Economic
sciences / 7. Accounting and Auditing
Kazybek M.K, master's degree,
Karaganda
Economic University of Kazpotrebsoyuz,
100009, Republic of
Kazakhstan, Karaganda, Akademicheskaya str. 9
Basic concepts and
meaning of the consolidated financial accounts.
The characteristic tendency of modern
development of management is the consolidation of enterprises. The necessity
for consolidated financial accounts is connected to the globalization of business,
the processes of concentration and centralization of the capital, the
establishment of various forms of commercial, manufacturing and financial
connections between the companies, overcoming national frontiers and the
development of transnational corporations, the active output of various
national companies on international stock markets.
The main key concepts in the theory
of consolidation are the concepts of «group of companies " and "
consolidated financial accounts". As the analysis of the literature shows,
there is still no generally accepted scientific definition of the consolidated
group yet. The existing definitions of the consolidated group are highly
condensed and do not fully disclose particular features and methodological essence
of the union. It is quiet difficult to give a single definition for
«consolidated group" due to the lack of research of its theoretical and
methodological essential principles. In addition, it must reflect the influence
of the leading company on branch establishments and dependant companies as for
each type of subordination there is its own method of inclusion in the
consolidated financial accounts of the company [1].
In 2011, the IASB would begin the
preparation process of the standard on the consolidated financial accounts from
IAS 27 "Consolidated and separated Financial accounts" IAS (IFRS) 10
"Consolidated financial accounts». This step was undertaken as during the
crisis criticism on accounting requirements was intensified, which allowed some
companies not to include some types of companies in the consolidated financial
accounts which led to the financial changes in the company [2].
According to a new standard, the
consolidated financial accounts is the financial accounts of the group where
the assets, liabilities , capital, income , expenses and money streams of the
leading enterprise and its branch establishments are presented as assets ,
liabilities, equity , income, expenses and money streams of a united economic
entity [3].
The consolidated financial accounts includes the consolidated
accounts of the financial condition,
the consolidated accounts of joint
income, the consolidated financial accounts of the changes in capital,
the consolidated accounts of cash assets traffic and the note to the consolidated
financial accounts. The detachment of the given form of the financial accounts
should be taken as an indication of the growth of the importance of research on
this topic.
The main key concepts in the theory of
consolidation are the concepts of «group of companies «and «consolidated
financial accounts". As the analysis of the literature shows, there is
still no generally accepted scientific definition of the consolidated group
yet. The existing definitions of the consolidated group are highly condensed
and do not fully disclose particular features and methodological essence of the
union. It is quiet difficult to give a single definition for «consolidated
group" due to the lack of research of its theoretical and methodological
essential principles. In addition, it must reflect the influence of the leading
company on branch establishments and dependant companies as for each type of
subordination there is its own method of inclusion in the consolidated
financial accounts of the company. Based on this, there was made an attempt to
give own sight in the disclosure of the concept "consolidated group»,
which refers to the leading organization with its all branch establishment,
which are connected by certain financial and legal relationships and acting as a
united business entity. Currently, the definition of the “consolidated
financial accounts” is vague and is not defined clearly in the economic
literature. There are two general approaches to the definition of «consolidated
financial accounts". These are simplified and extended. In the first case,
the disclosure of the content of the consolidated financial accounts is limited
where the main feature of reporting is mentioned. In the extended approach, the
specific peculiarities of the consolidation are mentioned. If we combine two
approaches, we can get the following definition of the consolidated financial
accounts, this is the accounts which reflects the financial condition and the
financial results of the group of the connected organizations, which are connected
on the basis of the ownership and presented as a united economic
organization. There could be considered
Tretyakova’s O. point of view on the consolidated financial accounts,
which states that for the majority of large corporations it is convenient to
lead the activity using the relationship " leading company – branch
establishment" because of economic, legal , tax and other reasons. The
main purpose of the consolidated financial accounts is to provide a picture
where the leading company and branch establishments is a united company. It has
become more important because many companies have grown through mergers and
acquisitions , including some multinational transactions in the recent years.
The terms " leading company”, " consolidation ", " the group
of companies " do not have generally accepted scientific definitions .
Existing definitions are very condensed and do not fully disclose particular
features and methodological essence of the union.
Consolidation [ Lat. consolidatio, from
con (cum) - together, conjointly and
solido - condense, strengthen, join] of business, which is
understood as the union of several interdependent organizations with the
aim to increase the efficiency of their
operation. The main concept in the
theory of consolidation is a concept of a group of companies. According to the
new editors IAS 10 «Consolidated Financial accounts", group is a leading
company and its branch enterprises, where leading company controls one or
several enterprises.
