Proportional consolidation

Question 1

What is Joint-venture?

Answer 1

Question 2

Equity method

Answer 2

Question 3

What are the two methods to consolidated Joint-Ventures?

Answer 3

1. proportional consolidation procedures
2. equity accounting

Question 4

Proportional method

Answer 4

Inclusionof 50% of assets and liabilities in the group accounts

Inclusion of 50% of income and expenses in the group accounts

No reflection of non-controlling interests (minorities)

Intra-group transactions (withJV) are proportionately eliminated

Question 5

Steps of proportional method

Answer 5

Question 6

Example from book

Answer 6

Question 7

How is this method allowed?

Answer 7

Proportional method is partially allowed e.g. under German HBG as welll as under Swiss Statutory accounting regulations. However the following main critical points always consitute arguments against this method:

1. The proportionate inlusion of assets and liabilites as well as income and expenses lead to the situation where inseparable B/S-postions and P+L postions. are distributed amongst various legal entities; this conflichts with the fiction of legal unity;
2. Generally (according to SWiss GAAP FER as well as IFRS) assets can only be included in the financial statements if the reporting unit has control over them. In case of a JV the parent has no direct control.

Question 8

What is equity accounting?

Answer 8

Inclusion of th associated companies is reflected in the investment line (therefore, also referred to as “one-line-consolidation”)

This investment is, hoewever, revalued on a constant basis with each new consolidated financial statement.

For first-time consideration, a revaluation on the investment included at equity is performed

Goodwill is calculated althoguht usually not presented separately under the caption of goodwill

The equity value cahnges with any profit/loss of the year, dividend received or any impairement that may arise.

Question 9

Equity method steps

Answer 9

Question 10

Equity method investment account

Answer 10

Question 11

Equity method investment account 2

Answer 11

Question 12

Equity accounting (30% stake) CFS

Answer 12

Question 13

Limitations of Equity method

Answer 13

In practise the equity method has limitations especially with regards to the limited access to current detailed financial information.

While the parent has a certain level of influence in the accosiate it has no possibility to excercise control and to impmenet its own consolidation procedures and consolidation hand-book

Sometimes also the closing of the financials of the associate does not match the closing date of the group financials.

Note: please also note that in practice some elimination may be avoided as e.g. the intragroup profit elimination or the eliminations o other P+L or B/S items. due to the (offtentimes) limited materiality of such amounta in the context of the whole group financials, such practise appears to be acceptable and does not lead to a distortion of the group accoutns.

Question 14

Equity method and IFRS

Answer 14

Investments in associate must be accounted for by using equity method

Equity method investments must be classified as non-current assets.

An associate is an entity over which the investor has significant influence (presumed for voting rights between 20% adn 50%)

Investments of an associate is initially recognised at acquisition cost

Subsequent valuation of investment increase or decrease according to investor’s share of profit or loss.

Difference between cost of investment and investor’s share of net assets is recognised as goodwill

Goodwill is not presented separately and may not be amortised

Goodwill is not teste for impairement but the entire investmen book value vs value. in use or fair value less divestment costs.