Principles of Group Accounting under IFRS

Andreas Krimpmann, Berlin, Germany, is a Certified Public Accountant and owner of Krimpmann MBA ▪ CPA, providing consulting and services in financial and management accounting. He is Head of the IFRS and Controlling working group of the Internationaler Controllerverein and Head of the IFRS-Practice Committee of the German CPA Society. Andreas is also an Associate Professor at Berlin universities (Beuth University of Applied Sciences and HTW University of Applied Sciences) for accounting, management accounting and taxes and teaches IFRS and group accounting at various training academies and educational institutions (e.g. Haufe Academy).

• List of figures xviiList of tables xxiiiPreface xxviiIntroduction to the book xxixA The case study 11. About the group 22. Allocation of examples 4B Legal requirements for consolidated financial statements 91. IFRS standards 101.1. Transition to the new consolidation suite (IFRS 10 to IFRS 12, IAS 27 and IAS 28) from IAS 27 rev. 2008 131.2. Dependencies between IFRS 3 and IFRS 10 221.3. Accounting transition of joint ventures 232. Exemptions 353. Local accounting standards 384. Taxation 395. Definitions 41C Definition of Groups 431. The control concept 442. Joint control 553. Loss of control 614. Group compositions 655. Special cases 685.1. Structured entities 685.2. Limited partnerships 705.3. Deemed separate entities 71D Preparation of Consolidated Financial Statements and Annual Reports 731. Lifecycle of subsidiaries 742. Structures 782.1. Accounting in group structures 782.2. Shared services 802.3. Accounting structures 832.4. Reporting structures 923. The preparation process 983.1. Communication 1023.2. Subsidiaries 1033.3. Reporting 1063.4. The parent 1073.5. The group 1074. Organization 110E Initial consolidation 1131. Basics 1141.1. Valuation levels 1161.2. The opening balance sheet 1192. Mergers and acquisitions 1282.1. The acquirer’s view 1302.2. The group’s view 1323. Purchase price allocation 1363.1. The acquirer 1383.2. The acquisition date 1403.3. Consideration transferred (purchase price) 1433.4. Acquired assets – recognition and measurement 1523.4.1. General requirements on recognition and measurement 1523.4.2 Existing assets and liabilities 1583.4.3. Non-accounted assets and liabilities 1613.5. Goodwill and non-controlling interests 1823.6. Business vs. assets and liabilities 1904 Other aspects of purchase price allocations 1934.1 Cash flow statements 1934.2 Disclosures 1945. Consolidation techniques 1975.1. The parent’s view 1985.2. The group’s view 2025.2.1. Step one – preparation for consolidation 2035.2.2 Step two – consolidation 2105.2.3. Bargain purchases 2166 Special cases 2176.1 Reverse acquisitions 2176.2 Acquisitions achieved in stages 2206.3 Obtaining control in special situations 2226.3.1 Obtaining control without an acquisition or consideration 2226.3.2 Exchange of equity interests 2236.3.3 Mutual entities 2236.4. Multi-component contracts 2256.4.1. Regular employment contracts 2276.4.2. Share-based payments as non-controlling interests 2296.4.3 Share-based payment exchanges 2306.5 Pre-existing relationships 2316.5.1 Reacquired rights 2396.6. Shares of the parent company 2406.7. Non-material subsidiaries 241F Subsequent consolidation 2451. Basics 2461.1. Preparation mechanics 2481.2. Tasks & timing 2492. Subsidiary preparation 2533. Equity consolidation 2633.1. Consolidation requirements 2633.2. Consolidation techniques 2663.3. Special cases 2694. Debt consolidation 2704.1. Intercompany relationships 2714.2. Consolidation techniques 2734.3. Differences 2784.4. Preventative activities 2824.4.1. Organizational aspects 2824.4.2. Simple settlement 2834.4.3. Netting 2845. Consolidation of income and expenses 2865.1. Intercompany relationships 