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Some general provisions on Consolidated Financial Statements
Posted date 04/02/2020
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Posted date 04/02/2020
10.227 view
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“Financial statements” (FS) are no longer a strange concept to those who study and work in accounting and auditing. However, the Consolidated Financial Statements (FCS) are an issue that many accountants at enterprises are interested in, because they are not only related to a company but also to the whole group, especially when the names of economic groups are mentioned more and more in recent years, notably: Vingroup Corporation, Mobile World Investment Joint Stock Company, Vietnam Dairy Products Joint Stock Company (Vinamilk), Hoa Phat Group Joint Stock Company, etc. So, what is a Consolidated Financial Statement? Why do some companies have both separate and consolidated financial statements, while other companies only have one financial statement? And what are the specific regulations on preparing consolidated financial statements?
“Financial statements” (FS) are no longer a strange concept to those who study and work in accounting and auditing. However, the Consolidated Financial Statements (FCS) are an issue that many accountants at enterprises are interested in, because they are not only related to a company but also to the whole group, especially when the names of economic groups are mentioned more and more in recent years, notably: Vingroup Corporation, Mobile World Investment Joint Stock Company, Vietnam Dairy Products Joint Stock Company (Vinamilk), Hoa Phat Group Joint Stock Company, etc. So, what is a Consolidated Financial Statement? Why do some companies have both separate and consolidated financial statements, while other companies only have one financial statement? And what are the specific regulations on preparing consolidated financial statements?
Consolidated financial statements: Are the financial statements of a group presented as the financial statements of an enterprise. This report is prepared on the basis of consolidating the reports of the parent company and its subsidiaries according to the provisions of accounting standard No. 25 (VAS 25) and specified in Circular 202/2014/TT-BTC.
A company has both separate and consolidated financial statements when it owns one or more subsidiaries. In that case, the separate financial statements show the financial and business situation of the parent company alone, while the consolidated financial statements will summarize the entire financial and business situation of the entire group, including both the parent company and its subsidiaries.
Consolidated financial statement preparation period:
Consolidated financial statements: Are the financial statements of a group presented as the financial statements of an enterprise. This report is prepared on the basis of consolidating the reports of the parent company and its subsidiaries according to the provisions of accounting standard No. 25 (VAS 25) and specified in Circular 202/2014/TT-BTC.
A company has both separate and consolidated financial statements when it owns one or more subsidiaries. In that case, the separate financial statements show the financial and business situation of the parent company alone, while the consolidated financial statements will summarize the entire financial and business situation of the entire group, including both the parent company and its subsidiaries.
Consolidated financial statement preparation period:
- BCTCHN includes annual report and Interim Report (quarterly report, including fourth quarter and semi-annual report).
+ Annual financial statements are prepared in full form.
+ Mid-year financial statements are prepared in full or summary form.
+ Mid-year financial statements are prepared in full or summary form.
- Annual and interim financial statements include:
+ Consolidated balance sheet
+ Consolidated income statement
+ Consolidated cash flow statement
+ Consolidated financial statements explanatory notes
Responsibility for preparing the financial statements
Parent companies that are listed on the stock market, large-scale public companies and state-owned parent companies must prepare full annual and semi-annual financial statements and summary quarterly reports (prepared in full if required).
For parent companies not subject to the subjects in point 1 above: Must prepare a full annual financial statement ; It is encouraged to prepare a full or summarized mid-year financial statement (if needed) .
A parent company is not required to prepare a financial statement when it satisfies all of the following conditions: It is not a public interest entity; It is not owned by the State or in which the State holds controlling shares; It is also a subsidiary owned by another company and the failure to prepare a financial statement requires the consensus of shareholders, including shareholders without voting rights; The equity or debt instruments of the parent company are not traded on the market; It does not prepare or is not in the process of submitting a dossier to the competent authority for permission to issue financial instruments to the public; The company owning the parent company prepares a financial statement for the purpose of public disclosure in accordance with the provisions of Vietnamese Accounting Standards.
