Studies and Scientific Researches. Economics Edition, No 33, 2021 http://sceco.ub.ro
26
THE ELIMINATION OF SECURITIES HELD IN THE
ENTITIES WITHIN THE GROUP.
ACCOUNTING APPROACH IN THE CONTEXT OF THE
CONSOLIDATION OF ACCOUNTS (I)
Mihai Deju
“Vasile Alecsandri” University of Bacău
mihai.deju@ub.ro
Abstract
The existence of groups of companies is a relatively new issue for professional accountants, the
academic environment, as well as for regulatory bodies in the field of accounting in Romania. In
this context, the theoretical and practical aspects of the preparation of the consolidated annual
financial statements generate extensive debates among accounting specialists, in order to find
practical solutions to support the understanding and correct application of accounting
regulations in the field of the consolidation of accounts. In two articles, we will present the
accounting treatment of the disposal of securities held, within subsidiaries, associates, as well
as in jointly controlled companies, by companies that prepare consolidated annual financial
statements. The issue of disposal of securities held with entities whose individual financial
statements are subject to consolidation will be presented in the form of case studies, structured
as follows: Elimination of securities held with affiliated entities (object of this article);
Elimination of securities held in associates and jointly controlled entities (joint ventures) - object
of the next article.
Keywords
consolidation of accounts; removal of titles; affiliated entities; associated entities; joint venture
JEL Classification
M41
Elimination of securities held with affiliated entities
The preparation of the consolidated annual financial statements by the parent company
involves the elimination of the carrying amount of the investment made by it in each
subsidiary, while eliminating its share of the equity of those subsidiaries. This is, in
fact, a compensation of the carrying amount of the shares held in the entities included
in the consolidation with the part of their equity, related to those securities (shares).
“The offsetting of disposed securities held in subsidiaries is based on the fair values of
the identifiable assets and liabilities at the acquisition of the shares or, if the acquisition
takes place in several stages, on the date on which the entity became a branch”1.
The difference resulting from the offsetting between the book value and the fair value
of the securities is presented as a separate element of the consolidated balance sheet,
respectively “Positive or negative goodwill”, as the case may be.
The positive goodwill is an asset that represents future economic benefits that are
generated by other assets acquired within a business grouping (acquisitions), but which
cannot be individually identified and valued separately. This, as a rule, is recognized
1 Accounting Regulations for individual annual financial statements and consoliated annual financial
statements approved by OMFP no.1802/2014, point 508(1).
THE ELIMINATION OF SECURITIES HELD IN THE ENTITIES WITHIN THE GROUP. ACCOUNTING APPROACH IN
THE CONTEXT OF THE CONSOLIDATION OF ACCOUNTS (I)
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on consolidation and represents the difference between the acquisition cost and the fair
value at the acquisition date of the part of the net assets related to the acquired securities.
Positive goodwill recognized in the consolidation of accounts is included in the
category of intangible assets and is usually amortized over a maximum period of 5
years. (...) However, in exceptional cases where the useful life of the goodwill cannot
be reliably estimated, entities may amortize goodwill systematically over a period of
more than 5 years, provided that this period does not exceed 10 years”2.
The negative goodwill is the result of anticipating future losses (such as expenses with
the restructuring of the acquired company) or the consequence of a good deal (the
acquisition of the company’s shares at a low rate due to the passing difficulties it is
going through).
The value of the negative goodwill can be transferred to the consolidated profit and loss
account, according to the legal regulations in force, only:
a) “if this difference corresponds to the forecast, at the acquisition date,
of unfavourable future results of the entity concerned or to the forecast
of costs that the entity will incur, to the extent that such forecast
materializes; or
b) to the extent that the difference corresponds to a gain realized ”3
In the context of the disposal of the securities held by the parent company in
subsidiaries, “non-controlling interests” must also be recognized, when part of the
shares of the subsidiaries included in the consolidation are also held by persons other
than those subsidiaries and the parent company.
“Non-controlling interests” are presented in the consolidated balance sheet in equity,
separately from the equity of the parent company.
We specify that the accounting regulations in our country do not make any reference to
the way of evaluating the “non-controlling interests”, but they can be valued either in
proportion to their share of the net assets of the subsidiary measured at fair value, or
their fair value4. In the examples we present, “non-controlling interests” will be valued
in proportion to their share of the net assets of the subsidiary measured at fair value.
The case when the participation titles are acquired on the date of the
establishment of the subsidiary.
