Elimination of investments in subsidiaries
To eliminate a portion of shares that are held by an owner entity within a group, you must create a group journal.
The portion of shares to eliminate does not always correspond to the ownership percentage. In that case, elimination must be conducted through a customized process or manual bookings. If the portion of shares to eliminate corresponds to the ownership percentage, you can run the standard process that is provided in Financial Consolidation.
Capital consolidation is always performed in the context of a group. However, eliminations are done at the entity level.
The created journal eliminates the entire investment value that is booked on the Investment Accounts of the owner entity. The booking is against the subsidiary's shared values that are booked on the Equity Accounts of the Subsidiaries and are based on the effective ownership percentage. Shared capital in the x amount, where x is the effective ownership percentage of an owned entity (intercompany), is eliminated as a debit booking.
An owned entity's shared capital is always entered and eliminated in the External element of the Intercompany dimension.
The amount of elimination always depends on the effective ownership. Minorities (non-controlling interests) are considered in a separate rule.
Debit differences occur if the book value of an investment of an entity that owns a subsidiary is higher than the portion of a subsidiary's equity value that is based on the effective ownership percentage. Then, the owning entity receives a debit difference that is booked to the Investment Property account. This makes the debit and credit equal. Such a case is called goodwill.
Credit differences occur if the book value of an investment of an entity that owns a subsidiary is lower than the portion of a subsidiary's equity value that is based on the effective ownership percentage. Then, the owning entity receives a credit difference that is booked to the Consolidation Reserve account. This makes the debit and credit equal. Such a case is called badwill.
Example of eliminating investments in subsidiaries
| Entity (Owner) | Intercompany (Owned) | Account | Value |
|---|---|---|---|
| RU0001 Genesis Cars | RU0002 Genesis Finance | (A131110) Investments in Related Entities (Gross Value) | 8,953,815.75 |
Genesis Cars owns 80% of Genesis Finance. Genesis Cars has a booking value of an investment towards Genesis Finance in the amount of 8,953,815,75 on the Investments in Related Entities account.
Genesis Finance has these shared values sections:
| Shared values section | Value | Stakeholder's portion (80%) | Minority portion (20%) |
|---|---|---|---|
| Shared Capital | 7,928,621.03 | 6,342,896.82 | 1,585,724.21 |
| Additional Paid in Capital | 1,631,897.48 | 1.305.517,98 | 326,379.5 |
| Pre-Acquisition Retained Earnings | 1,658,947.03 | 1,327,157.60 | 331,789.43 |
The sum of the stakeholder's portion (Genesis Cars' portion) in Genesis Finance's shared values is 8,975,572.43. The amounts that make up this sum are eliminated as debit bookings on Genesis Finance's accounts. For those amounts, the intercompany must be specified as external. The amount that is eliminated depends on the effective ownership. Minorities are considered by a separate rule. Capital consolidation is performed in the context of a group, but eliminations are done only on the affected entities.
The deduction of the value of Genesis Cars' investment in Genesis Finance from the sum of the Genesis Cars' portion of the Genesis Finance's shared values results in a difference of -21,756.68. The difference can be goodwill if the value of an investment exceeds the value of a share portion, or badwill if the value of an investment is less than the value of a share portion.
8,953,815.75 (investment) - 8,975,572.43 (sum of stakeholder's portion) = -21,756.68 (badwill)This table shows an example of the elimination of Genesis Cars' investments in Genesis Finance with a manual group journal. In this example, segments 1, 2, 3, and intersegments 1, 2, 3 are unassigned.
| Entity | Account | Intercompany | Schedule Detail | Debit | Credit |
|---|---|---|---|---|---|
| Genesis Cars (owner) | (A13110) Investment in Related Entities | Genesis Finance (owned) | Increases | 8,953,815.75 | |
| Genesis Finance | (L110100) Share Capital | External | Increases | 6,342,896.82 | |
| Genesis Finance | (L110200) Additional Paid in Capital | External | Increases | 1,305,517.98 | |
| Genesis Finance | (L110510) Pre Acquisition Retained Earnings | External | Increases | 1,305,400.94 | |
| Genesis Finance | (L110510) Pre Acquisition Retained Earnings | External | Revaluations | 21,756.68 | |
| Genesis Cars (owner) | (L110400) Consolidation Reserve | Genesis Finance (owned) | Other Movements | 21,756.68 |
The value of Genesis Cars' investment in Genesis Finance is booked as a credit on Genesis Cars' account. The stakeholder's portion of Genesis Finance's shared values is booked as a debit on Genesis Finance's accounts. The pre-acquisition retained earnings are split into two schedule details, increases and revaluations. Revaluations contain the badwill amount and increases contain the remaining part of the pre-acquisition retained earnings. In this example, the badwill is disclosed in Consolidation Reserve on Genesis Cars' account but the way goodwill or badwill are disclosed depends on an entity's requirements.
- Account
- Entity
- Intercompany
- Schedule detail
- Segment 1
- Intersegment 1
- Segment 2
- Intersegment 2
- Segment 3
- Intersegment 3
For each matching combination, a journal line must be created.