+ Consolidated income statement
+ Consolidated cash flow statement
+ Consolidated financial statements explanatory notes
Responsibility for preparing the financial statements
Parent companies that are listed on the stock market, large-scale public companies and state-owned parent companies must prepare full annual and semi-annual financial statements and summary quarterly reports (prepared in full if required).
For parent companies not subject to the subjects in point 1 above: Must prepare a full annual financial statement ; It is encouraged to prepare a full or summarized mid-year financial statement (if needed) .
A parent company is not required to prepare a financial statement when it satisfies all of the following conditions: It is not a public interest entity; It is not owned by the State or in which the State holds controlling shares; It is also a subsidiary owned by another company and the failure to prepare a financial statement requires the consensus of shareholders, including shareholders without voting rights; The equity or debt instruments of the parent company are not traded on the market; It does not prepare or is not in the process of submitting a dossier to the competent authority for permission to issue financial instruments to the public; The company owning the parent company prepares a financial statement for the purpose of public disclosure in accordance with the provisions of Vietnamese Accounting Standards.
Deadline for submission and publication of consolidated financial statements
The annual financial statements must be submitted no later than the 90th day and made public within 120 days from the end of the year. The parent company is a public interest entity in the securities sector and must submit the annual financial statements and make them public in accordance with the provisions of the law on securities.
The interim financial statements must be submitted no later than 45 days from the end of the accounting period. The parent company is a public interest entity in the securities sector and must submit the interim financial statements and publicly disclose the interim financial statements in accordance with the provisions of the law on securities.
The annual financial statements must be submitted no later than the 90th day and made public within 120 days from the end of the year. The parent company is a public interest entity in the securities sector and must submit the annual financial statements and make them public in accordance with the provisions of the law on securities.
The interim financial statements must be submitted no later than 45 days from the end of the accounting period. The parent company is a public interest entity in the securities sector and must submit the interim financial statements and publicly disclose the interim financial statements in accordance with the provisions of the law on securities.
General principles when preparing and presenting Consolidated Financial Statements
When preparing Consolidated Financial Statements, a parent company must consolidate its own Financial Statements and those of all domestic and foreign subsidiaries directly or indirectly controlled by the parent company, except in the following cases:
When preparing Consolidated Financial Statements, a parent company must consolidate its own Financial Statements and those of all domestic and foreign subsidiaries directly or indirectly controlled by the parent company, except in the following cases:
a) The parent company's control is only temporary because the subsidiary is only purchased and held for the purpose of resale for a period not exceeding 12 months.
- Temporary control must be determined at the time of acquisition of the subsidiary and the investment with temporary control must not be presented as an investment in a subsidiary but must be classified as a short-term investment held for trading purposes.
- If at the time of purchase, the parent company classified the investment as a subsidiary, and then the parent company plans to divest within less than 12 months or the subsidiary plans to go bankrupt, dissolve, split, merge, or cease operations within less than 12 months, then the control is not considered temporary.
b) The subsidiary's operations are restricted for a period of more than 12 months and this significantly affects the ability to transfer capital to the parent company.
The parent company is not excluded from the Consolidated Financial Statements for:
The parent company is not excluded from the Consolidated Financial Statements for:
a) Subsidiaries whose business activities are different from those of the parent company and other subsidiaries in the group;
b) Subsidiaries are Trust Funds, Mutual Funds, Venture Capital Funds or similar enterprises.
The consolidated financial statements are prepared on the basis of applying uniform accounting policies for like transactions and events in similar circumstances throughout the Group.
b) Subsidiaries are Trust Funds, Mutual Funds, Venture Capital Funds or similar enterprises.
