Consolidated Financial Statements - What should concern you?

On January 1, 2016, the new lower limits for the mandatory preparation of consolidated financial statements entered into force. As a result, the number of entities that have to compulsorily prepare consolidated financial statements increased and during preparation they will face a few practical problems. The reason for these problems is that there is firstly very brief legislative regulation of the consolidated financial statements and secondly a lack of specialized literature.

The issue of consolidated financial statements is dealt with by Czech Accounting Standard 020 but it only describes the full, equivalent and proportionate method, calculation and depreciation of the consolidation difference from the acquisition of a subsidiary, affiliate or joint venture and consideration of intra-group transactions.

What unfortunately we do not find in Czech Accounting Standard 020 is the sale of the shares in a subsidiary. This transaction may result in the following situations:

1. even after the sale of the subsidiary the parent company retains control, i.e. instead of original 90% share it remains with 80% share;
2. after the sale, the parent company will retain a 30% share and instead of a subsidiary, it has a new affiliate or joint venture;
3. the parent company sells all its shares and, if it was its sole subsidiary, will no longer be obliged to prepare the consolidated financial statements;
4. the parent company sells its interest to another subsidiary of the group and will essentially restructure the group.

The issues that need to be addressed in these situations are primarily to capture revenue from the sale of the stake and the possible derecognition of net assets sold. In most cases, it is also necessary to adjust the value of the consolidation difference and minority interests.

For a number of accounting transactions (and not only from the point of view of consolidated financial statements), a solution (or inspiration for it) can be found in International Financial Reporting Standards.  However, in business combinations, there was a conceptual change in 2008 in the approach to determining the amount of goodwill and the timing of its determination.  Goodwill (in our consolidated financial statements is referred to as the consolidation difference) is set in IFRS from 2008 only once at the acquisition date and not at each acquisition date of the sub-stake as required by Czech Accounting Standard 020.  The acquisition date is defined the same way as in the Czech Accounting Standard 020 as the moment from which the acquirer can exercise control over the acquiree. Sales of shares are then recognized under IFRS 3 Business Combinations only finally at the sale of the majority interest.  In the case of partial sale of the share while retaining a controlling influence, the result of the transaction is captured only in capital. This solution, however, is unlikely to apply in our circumstances, given the diverging capture of the acquisition where, under IFRS, it is such a significant event (acquisition of control) that, as the only one, may result in the disclosure of goodwill.

Therefore, until the Czech consolidation rules come closer to the current IFRS concept, we should proceed under IFRS rules valid until 2008, and to report profit or loss on each, even the partial sale, of share in the subsidiary in the consolidated profit and loss statement.

It has to be noted that IFRS 3 applies to both the capital acquisitions which may result in the obligation to prepare the consolidated financial statements, as well as the property acquisitions which are referred to as the purchase of parts of a commercial establishment.

The National Accounting Board is currently preparing an interpretation of the sale of the entire holding in a subsidiary in the consolidated financial statements.  It is probable that the National Accounting Board will subsequently deal with the situation of a partial sale of shares after which the subsidiary becomes an affiliated company.  In the meantime, an accounting entity must choose a solution that complies with general accounting principles, in particular the principles of accrual and of a true and fair view.

Alice Šrámková