The parent company (SM) holds 60% of the shares of Company F (subsidiary),
securities that it acquired on the date of its incorporation, on 01.05.N-1. The acquisition
cost of the securities is 1,200 lei.
At 31.12.N, the equity of Subsidiary F recorded the following values:
- capital: 2,000 lei ;
- reserves: 1,000 lei
- the result of the financial year : 500 lei.
At 31.12.N, the parent company prepares for the first time consolidated annual
financial statements.
In order to reflect the accounting of the elimination of the securities held by the parent
company at Subsidiary F, the net assets of Subsidiary F will be divided, in the part
belonging to the parent company and the part belonging to minorities, as follows:
2 Idem point 183 (1)
3 Idem point 551 (1)
4 These two ways of assessing non-controlling interests are provided by IFRS “Business Combinations”
(IFRS 3.18)
Deju
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Equity(net accounting
assets)
Total
The part that
belongs to the
parent
company
(60%)
The part that
belongs to the non-
controlling
interests (40%)
Capital 2,000 1,200 800
Reserves 1,000 600 400
Result of the financial year 500 300 200
Total 3,500 2,100 1,400
a) The accounting reflection of the elimination of F-titles, of the taking over
of the shares of equity capital belonging to the parent company and of the non-
controlling interests (recording at the balance sheet level):
3,500
2,000
1,000
500
%
101
“Capital F”
106
„Reserves F”
121
„Profit or loss F”
= %
261
“Shares held by affiliated
entities”
106
„Consolidated reserves”
121
„Consolidated result”
108
„Non-controlling Interests” 5
3,500
1,200
600
300
1,400
When consolidating the subsidiaries whose securities are held by the parent
company from the date of establishment of that subsidiary, the fair value of the assets
and liabilities coincides with their carrying amount, so that the elimination of the value
of the equity securities on consolidation does not generate goodwill.
b) Recording the share of the result of Subsidiary F (corrections at the
level of the Profit and Loss Account):
%
121
„Result that belongs to the shareholders
of the parent company(consolidated
result)
1081
„Result- non-controlling interests ”
(with the part of the result that belongs
to the minorities)
= 121
„Profit or loss F”
500
300
200
The case of the acquisition of securities by the parent company at a date
subsequent to the establishment of the issuing company (subsidiary)
On 31.12.N-3, the parent company acquired 80% of the shares of Company F, which
was incorporated at an earlier date. The acquisition cost of the shares is 300,000 lei.
The parent company consolidates Subsidiary F for the first time on 31.12.N. In order
to consolidate Subsidiary F, the following clarifications will be taken into account:
5 Non-controlling interests represent a balance sheet item that appears in the consolidated balance sheet
only in the case of global integration.
THE ELIMINATION OF SECURITIES HELD IN THE ENTITIES WITHIN THE GROUP. ACCOUNTING APPROACH IN
THE CONTEXT OF THE CONSOLIDATION OF ACCOUNTS (I)
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1. We assume that the evolution of the capital of Subsidiary F was as follows:
lei
Equity On the acquisition
day (N-3)
Values on the
consolidation day
(31.12.N)
Subscribed and paid-in
capital
200,000 200,000
Reserves 70,000 210,000
Result of the financial year 0 40,000
Total equity 270,000 450,000
2. The equity of company F, on 31.12.N-3, had the following values:
subscribed and paid-in capital 200,000 lei, reserves 70,000 lei. Also, at the
date of acquisition of the securities, the fair values of the identifiable assets
and liabilities were identical to the accounting ones, except for a building
whose fair value was higher than the book value by 80,000 lei. The
remaining amortization period of the building, from the moment of
acquiring the titles, is 20 years.
3. Goodwill is amortized over a period of 5 years.
The difference between the acquisition cost and the fair value of the units,
determined at the date of acquisition of those securities, represents a positive / negative
“goodwill”, as the case may be.
a) The determination of good will6:
i) The cost of acquiring the securities 300,000
- Capital F
- Reserves F
- Building value added (valuation reserves)
- Net assets of company F measured at fair
value (on 31.12.N-3)
200,000
70,000
80,000
350,000
ii) Share of net assets evaluated at fair
acquisition day (350.000 x 80%)
280,000 280,000
iii) Goodwill (i-ii) 20,000
b) Share of equity of subsidiary F at the date of consolidation (31.12.N):
Equity
Total
The part that
belongs to the
parent company
SM (80%)
The part that
belongs to the
“non-controlling
interests” (20%)
Capital 200,000 160,000 40,000
Reserves 210,000 168,000 42,000
Result of the financial
year
40,000 32,000 8,000
Total 450,000 360,000 90,000
6 We specify that in the presented examples the part of good will that belongs to the parent company is
determined.