The consolidated financial statements are prepared on the basis of applying uniform accounting policies for like transactions and events in similar circumstances throughout the Group.
a) In case a subsidiary uses accounting policies different from the accounting policies applied consistently in the group, the Financial Statements used for consolidation must be adjusted according to the general policies of the group. The parent company is responsible for guiding the subsidiary to adjust the Financial Statements based on the nature of transactions and events.
Example: Using uniform accounting policies:
- Foreign subsidiaries apply the revaluation model for fixed assets, the parent company in Vietnam applies the cost model. Before consolidating the Financial Statements, the group must convert the financial statements of the subsidiaries to the cost model;
- The parent company in Vietnam applies the interest capitalization method for the construction of unfinished assets, the foreign subsidiary records the interest expense for unfinished assets as expenses in the period. Before consolidating the Financial Statements, the group must convert the Financial Statements of the subsidiary according to the interest capitalization method for unfinished assets.
b) In case a subsidiary cannot use the same accounting policy as the general policy of the group, the Notes to the Consolidated Financial Statements must clearly present the items that have been recorded and presented according to different accounting policies and must clearly explain those different accounting policies.
The separate financial statements of the parent company and the financial statements of the subsidiary used for consolidation must be prepared for the same accounting period.
The parent company's and non-controlling shareholders' share of the identifiable net assets of the subsidiary at the acquisition date must be presented at fair value, specifically:
Example: Using uniform accounting policies:
- Foreign subsidiaries apply the revaluation model for fixed assets, the parent company in Vietnam applies the cost model. Before consolidating the Financial Statements, the group must convert the financial statements of the subsidiaries to the cost model;
- The parent company in Vietnam applies the interest capitalization method for the construction of unfinished assets, the foreign subsidiary records the interest expense for unfinished assets as expenses in the period. Before consolidating the Financial Statements, the group must convert the Financial Statements of the subsidiary according to the interest capitalization method for unfinished assets.
b) In case a subsidiary cannot use the same accounting policy as the general policy of the group, the Notes to the Consolidated Financial Statements must clearly present the items that have been recorded and presented according to different accounting policies and must clearly explain those different accounting policies.
The separate financial statements of the parent company and the financial statements of the subsidiary used for consolidation must be prepared for the same accounting period.
The parent company's and non-controlling shareholders' share of the identifiable net assets of the subsidiary at the acquisition date must be presented at fair value, specifically:
a) The net assets of a subsidiary at the date of acquisition are recorded in the Consolidated Balance Sheet at fair value. If the parent company does not own 100% of the subsidiary, the difference between the carrying amount and fair value must be allocated to both the parent and non-controlling shareholders.
b) After the acquisition date, if the assets of the subsidiary at the acquisition date (with fair value different from the book value) are depreciated, liquidated or sold, the difference between the fair value and the book value is considered to have been realized and must be adjusted to:
- Undistributed profit after tax corresponding to the ownership share of parent shareholders;
- Non-controlling shareholder interests correspond to the ownership share of non-controlling shareholders.
The results of operations of a subsidiary must be included in the Consolidated Financial Statements from the date the parent company takes control of the subsidiary and ends on the date the parent company actually ceases to control the subsidiary. Investments in an enterprise must be accounted for in accordance with the Accounting Standard “Financial Instruments” from the time the enterprise ceases to be a subsidiary and does not become a joint venture or associate.
If there is a difference between the fair value and the carrying amount of the net assets of the subsidiary at the acquisition date, the parent company must recognize deferred corporate income tax arising from the business combination transaction.
Goodwill or gain from a bargain purchase is determined as the difference between the cost of the investment and the fair value of the identifiable net assets of the subsidiary at the acquisition date held by the parent company (the time the parent company holds control of the subsidiary).
b) After the acquisition date, if the assets of the subsidiary at the acquisition date (with fair value different from the book value) are depreciated, liquidated or sold, the difference between the fair value and the book value is considered to have been realized and must be adjusted to:
- Undistributed profit after tax corresponding to the ownership share of parent shareholders;
- Non-controlling shareholder interests correspond to the ownership share of non-controlling shareholders.
