Group accounts Learning objectives

1
Group accountsLearning objectives

• Know the criteria for a group in relation to
  financial statements - The basic criterion is
  decisive influence
• Understand the purpose of the group account as an
  element in the financial statements
• Understand and be able to use the consolidation
  schedule
• Be able to consolidate the statements/accounts of
  the consolidating companies
• Understand and be able to eliminate the double
  counting caused by internal share ownership by
  means of the past equity method
• Understand the Equity method/internal value
  method for measurement of shares in D in the
  statements of the parent company

2
What is a group?

• Basically a group can be defined as a financial
  combination of legally independent companies.
• A group may be established under different
  corporate forms (partnerships, operating
  foundations, co-operative societies, public
  limited (liability) companies, private limited
  companies)
• A group consists of a parent company and its
  subsidiary companies

3
DCAA Bil. B4 - definition of a group.

• According to the DCAA parent companies
• a) hold the majority of the voting rights in
  another company,
• b) are company members and have a right to
  appoint and dismiss a majority of the members in
  the top management of the other company (board of
  directors and/or corporate management),
• c) are company members and have a right to
  exercise a controlling influence over another
  company on the basis of the articles of
  association of or agreement with that company,
• d) are company members and hold the majority of
  the voting rights in another company on the basis
  of agreement with other members or
• e) own equity interests in another company and
  exercise a controlling influence on this company.

4
DCAA Bil. A5, A1 and B5 - definition of a group.

• In this Act company members are
• Stockholders, shareholders or others who have
  equity interests in a company
• In this law equity interests are
• Holdings in public limited companies
  (shares), in private limited companies (shares)
  and also in the share capital of other companies
• Affiliated companies The subsidiary companies of
  a company, its parent companies and their
  subsidiary companies (the sisters, aunts, and
  cousins)

5
DCAA Bil. B2 - definition of a group.

• In this Act subsidiary companies are
• Companies with which a company directly or
  indirectly have the connections mentioned under
  the definition of a parent company

6
DCAA bil. B4 - definition of a group.

• In practice a business is normally a parent
  because it owns the majority of the voting rights
  in the subsidiary
• A company is very rarely a parent solely as a
  result of the other criteria alone

7
DCAA Bil. B6 and 7 - direct and indirect voting
rights etc.

• In the calculation of voting rights and rights to
  appoint and dismiss members of management organs,
  both directly owned equity interests (by the
  parent on which the parent can thus exercise the
  voting right) and indirectly owned equity
  interests (on which the parent can exercise the
  voting right by controlling the subsidiary with
  the equity interests) must be included

8
Consolidated financial statements

• Consolidated financial statements are an element
  of the financial statements of the parent
  company they are a supplement to the financial
  statements
• Particular specification requirements concerning
  group relations in the parent and subsidiary
  financial statements. The following items are
  specified in the balance sheet (they are
  eliminated in the consolidated financial
  statements)
• Financial fixed assets
• Equity interests in/receivables from affiliated
  companies
• Current assets - receivables
• Receivables from affiliated companies
• Current assets - securities and equity interests
• Equity interests in affiliated companies
• Debt
• Debt owing to affiliated companies

9
Consolidated financial statements

• The income statement Separate items for
• Income from equity interests in affiliated
  companies,
• other financial income from affiliated
  companies and
• financial expenses resulting from affiliated
  companies
• Note information requirements There are a series
  of requirements to the information in notes
  concerning the consolidated financial statements
  - DCAA 97 (category C/ guarantee commitments)
  and 72 (category B/ The name of the parent
  company/ address/information of the share
  owned/result of operations/owners equity)

10
Consolidated financial statements

• Purpose of consolidated financial statements
• Basis of law
• Duty to prepare consolidated financial
  statements, including exemptions and leaving out
• Form/substance
• Consolidation

11
Purpose of consolidated financial statements

• To provide an over-all picture of the financial
  position and the result of operations of the
  entire group.
• To summarize information which is already stated
  in the individual financial statements (no new
  information).
• E.g. the over-all debt/receivables to and
  from the external environment
• To describe matters such as they are when the
  accounting group is the accounting unit (new
  information) -
• E.g. the total sales of the group to the
  external environment (which has been eliminated
  for trade between the group companies)
• To inform interest groups of the parent company
  and the subsidiary companies (and management of
  the group?)