The prerequisites for the formation of the
group are:
1.the resolving of a common goal ;
2. the creation of the united management ;
3.the determination of subgoals of individual activities;
4. the determination of
activities functions;
5. the united control of achievement;
6. the possession of certain
part of the vote or other members’
capitals;
7.the means to influence on
members of the group . [4]
The group occurs when separated types of activities and business lines are
not merged into one consolidated company
but when are conducted through several companies , each of which is
legally independent . But the legal independence of each of them does not mean
their economic independence. The economic dependence of companies which are
within the group, is manifested by the form of economic control. Economic
control should be understood as the ability of one company to provide a
decisive influence on the acceptance or rejection of relevant solutions to the
other members of the association. Control is the right to determine the
operating and financial policies of the company with the aim to obtain benefits
from its activities. The operational policy includes the policy regarding sales,
production , resource management , investment and divestment . The
financial policy includes dividend policy, the budget, the formation of
financial resources, cash management, capital expenditure and accounting. The
notion of control is key in determining the leading and branch enterprises. The
criteria for establishing branch companies are: the dominant participation in
the authorized capital (property type of dependance ), the contract
(contractual type of dependence ), other circumstances (organizational type of
dependence ) .
The consolidated financial accounts first of all has a purpose to show the
investors and other interested parties the results of financial and economic
activities of a group of connected companies, which are legally independent ,
but in fact are a united economic organism. The main necessity of the consolidated
accounts is the elimination of individual figures of enterprises within the
group in order to avoid double counting in the final consolidated accounts of
the group. The leading company must include all its local and foreign branch
partnership enterprises into the consolidated financial accounts, except in
cases when :
- branch enterprise was
acquired for the purpose of selling in the near future and the control will be
temporary;
- branch partnership enterprise operates
under severe long-term restrictions that significantly reduce its ability to
transfer funds to the main partnership .
In the consolidated balance the
accounting stock includes all the stocks, which are owned by the leading and
branch enterprises. Similarly, in the consolidated accounts of incomes and
expenses the accounting from sales is all the incomes from the sells of the
leading company and all its branch enterprises. This survey helps the guidance
and shareholders of the leading company to judge how they have progressed in
achieving their goals . In the past, it was quiet acceptable not to consolidate
certain branch enterprises into the financial accounts , in spite of the fact
that the leading company owned a controlling
stake in cases when the scope of
activities of the branch enterprise did
not coincide with the scope of activities of the leading company . However,
such practice was subjected to much criticism since it led to the financial
collapse of some companies. As a result, at the moment, except for some cases,
the financial accounts of all branch enterprises, the controlling pack of
stocks which are owned by another company, must be consolidated with the
financial accounts of their leading companies in order to provide the external
users with the complete information. The users of financial accounts of the
partnership are not just interested in information about the financial
condition and the results of operations of the main partnership but of the whole
group as well. This necessity is provided by the consolidated financial
accounts.
Under the observance of the following
conditions the leading organization should not provide the consolidated financial accounts:
1. The leading company is a branch enterprise and is wholly or partially owned by another
organization. The owners of the leading company and also the owners of the
branch enterprises, should be informed that the given organization will not
provide the consolidated financial accounts;
2 . The debt or share instruments of the
leading company are not circulating on the open market;
3 . The leading company does not prepare
the documents for the issuance of debt or share instruments in the open market;
4 .The ultimate leading company of the
leading company provides the consolidated financial accounts which is prepared
in accordance with IFRS.
The professor S. Moderov believes that for
the consolidation of the financial accounts
it is necessary to state common rules for the accounting of the operations
for all companies, which are included to the group .This procedure can be
easily implemented in the presence of control of branch companies. The common
rules for accounting of the operations will
beneficially effect on the controllability of the company and "
united corporate spirit."
The indicators which characterize
intragroup transactions , i.e. the
relationship of elements with each other should not be included in the
consolidated financial accounts. There appears the analogy with the usual financial
accounts: it is characterized by the company's relationship with the external
environment, but not by the relationships between the units within the company.
By this analogy the unrealized profits are removed, is means, the profit that
one of the companies shows in its individual accounts but which arose from the
sale of goods ( works, services) between the primary means of group companies
or associated companies , i.e. unrealized "for outside the group "
profit . As for getting the individual accounts of groups, this operation must
be implemented on the basis of common principles for obtaining accounting data,
so there should be applied the united accounting policies . In principle , IFRS
does not require the full IFRS reports about branch companies, most
importantly, that the reporting elements were prepared in accordance with
united accounting policies under IFRS of the leading company. This can be
accomplished by issuing the special forms by the leading company for filling in
by the companies of sufficient information for the consolidated financial
accounts. It is advisable to introduce a united software product within the
group that is able to use a united chart of accounts. The specialists of the
leading company can work on described consolidation records when receive the
data from all branch companies in the united format and the united system. This
method involves investing in the purchase and setup of a united software
product.