The results of operations of a subsidiary must be included in the Consolidated Financial Statements from the date the parent company takes control of the subsidiary and ends on the date the parent company actually ceases to control the subsidiary. Investments in an enterprise must be accounted for in accordance with the Accounting Standard “Financial Instruments” from the time the enterprise ceases to be a subsidiary and does not become a joint venture or associate.
If there is a difference between the fair value and the carrying amount of the net assets of the subsidiary at the acquisition date, the parent company must recognize deferred corporate income tax arising from the business combination transaction.
Goodwill or gain from a bargain purchase is determined as the difference between the cost of the investment and the fair value of the identifiable net assets of the subsidiary at the acquisition date held by the parent company (the time the parent company holds control of the subsidiary).
a) The period for allocating commercial advantages shall not exceed 10 years, starting from the date the parent company takes control of the subsidiary according to the following principle: The allocation must be made gradually over the years. The parent company must periodically assess the loss of commercial advantages at the subsidiary. If there is evidence that the amount of lost commercial advantages is greater than the annual allocation, the allocation shall be made according to the amount of lost commercial advantages in the period in which they arise. Some evidence of lost commercial advantages is as follows:
- After the date of control of the subsidiary, if the cost of the additional investment is less than the parent company's ownership share in the book value of the net assets of the additional subsidiary;
- The market value of the subsidiary is reduced (for example, the market value of the subsidiary's shares is significantly reduced due to the subsidiary's continuous loss-making operations);
- Credit rating is reduced for a long time; Subsidiary company is insolvent, temporarily suspended or at risk of dissolution, bankruptcy, or termination of operation;
- Financial indicators are seriously and systematically declining…
For example: Suppose the arising commercial advantage is 10 billion VND, allocated for 10 years (1 billion VND per year). After 3 years of allocation (3 billion VND), if there is evidence that the commercial advantage has been completely lost, then in the 4th year, the allocated commercial advantage is 7 billion VND.
b) In a multi-stage business consolidation transaction, when determining goodwill or gain from a bargain purchase (negative goodwill), the cost of the investment in a subsidiary is calculated as the sum of the cost of the investment at the date of obtaining control of the subsidiary plus the cost of the investment from previous exchanges that have been reassessed at fair value at the date the parent company controls the subsidiary.
If, after controlling the subsidiary, the parent company continues to invest in the subsidiary to increase the percentage of holding interest, the difference between the cost of the additional investment and the book value of the net assets of the additional subsidiary must be recorded directly in retained earnings and considered as equity transactions (not recorded as goodwill or gain from bargain purchase). In this case, the parent company does not record the net assets of the subsidiary at fair value as at the time of controlling the subsidiary.
If, after controlling the subsidiary, the parent company continues to invest in the subsidiary to increase the percentage of holding interest, the difference between the cost of the additional investment and the book value of the net assets of the additional subsidiary must be recorded directly in retained earnings and considered as equity transactions (not recorded as goodwill or gain from bargain purchase). In this case, the parent company does not record the net assets of the subsidiary at fair value as at the time of controlling the subsidiary.
The items in the Consolidated Balance Sheet and Consolidated Income Statement are prepared by adding each item in the Balance Sheet and Income Statement of the Parent Company and its subsidiaries in the group, then adjusting for the following contents:
- After the date of control of the subsidiary, if the cost of the additional investment is less than the parent company's ownership share in the book value of the net assets of the additional subsidiary;
- The market value of the subsidiary is reduced (for example, the market value of the subsidiary's shares is significantly reduced due to the subsidiary's continuous loss-making operations);
- Credit rating is reduced for a long time; Subsidiary company is insolvent, temporarily suspended or at risk of dissolution, bankruptcy, or termination of operation;
- Financial indicators are seriously and systematically declining…
For example: Suppose the arising commercial advantage is 10 billion VND, allocated for 10 years (1 billion VND per year). After 3 years of allocation (3 billion VND), if there is evidence that the commercial advantage has been completely lost, then in the 4th year, the allocated commercial advantage is 7 billion VND.