12
Basis of law

• DCAA, especially section VI Consolidated
  financial statements and financial statements for
  mergers etc.
• Guideline for consolidated financial statements -
  issued by the Danish Commerce and Companies
  Agency (DCCA)

13
Liability to prepare consolidated financial
statements - exemptions/leaving out

• DCAA 2, quote
• For every accounting year the companies
  mentioned in 3, paragraph 1, must prepare
  consolidated financial statements according to
  this Act. Unless otherwise stated in 18, 22,
  78, 102 or 109, the consolidated financial
  statements must be supplemented with
• 1) financial statements for the group controlled
  by the company (consolidated financial
  statements)
• 2) management report for the group controlled by
  the company
• Exemptions
• small groups, 110 - DKK20 million balance sheet
  total/DKK40 million net sales/50 employees
• Parent companies that are themselves 100 owned
  by another company (or close to 100 owned) ,
  112 - a series of conditions

14
Liability to prepare consolidated financial
statements - exemptions/leaving out

• Leaving out
• In certain cases it is possible to leave out a
  subsidiary company from the consolidated
  financial statements, cf. DCAA 114, paragraph 2
  
• if owing to special circumstances the parent
  company cannot exercise its owner influence on
  the subsidiary
• if owing to special circumstances the parent
  company cannot get the necessary information
• Ownership which is solely motivated as a
  temporary and short term arrangement
• In certain cases subsidiary companies must be
  left out from the consolidated financial
  statements, cf. DCAA 114, paragraph 3
• Especially in terms of subsidiary companies
  within financial business
• The regulations do not leave much room for
  interpretation - it takes very good
  arguments/reasons for leaving out a subsidiary
  company

15
Form/substance

• DCAA 115
• Consolidated financial statements must show
  the assets and liabilities of the consolidated
  companies, their financial position and result of
  operations, as if they combined were one single
  company.
• As if legal fiction, but financial
  reality

16
Form/substance

• DCAA 117, paragraph 1
• By consolidation uniform items in the
  financial statements are added item by item so
  that uniform revenue and expenses as well as
  assets and liabilities are totaled for all group
  companies. Adjustments must be made, though,
  which are necessary on the basis of the special
  circumstances which apply to consolidated
  financial statements and are different from
  ordinary financial statements.
• DCAA 122, paragraph 2
• The equity interests of one consolidated
  company in another consolidated company, measured
  at their cost price, are set off from the
  consolidated statements and against the owned
  companies net assets, measured at their current
  accounting value of the consolidated companies,
  cf. paragraph 1. The goodwill resulting from this
  setoff is determined at the time of group
  establishment.

17
Form/substance

• DCAA 120 eliminations
• 1) Receivables and liabilities between the
  consolidated companies
• 2) income and expenses resulting from
  transactions between the consolidated companies
  and
• 3) profit and loss resulting from transactions
  between the consolidated companies, which is
  included in the items booked value

18
Form/substance

• Consolidated financial statements are prepared
  according to the same rules as the parent company
• The applied accounting principles in the group
  must be the same. The valuation principles of the
  parent company are usually used for the group.
  DCAA 119
• The same accounting year as the parent company.
  If more than 3 months ahead of the balance sheet
  day of the parent company then special financial
  statements need to be prepared as of the balance
  sheet day of the parent company. DCAA 116

19
Consolidated financial statements

• The consolidated financial statements are the
  result of a additions and a number of
  eliminations
• Consolidation a summation of information in the
  individual companies financial statements in
  consolidated financial statements
• Eliminations gt summarize the information so that
  the group is the accounting unit (as if there
  were only one company), i.e. only include those
  transactions which have been made with external
  parties