Studies and Scientific Researches. Economics Edition, No 34, 2021 http://sceco.ub.ro 6 THE ELIMINATION OF SECURITIES HELD IN THE ENTITIES WITHIN THE GROUP. ACCOUNTING APPROACH IN THE CONTEXT OF THE CONSOLIDATION OF ACCOUNTS (II) Mihai Deju The “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 previous article); Elimination of securities held in associates and jointly controlled entities (joint ventures) - object of this article. Key words: consolidation of accounts; removal of titles; affiliated entities; associated entities; joint venture. JEL Classification M41 The elimination of securities held in associated and jointly controlled entities The consolidation of jointly controlled entities as well as associated entities is done through the equity method, so that the interest of the securities holding company in such entities is presented in the consolidated balance sheet separately under the item “Equity securities”. In the case of using the equity method, for the preparation of the consolidated annual financial statements, participation interests are initially recognized at acquisition cost and, depending on post-acquisition changes in the investor's share of the net assets in which he invested, their value will be adjusted. The share of the profit or loss of associates and jointly controlled entities, attributed to the interest in participating in these entities, is presented separately in the consolidated profit and loss account, under the item “Profit or loss for the financial year related to associates and controlled entities in common”. If the equity method is applied for the first time to an associate or jointly controlled entity, that entity is presented in the consolidated balance sheet at the value of the proportion of equity of the associate or jointly controlled entity represented by that interest. The difference between the carrying amount of the securities (participation interest) held by the investor and his proportion of the consolidated entity’s equity Deju 7 (associated or jointly controlled) is presented separately in the consolidated balance sheet or in its explanatory notes, to the equity elements that make up this difference. That difference shall be calculated on the date on which the equity method is first applied, and where that difference cannot be identified as belonging to assets or liabilities, it shall be treated in accordance with the rules applicable to goodwill. The case of participation interests acquired at the date of incorporation of the issuing company Company M holds 20% of the shares of Company C, securities that were acquired at the time of the establishment of Company C, at the acquisition cost of 20,000 lei. Company M exercises a significant influence over Company C. On 31.12.N, Company M prepares consolidated accounts and Company C is retained in the consolidation perimeter. . At 31.12.N, the equity of Company C recorded the following values: - subscribed and paid-in share capital: 100,000 lei; - statutory reserves: 50,000 lei; - the result of the financial year: 10,000 lei. The determination of the share of Company M in the net assets of Company C: Equity (net assets) Company „C” Total Part that belongs to Company M (20%) Subscribed and paid-in share capital 100,000 20,000 Statutory reserves 50,000 10,000 The result of the current financial year 10,000 2,000 Total 160,000 32,000 By equivalence, at the end of year N, the securities held by the investor (Company M) in the issuing entity (Company C) will be valued in the consolidated balance sheet at a value equal to the share of Company M in the equity of Company C (32,000 lei). a) The equivalence of the issuing company, the disposal of the securities held and registration of the takeover of the share held by the investing company (recorded at the balance sheet level): 264 „Equivalent C titles” = % 263 „Shares held in jointly controlled entities” 106 „Consolidated reserves” 121 „Consolidated result” 32,000 20,000 10,000 2,000 c) Reflection of the share of the result of Company C that belongs to Company M (corrections at the level of “Profit and loss account”): 121 = 768/analytic 2,000 THE ELIMINATION OF SECURITIES HELD IN THE ENTITIES WITHIN THE GROUP. ACCOUNTING APPROACH IN THE CONTEXT OF THE CONSOLIDATION OF ACCOUNTS (II) 8 „Consolidated result” „Profit for the financial year related to associated entities and jointly controlled entities” Note: If the investing company has acquired interest in the issue at the date of incorporation of the issuing company, their acquisition cost is also fair value, and we no longer need to use “goodwill” to reflect any differences between the acquisition cost and the fair value of the investment of the respective interests of participation. The case when the participation interests are acquired, at a date subsequent to the establishment of the issuing company, at a cost higher than the fair value of the respective securities (positive goodwill). On 31.12 (N-1), Company M acquired 20% of the shares of Company Y, which it jointly controls with Company Z. At this date, the carrying amounts and fair values of the identifiable assets and liabilities of Company Y are equal, and the equity of Company Y has the following values: Equity Y at (N-1) Values Subscribed and paid-in share capital 100,000 Reserves from re-evaluation 50,000 Statutory reserves 30,000 Total equity 180,000 The acquisition cost of the Y participation interests is 40,000 lei. On 31.12.N, the result of Company X is 15,000 lei, and the revaluation reserves of this company increase by 10,000 lei following a revaluation operation. On 31.12.N, Company M prepares consolidated annual financial statements, and Company Y, over which Company M exercises a significant influence, is included in the scope of consolidation. If the participation interests are acquired at a date subsequent to the formation of the issuing company, the difference in value between the acquisition cost and the fair value, at the date of acquisition of those participation interests, will be recorded as “Goodwill - positive / negative”, according to the case. In our example, we will consider that the positive goodwill, resulting from the equivalence of Company Y by Company M, is amortized over a period of 4 years. a) The determination of goodwill - as the difference between the acquisition cost of the participating interests held and the value of the net assets at the acquisition date (N-1): i) The acquisition cost of securities Y (N-1) 40,000 Subscribed and paid-in share