b) In a multi-stage business consolidation transaction, when determining goodwill or gain from a bargain purchase (negative goodwill), the cost of the investment in a subsidiary is calculated as the sum of the cost of the investment at the date of obtaining control of the subsidiary plus the cost of the investment from previous exchanges that have been reassessed at fair value at the date the parent company controls the subsidiary.
If, after controlling the subsidiary, the parent company continues to invest in the subsidiary to increase the percentage of holding interest, the difference between the cost of the additional investment and the book value of the net assets of the additional subsidiary must be recorded directly in retained earnings and considered as equity transactions (not recorded as goodwill or gain from bargain purchase). In this case, the parent company does not record the net assets of the subsidiary at fair value as at the time of controlling the subsidiary.
If, after controlling the subsidiary, the parent company continues to invest in the subsidiary to increase the percentage of holding interest, the difference between the cost of the additional investment and the book value of the net assets of the additional subsidiary must be recorded directly in retained earnings and considered as equity transactions (not recorded as goodwill or gain from bargain purchase). In this case, the parent company does not record the net assets of the subsidiary at fair value as at the time of controlling the subsidiary.
The items in the Consolidated Balance Sheet and Consolidated Income Statement are prepared by adding each item in the Balance Sheet and Income Statement of the Parent Company and its subsidiaries in the group, then adjusting for the following contents:
a) The carrying amount of the parent company's investment in each subsidiary and the parent company's share of the subsidiary's equity must be eliminated in full, and any goodwill or gain from bargain purchase (if any) must be recognized;
b) Allocation of commercial advantages;
c) Non-controlling interests are presented in the consolidated balance sheet as a separate item in the equity section. The non-controlling interest in the group's income statement must also be presented as a separate item in the consolidated income statement;
d) The balance of receivables, payables, loans... between units within the same group must be completely eliminated;
d) Revenues, incomes and expenses arising from transactions within the group must be completely eliminated;
e) Unrealized profits arising from intra-group transactions that are included in the value of assets (such as inventories, fixed assets, etc.) must be eliminated in full. Unrealized losses arising from intra-group transactions that are included in the value of assets (such as inventories, fixed assets, etc.) must also be eliminated unless the costs causing the loss are irrecoverable.
The difference between the proceeds from divestment of capital in a subsidiary and the value of the net assets of the divested subsidiary plus (+) the value of unallocated goodwill is recorded immediately in the period in which it arises according to the following principles:
-If the divestment transaction does not cause the parent company to lose control over the subsidiary, the entire difference mentioned above is recorded in the "Undistributed profit after tax" item on the Consolidated Balance Sheet.
-If the divestment transaction results in the parent company losing control over the subsidiary, the entire difference mentioned above is recorded in the Consolidated Statement of Business Performance. The investment in the subsidiary will be accounted for as a normal financial investment or accounted for under the equity method since the parent company no longer has control over the subsidiary.
-After making all adjusting entries, the difference arising from adjusting the indicators in the Income Statement must be transferred to undistributed profit after tax.
The consolidated cash flow statement is prepared based on the consolidated balance sheet, consolidated income statement, and cash flow statement of the parent company and subsidiaries according to the following principles:
b) Allocation of commercial advantages;
c) Non-controlling interests are presented in the consolidated balance sheet as a separate item in the equity section. The non-controlling interest in the group's income statement must also be presented as a separate item in the consolidated income statement;
d) The balance of receivables, payables, loans... between units within the same group must be completely eliminated;
d) Revenues, incomes and expenses arising from transactions within the group must be completely eliminated;
e) Unrealized profits arising from intra-group transactions that are included in the value of assets (such as inventories, fixed assets, etc.) must be eliminated in full. Unrealized losses arising from intra-group transactions that are included in the value of assets (such as inventories, fixed assets, etc.) must also be eliminated unless the costs causing the loss are irrecoverable.
