included into the consoldiation process is not the same
as the one used in it, necessary reclasifications must be done
(art. 19 NOFCAC).

 Examples:
 Different names for similar accounts.
 Different format / sketch for the financial statements.

58
 Case 7

Companies A and B are part of a group which is preparing the

consolidated annual accounts.

1. Subsidiary B acquired last january a machine for 8.000.000 €. Its

economic life is estimated in 10 years. Similar machines have an
estimated economic life in the group of 5 years.
2. At the end of the period, B has in its warehouse merchandise valued
in 110.000.000 €. Valuation criteria applied was FIFO. The valuation
criteria used in the consolidation account is average cost. If this
method would have been used, the value of the stocks of
merchandise in B would have been 103.000.000 €.
3. For the consolidaton purpose, the group does not consider
Investigation and Development Expenses as an asset. B has
considered them as an asset (1.500.000 €) and has amortizated them
20%.

59
 Case 7

Balance Sheet (in A B Adjust.(1) Adjustm. Adjustm.(3)

(2)
mill.)
Non current assets 550 220 -0,8 -1,5 +0,3
Current assets 120 420 -7
Total assets 670 640
Capital and Reserves 100 150
Result 120 70 -0,8 -7 -1,5 +0,3
Non current liabilities 210 100
Current liabilities 240 320
Total EQ + Liabilit. 670 640

60
 Case 7

Income Statement A B Adjust.(1) Adjustm. Adjustm.(3)

(2)
Revenues 1370 3470
Expenses 1250 3400 0,8 7 1,5 -0,3
Result 120 70 -0,8 -7 -1,5 0,3

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AGREGGATION

 Addition of different accounts, according to its nature, of assets,

liabilities, equities, revenues and expenses, that have been
homogeneized previuosly of all the companies that are part of
the group (art. 21 NOFCAC).
 For companies that began beeing part of the group during the
economic period, its Income Statement will be included into the
consolidated accounts since the acquisition date.
 For companies that have beeing sold during the period, its
Income Statement will be included into the consolidated accounts
until the loss of control.
 Methods
 Global consolidation method
100% aggregation.
 Proportional consolidation method
aggregation according the
% of participation.
 Equity method
No aggregation.
62
 Case 7

Balance Sheet (in A B Adjust.(1) Adjust.(2 Adjust.(3) B ´H Aggregatio

n
mill.)
Non current assets 550 220 -0,8 -1,5 +0,3 218 768
Current assets 120 420 -7 413 533
Total assets 670 640 631 1301
Capital and Reserves 100 150 150 250
Result 120 70 -0,8 -7 -1,5 +0,3 61 181
Non current liabilities 210 100 100 310
Current liabilities 240 320 320 560
Total EQ + Liabilit. 670 640 631 1301

63
 Case 7

Income A B Adjust.( Adjust.( Adjust.(3) B ´H Aggregatio

1) 2 n
Statement
Revenues 1370 3470 3470 4840
Expenses 1250 3400 0,8 7 1,5 -0,3 9 4659
Result 120 70 -0,8 -7 -1,5 0,3 61 181

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 ELIMINATIONS
 Compensations of balances or reciprocal amounts between companies
of the consolidation set to avoid duplicities into the consolidated
statements.
 To search the group as a unit means to eliminate every internal
transaction.
 TYPES:
 Equity elimination
Investment – Equity.
 Reciprocal accounts:
 Financial eliminations (debits-credits; acc. receivable - acc. payable).
 Expenses and revenues because of internal transactions (purchases-
revenues….).
 Elimination of non realized results (fictious)
 Merchandise.
 Non current assets.
 Services.
 Financial assets.
 Internal dividends.

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ELIMINATION INVESTMENT - EQUITY
Global integration method
In the balance sheet of the investor appears the investment by its
acquisition cost, (minus impairment), and in the balance sheet of the
subsidiary appears the equity (total or part) of the parent company.
That means:
a) There is a duplicity.
b) There is a valuation difference.
Equity
Equity Investment
Investment in
in group
group companies
companies
When preparing consolidated financial statements, the individual balances of the parent
and its subsidiariesare aggregated on a line-by-line basis, and then certain consolidation
adjustments are made. The adjustments include the elimination of the carrying amount of
the parent’s investment in each subsidiary and the parent’s portion of equity of each
subsidiary.
Goodwill or Negative Difference of consolidation can appear at the acquisition’s date.

66
ELIMINATION INVESTMENT - EQUITY

Proportional consolidation method

In the balance sheet of the investor appears the investment by
its acquisition cost, (minus impairment), and in the balance sheet
of the subsidiary appears the percentaje in the equity that
controls the parent company.
That means:
a) There is a duplicity.
b) There is a valuation difference.

67
ELIMINATION INVESTMENT - EQUITY

Equity method
In the balance sheet of the investor appears the investment by its
acquisition cost, (minus impairment), of the associate company.

Art. 54.. In the consolidated balance sheet, this participation will appear as
“participations puts / places in equity”.

Art. 54. The participation in the consoldiated accounts will be valued adjusted to
the percentaje that they represent in the equity of the company. If the difference
is positive, it will included in the book value of the investment and will be explain
in the notes to the consolidated accounts. If the difference is negative, it will be
brought directly into the Income Statement as a positive result.

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ELIMINATION RECIPROCAL ACCOUNTS

Financial eliminations: Are the ones that affects assets in the

balance sheet from one company and liabilities in another
one: “Mutual or reciprocal credits and debits”.

Accounts payable Accounts receivable

Expenses and revenues: Are the ones that affects the components of the
Income Statement, that means, expenses and revenues because of
internal transactions. They must be eliminated by compensating both
balances:

Sales of merchandise Purchases of merchadise

69
 ELIMINATION OF NON REALIZED RESULTS

What to eliminate? Non realized results (fictitious results):

 Transactions with inventories.

 Transactions with non current assets.
 Transactions with services.
 Transactions with financial assets.
 Internal dividends.

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CONSOLIDATED ACCOUNTS
Consolidated annual accouts include:

 Consolidated Balance Sheet

 Consolidated Income Statement
 Consolidated Statement of Changes in Equity.
 Consolidated Statement of Cash Flow.
 Notes to the Consolidated Annual Accouts.

The consolidated annual accounts must be form an unit.

In addition, it will include a consolidated management report.

(Art. 44.1 CC).

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CONSOLIDATED ACCOUNTS
Consolidated annual accounts are the financial statements of a
group presente as those of a single economic entity. They must
show a fair view of its wealth, its financial position and the result
of the companies included in the consolidation.

They must be established at the same date as the company

obliged to consolidate.

When the composition of the companies included in the

consolidation process had varied considerably during an
economic year, this information must be included in the notes to
the financial statements.

The consolidated annual accounts and the management report

must be signed by all members of the board of directors of the
company obliged to consolidate (CC, art. 44.2.3.4.6).

72