If the introduction of a united software
product is impractical , then you can generate consolidated financial accounts
from the individual reportings which
are made by the specialists of the leading company. It is necessary to foresee
the giving out the efficient extra information by the specialist of the branch
companies for the individual accounts for the composition of the consolidated
financial accounts. It is difficult to overestimate the importance of the
consolidated financial accounts . After all,
it often more important for the company's guidance, as well as for investors
to analyze the economic and financial situation and results of operations of
enterprises as a whole , and not just the performance of individual firms.
At the same time the accuracy of the
consolidated financial accounts is provided
by the guidance of the leading organization. Therefore, it is
advisable to get an independent
auditor’s conclusion for greater confidence in the reliability of reporting.
During the audit checking it is necessary to identify the scope of
consolidation of financial accounts, to check the documents which are the basis
for consolidation , to evaluate the methods of accounting and reporting , thier
objectivity and consistency in terms of consolidated accounts , because the
composing of such accounts by the guidance of the leading enterprise is
possible under the united accounting policy of all organizations, which are
included into the scope of the consolidation. By decision of the members of the
group consolidated financial accounts may be published as part of the published
financial accounts of the leading organization .
General requirement for annual
consolidated financial accounts, is a condition that the property and financial
condition, as well as the level of income must be presented in such a way that
a group of companies must look as a whole . The problem is that the balances of
the leading and branch companies can be
compiled on different dates and in different currencies, can be different in
structure, composition, content and evaluation of the articles.. It is provided,
by the international standards, that the consolidated financial accounts can be
prepared in several stages, using intermediate drawing balances it is necessary
to prepare statements of the group of the consolidated accounts clicking on
united reporting requirements applicable the leading company. During the
preparation of the reporting from of a branch company , there could appear the
necessity to make some changes:
• in the structure of the balance;
• in the composition and content of the
article balance;
• in the evaluation of the article
balance;
• in recounting of articlebalance from one
currency to another ;
The first step in
preparation for the consolidated report is reclassification of the article
balance. There is usually necessity in it if the branch companies are in the
same country with the leading company, because then they tend to use united
methods of reporting. However, foreign branch companies, which report in
accordance with national requirements, are forced to regroup their content of
balance in accordance with the requirements of the accounting of the leading
company. Then it is necessary to pay attention to the valuation of balance
components of articles and make adjustments if they are necessary. The changes
may be necessary for foreign branch companies, as well as for domestic , if
their applied accounting policy is different from that of the leading company.
The two fundamental approaches to the
recounting in the literature are distinguished.
The representatives of one direction
believe that the recounting of the currency in this case is purely formal
procedure which is adopted to ensure comparability of indicators for which
figures simply translated at the balance date. The long side of this method
used in Germany and USA, Netherlands, United Kingdom, is not only its
simplicity, but also in the fact that this does not change the structure of
balance sheets of branch companies. Representatives of the other direction are
trying applying different conversion rates, to achieve unity in the assessment
of articles reporting. In the past, there was developed a number of methods
using different conversion rates. For example, fixed assets, long-term
receivables (amounts falling due after more than 12 months after the reporting
date), long-term liabilities and comparative capital is estimated at historical
rates (i.e. at the date of acquisition or origination), stocks, cash and
short-term receivables - the exchange rate at the balance sheet date, and
income and expenses - average monthly rate calculated for the month of their
occurrence. The disadvantage of this method lies in the fact that there are
differences in terms of which must be considered separately.
References:
1. Aliev M.K. - Abstract : Consolidated
financial accounts: theory, methodology and practice - 2012 - Almaty
2. ERNST & YOUNG - publication:
Overview of IFRS (IFRS) 10 "Consolidated Financial accounts", IAS
(IFRS) 11 "Joint Arrangements" and IFRS (IFRS) 12 " Disclosure
of Interests in Other Entities " - 2012
3 . IAS (IFRS) 10 "Consolidated
Financial accounts" -2013 - http://www.minfin.gov.kz
4 . PONOMARENKO T.V., KOSOVTSEVA T.R. -
Essence and signs of economic control in a consolidated group of companies -
2010 -SPb . : Institute of Business and Law.
5 . Nurgaliyeva R.N. Financial Accounting
2 - Karaganda Karaganda Printing, 2012. – p.340