The difference between the proceeds from divestment of capital in a subsidiary and the value of the net assets of the divested subsidiary plus (+) the value of unallocated goodwill is recorded immediately in the period in which it arises according to the following principles:
-If the divestment transaction does not cause the parent company to lose control over the subsidiary, the entire difference mentioned above is recorded in the "Undistributed profit after tax" item on the Consolidated Balance Sheet.
-If the divestment transaction results in the parent company losing control over the subsidiary, the entire difference mentioned above is recorded in the Consolidated Statement of Business Performance. The investment in the subsidiary will be accounted for as a normal financial investment or accounted for under the equity method since the parent company no longer has control over the subsidiary.
-After making all adjusting entries, the difference arising from adjusting the indicators in the Income Statement must be transferred to undistributed profit after tax.
The consolidated cash flow statement is prepared based on the consolidated balance sheet, consolidated income statement, and cash flow statement of the parent company and subsidiaries according to the following principles:
The consolidated cash flow statement only presents cash flows between the group and entities outside the group, including cash flows arising from transactions with joint ventures, associates and non-controlling shareholders of the group and is presented on the consolidated cash flow statement according to 3 types of activities: Business activities, investing activities and financing activities. All cash flows arising from transactions between the parent company and subsidiaries within the group must be completely eliminated on the consolidated cash flow statement.
In case a parent company has subsidiaries that prepare Financial Statements in a currency different from the parent company's reporting currency, before consolidating the Financial Statements, the parent company must convert all Financial Statements of the subsidiaries to the parent company's reporting currency according to the provisions of Chapter VI of this Circular.
The notes to the consolidated financial statements are prepared to explain additional financial and non-financial information, based on the Consolidated Balance Sheet, Consolidated Income Statement, Consolidated Cash Flow Statement and related documents during the consolidation of the Financial Statements.
In case a parent company has subsidiaries that prepare Financial Statements in a currency different from the parent company's reporting currency, before consolidating the Financial Statements, the parent company must convert all Financial Statements of the subsidiaries to the parent company's reporting currency according to the provisions of Chapter VI of this Circular.
The notes to the consolidated financial statements are prepared to explain additional financial and non-financial information, based on the Consolidated Balance Sheet, Consolidated Income Statement, Consolidated Cash Flow Statement and related documents during the consolidation of the Financial Statements.
Procedure for consolidating the balance sheet and income statement between parent company and subsidiary
- Sum of the items in the Balance Sheet and Income Statement of the parent company and subsidiaries in the group.
- Eliminate the entire carrying amount of the parent's investment in each subsidiary, the parent's portion of the subsidiary's net assets held in equity, and recognize any goodwill or gain on a bargain purchase.
- Allocation of commercial advantages (if any).
- Separation of non-controlling interests.
- Exclude all intragroup transactions.
- Prepare the Adjustment Summary Table and the Consolidation Summary Table. After preparing the adjustment entries, based on the difference between the increased adjustment and decreased adjustment of the indicators in the Business Performance Report, the accountant makes a transfer entry to reflect the total impact arising from the adjustment of revenue and expenses to undistributed profit after tax.
- Prepare Consolidated Financial Statements based on the Summary Table of Consolidated Indicators after adjusting and excluding transactions arising within the group.
Above are some general regulations on BCTCHN to help readers better understand what a BCTCHN is. However, BCTCHN is a complex topic and has many contents that the article has not mentioned. Hopefully this topic will be of interest and research to many people.
References:
References:
- Accounting Standard No. 25
- Circular 202/2014/TT-BTC issued on December 22, 2014
MSc. Vu Thi Mai Nhi – Lecturer of Faculty of Accounting
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