Deju
30
c) Elimination of F securities, reflection of goodwill, takeover of the shares in the
respective equity elements of the subsidiary, according to the percentage of interest
held by the parent company and non-controlling interests (balance sheet entry):
550,000
200,000
210,000
40,000
20,000
80,000
%
101
„Capital F ”
106
„Reserves F ”
121
„Profit or loss F”
2071
„Goodwill”
212
„Constructions ”
= %
261
„Shares held at affiliated
entities”
106*
„Consolidated reserves ”
121*
„Consolidated result ”
108**
„Non-controlling interests ”
550,000
300,000
112,000
32,000
106,000
* Represents the share - part of the SM Company from the reserve of Subsidiary F obtained after the date of
acquisition of the securities: (210,000 lei - 70,000 lei) x80% = 112,000 and the share of the current result.
** Represents the share that belongs to the minorities from the own capitals of the F Branch from 31.12.N
(90,000 lei) + the share - part of the value added afferent to the construction (80,000 lei x 20%).
Note: it can be seen that only the shares that were formed after the acquisition
of the securities are taken over from the consolidated equity, and the non-controlling
interests are taken over, in addition to the share of the equity belonging to the
minorities, and the share of the surplus value related to assets expressed at fair value.
d) Share of the result of company F (recording at the level of “Profit and loss
account” - component of the financial statements):
%
121
„Result that belongs to the
shareholders of the parent company”
1081
„Result– part that belongs to non-
controlling interests”
= 121
„Profit or loss F”
40.000
32.000
8.000
e) Recording the depreciation of the difference (plus) of value related to the
construction (annual depreciation 80,000 / 20 = 4,000 lei):
lei
Construction
depreciation
Previous financial years
(N-2 and N-1)
Current financial year
(N)
Part that belongs to SM 4,000 x 2 x 80% = 6,400 4,000 x 80% =3.200
Part that belongs to non-
controlling interests
4,000 x 2 x 20% =1,600 4,000 x20% =800
Total 8,000 4,000
-recording at the balance sheet level:
%
106
„Consolidated reserves”
= 2812
„Construction depreciation”
12,000
6,400
THE ELIMINATION OF SECURITIES HELD IN THE ENTITIES WITHIN THE GROUP. ACCOUNTING APPROACH IN
THE CONTEXT OF THE CONSOLIDATION OF ACCOUNTS (I)
31
121
„Consolidated result”
108
„non-controlling interests”
3,200
2,400
-corrections at the level of the „Profit and loss account”:
6811
„Operating expenses on
depreciation of fixed assets”
= %
121
„Result that belongs to the
shareholders of the parent
company”
1081
„Result– part that belongs to
non-controlling interests”
4,000
3,200
800
f) Amortization of goodwill
Amortization of goodwill 20,000 / 5 x 2 =8,000 20,000/5 = 4,000
- Balance sheet entry
%
106
„Consolidated reserves”
121
„Consolidated result”
= 2807
„Amortization of goodwill”
12,000
8,000
4,000
-corrections at the level of the „Profit and loss account”:
6811
„Operating expenses on depreciation
of fixed assets”
= 121
„Result that belongs to the
shareholders of the parent
company”
4,000
Conclusions
Approaching some practical aspects regarding the preparation of the consolidated
annual financial statements by the groups of companies in Romania, through case
studies, given that accounting theory and practice do not abound in effective solutions
for applying accounting regulations in the field, we consider that it can represent an
indicative guide for the application and understanding of those regulations by
professional accountants, academic researchers and economics students.
With the confidence that both accounting theory and practice can be permanently
updated and improved, I am waiting for proposals or suggestions on the issues
discussed in this article.
References
Bogdan V., Fărcane N., Popa D.N., Boloş M.I. (2011), Raportarea financiară la nivelul
grupurilor de societăți – Repere contemporane, București, Editura Economică.
Deju M.. Note de curs “ Contabilitate consolidată – Bacău 2020
Feleagă N., Feleagă L. (2007), Contabilitate consolidată. O abordare europeană și
internațională, București, Editura Economică.
Deju
32
Order of the Minister of Public Finance no. 1802/2014 for the approval of the
Accounting Regulations regarding the individual annual financial statements
and the consolidated annual financial statements, with subsequent amendments
and completions.