capital Y 100,000 Reserves from re-evaluation Y 50,000 Statutory reserves Y 30,000 Net assets of company Y evaluated at fair value (on 31.12.N-1) 180,000 ii) Share of net assets evaluated at fair value on the date of the acquisition of securities (180,000 x 20%) 36,000 36,000 iii) Goodwill (i-ii) 4,000 Deju 9 b) The determination of the share of Company M in the net assets of Company Y at the date of consolidation (31.12.N): Equity (net assets) Total Part that belongs to company M (20%) Subscribed and paid-in share capital 100,000 20,000 Reserves from re-evaluation (50.000+10.000) 60,000 12,000 Statutory reserves 30,000 6,000 The result of the current financial year (N) 15,000 3,000 Total 205,000 41,000 c) The equivalence of the associated entity, with the reflection of positive goodwill and equity elements, related to the values recognized after the acquisition of the securities, taken over to consolidated equity (recorded at the balance sheet level): 45.000 41.000 4.000 % 264 “Equivalent Y titles” 2071 “Positive Goodwill” % 263 “Shares held in jointly controlled entities” 105 “Re-evaluation reserves ⃰ ” 121 “Consolidated result” 45,000 40,000 2,000 3,000 * The part that belongs to Company M from the reserves of Company Y, recognized after the date of acquisition of the securities ((60,000 lei-50,000 lei) x 20%). It can be seen that in the case of the consolidation of an associate or jointly controlled entity, only the part of the equity elements obtained after the acquisition of the securities will be taken over. In our case, 20% of the revaluation differences of 10,000 lei and 20% of the profit for the current year. d) The reflection of the share held by Company M from the result of Company Y (corrections at the level of the “Profit and Loss Account”): 121 “Consolidated result” = 768/analytic “Profit for the financial year related to associated entities and jointly controlled entities” 3,000 e) Depreciation of goodwill on account of current result (4,000 lei x 1/4): - balance sheet recording: 121 “Parent company profit or loss” = 2807 “Depreciation of goodwill” 1,000 - “Profit and loss account” correction: 6811 “Operating expenses on depreciation of fixed assets” = 121 “Parent company profit or loss” 1,000 THE ELIMINATION OF SECURITIES HELD IN THE ENTITIES WITHIN THE GROUP. ACCOUNTING APPROACH IN THE CONTEXT OF THE CONSOLIDATION OF ACCOUNTS (II) 10 Note: The corrections at the level of the “Profit and loss account” - component of the financial statements, presented figuratively as equities, will influence the respective component according to the established model of the “Profit and loss account”: - the elements on the right side of equality will be added to the “revenue” part; - the elements on the left side of equality will influence the “expenditure and profit” part. The case when the participation interests are acquired at a date subsequent to the establishment of the issuing company, and their cost is lower than the fair value at the date of acquisition of those participation interests (negative goodwill). On December 31, 2007 (N-1) Company M acquires 30% of the securities issued by Company C. The cost of the purchased participation interests is 30,000 lei. On 31.12.N Company M prepares consolidated annual financial statements, including in the consolidation perimeter Company C. The equity of Company C, at the date of acquisition of the participation interests (N-1), respectively the date of inclusion in the consolidation perimeter by Company M, recorded the following values: Equity of company C On 31.12.N-1 On 31.12.N Subscribed and paid-in share capital 100,000 100,000 Reserves from re-evaluation 50,000 60,000 Statutory reserves 20,000 45,000 The result of the current financial year 10,000 30,000 Reported result 0 10,000 The value of net assets 180,000 245,000 a) The determination of goodwill - as the difference between the acquisition cost of participation interests C and the share of the value of the net assets of Company C, at the date of acquisition (N-1) of the respective participation interests by Company M: i) The acquisition cost of securities C (N-1) 30,000 Subscribed and paid-in share capital 100,000 Reserves from re-evaluation C 50,000 Statutory reserves C 20,000 The result of the current financial year (N-1) 10,000 Net assets of company C evaluated at fair value (on .12.N-1) 180,000 ii) Share of net assets evaluated at fair value on the date f the acquisition of securities (180.000 x 30%) 54,000 54,000 iii) Negative Goodwill (i-ii) -24,000 b) The determination of the share of Company M in the net assets of Company C at the date of consolidation (31.12.N): Deju 11 Equity (net assets) Total Part that belongs to company M (30%) Subscribed and paid-in share capital 100,000 30,000 Reserves from re-evaluation 60,000 18,000 Statutory reserves 45,000 13,500 The result of the current financial year (N) 30,000 9,000 Reported result 10,000 3,000 Total of net assets on 31.12.N 245,000 73,500 c) The equivalence of the associated entity, reflecting the negative goodwill and equity elements of Company C, related to the values recognized after the acquisition of the securities, taken over at consolidated equity (recorded at the balance sheet level): 73,500 264 “Equivalent C titles” % 262 “Shares held in jointly controlled entities” 105* “Consolidated re-evaluation results” 106* “Consolidated statutory reserves” 121* “Consolidated result” 207.5 “Negative Goodwill” 73,500 30,000 3,000 7,500 9,000 24,000 * Note: The shares of the differences realized in the respective elements after the date of acquisition of the participation interests were taken over at consolidated equity: - for re-evaluation reserves: (60,000-50,000) x30%); - for statutory reserves: (45,000-20,000) x30%); - to the current result: 30,000 x 30%. d) Reflection of the share held by Company M from the result of Company C (corrections at the level of the “Profit and loss account”): 121 “Consolidated result” = 768/analytic “Profit for the financial year related to associated entities and jointly controlled entities” 3,000 e) Transfer of “Goodwill - negative” to consolidated results according to the accounting regulations in force (point 551.1). 207.5 “Negative Goodwill” = 121 “Consolidated profit or loss” 24,000 THE ELIMINATION OF SECURITIES HELD IN THE ENTITIES WITHIN THE GROUP. ACCOUNTING APPROACH IN THE CONTEXT OF THE CONSOLIDATION OF ACCOUNTS (II) 12 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. 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.