PREPARATION OF THE CONSOLIDATION Flashcards
What should an auditor do in order to align the figures of all entities before start the actual consolidation process?
Before starting the actual consolidation process, the figures of all entities should be aligned:
(1) Apply consistent valuation rules for the local financial statements
(2) Translation of the financial statements denominated in a foreign currency
(3) Reconciliation of inter-company balances
(4) Reclassifications => uniform presentation
(5) Consolidation reporting package
What means to apply consistent valuation rules for the local financial statements? (1)
It means consistency in the accounting principles for the subsidiaries included in the consolidation.
The restatements of the local financial statements prior to the consolidation process are no actual accounting entries to be recorded in the local financial statements of each company.
The restatements are recorded in specific ledgers in the consolidation tool.
Examples are the restatement of fixed assets (depreciation), the restatement of formation expenses, and the restatement of inventories (difference in valuation rules)
Translation of foreign currency statements (2)
In the event one or more of the companies included in the consolidation report under another currency than the reporting currency , these figures have to be translated.
The report have to be in parent currency
Which are the two translate methods of foreign currency?
- Monetary / non-monetary method
- Closing rate method
How should we choose which translation methods use?
1) Monetary/ non monetary method:
*When transactions of the subsidiary are principally performed in the parent company’s currency
*When the exchange rate fluctuations of the local currency/ consolidation currency have a significant effect on the transactions and cash flow of the subsidiary
2) Closing rate method (most common):
*When the exchange rate fluctuations of the local currency/ consolidation currency have little or no influence on the transactions and cash flows of the subsidiary
Is mandatory to use the same method for all the subsidiaries?
No obligation to use the same method for all the subsidiaries.
Possibility to adopt other translation methods in special circumstances
Which are the currency methods?
- Closing rate: exchange rate al 31/12
- Historical rate: exchange rate at acquisition date
- Average rate: exhange rate as result of the average of over a period of time
Which currency methods need to be used to translate the different currency value of Assets under the two translate methods?
Monetary / non-monetary method:
- Monetary method: closing rate
- Non-monetary method: historical rate
Closing rate: closing rate
Which currency methods need to be used to translate the different currency value of Equity under the two translate methods?
Monetary / non monetary method: historical rate
Closing rate: historical rate
How is accounted the translation differences caused by the use of the different currency methods?
Monetary / non-monetary method: Posted in Profit and Loss
Closing rate method: Posted in separate caption in Equity as “CTA”
How is accounted the Share of the difference to be allocated to the minority interest using the two translation of currency methods?
Monetary / non-monetary method: Separate caption “Share of minority interest” in the net result
Closing rate method: Separate caption “Minority Interests” under Liabilities
What means the reconciliation of intercompany balances and transactions? (3)
It means that Intercompany positions need to be identified, in order to eliminate Group reporting
and Intercompany confirmations in a later stage.
Examples are: Loans, Trade receivables and payables, Recharges, Transfer of goods