2875.2. Consolidation techniques 2915.2.1. Profit & loss statement by function 2925.2.2. Profit & loss statement by nature 2995.2.3. Consolidation differences 3086. Unrealized profits 3106.1. Profit calculation 3126.1.1. Purchased assets 3136.1.2. Self-constructed assets 3136.2. Transfer pricing 3166.2.1. Basics 3166.2.2. Profit and cost determination 3296.2.3. Documentation and compliance 3326.2.4. Application in group accounting 3366.3. Consolidation techniques 3377. Non-controlling interests 3417.1. Allocation of profit and loss 3417.2. Consolidation techniques 3437.3. Special cases 3458. Group-level transactions 3458.1. Valuation adjustments and remeasurements 3468.2. Impairments 3488.2.1. Basics 3488.2.2. Impairment steps 3508.2.3. Cash-generating units 3628.2.4. Other issues 3718.3. Netting 3738.4. Reclassifications 3749. Special cases 3759.1. Intercompany dividends 3759.1.1. Basics 3759.1.2. Ordinary profit distributions 3789.1.3. Profit transfer agreements 3799.2. Intercompany sale of non-current assets 3809.3. Consolidation of multi-level groups 3899.3.1. Characteristics of multi-level groups 3899.3.2. Consolidation techniques 3919.3.3. Special cases 415G Associated companies 4251. Basics 4261.1. The equity method 4271.2. Preparation of and presentation in financial statements 4272. Consolidation techniques 4302.1. Initial consolidation 4302.1.1. Purchase price allocation 4322.1.2. Consolidations 4402.1.3. Issues around the initial consolidation 4432.2. Subsequent consolidation 4432.2.1 Adjustments 4432.2.2. Equity accounting 4482.2.3 Debt consolidation 4502.2.4. Unrealized profits and income & expense consolidations 4512.3. Disposals / Deconsolidation 4562.3.1. The parent’s view 4572.3.2. The group’s view 4582.3.3. IFRS 5 and disposals of associated companies 4663. Treatment of losses 4694. Impairments 4705. Special cases 4715.1. Associates and cash-generating units 4725.2. Partnership as associate 4735.3. Non-material associate becomes material 476H Joint arrangements 4791. Basics 4802. Accounting and consolidation 4892.1 Joint operations 4892.2 Joint ventures 4942.3 Interests in joint arrangements without joint control 4953. Disposals / Deconsolidation 4953.1 Joint operations 4963.1.1 The parent’s view 4963.1.2 The group’s view 4993.2 Joint ventures 4993.2.1 The parent’s view 4993.2.2 The group’s view 5003.3 IFRS 5 and disposals of joint arrangements 500I Changes in control 5011. Basics 5022. The parent’s view 5043. Increase in investments 5053.1. Financial investment to associate 5063.2. Financial investment to joint venture 5103.3. Financial investment to subsidiary 5113.4. Associate to joint venture 5153.5. Associate to subsidiary 5153.6. Joint venture to subsidiary 5254. Decrease in investments 5274.1. Associate to financial investment 5274.2. Joint venture to financial investment 5334.3. Joint venture to associate 5344.4. Subsidiary to financial investment 5344.5. Subsidiary to associate 5374.6. Subsidiary to joint venture 5415. Acquisitions and disposals without changes in control 5445.1. Financial investment 5455.1.1. Step acquisitions 5465.1.2. Partial disposals 5475.2. Associate 5485.2.1. Acquisitions and increases in capital 5495.2.2. Partial disposals and decreases in capital 5525.3. Joint venture 5565.3.1. Retirement of parties 5575.3.2. Acceptance of new parties 5585.4. Subsidiary 5595.4.1. Step acquisition 5625.4.2. Partial disposals 5646. Special cases 5656.1. Discontinued operations 5656.2. Deemed disposals 5676.3. Other constitutions of control 567J Disposals and deconsolidation 5691. Basics 5701.1 Transitional consolidation without external involvement 5722. Control 5733. Deconsolidation techniques 5753.1 The parent’s view 5763.2 The group’s view 5783.2.1 Calculation of gains and losses 5793.2.2 Asset and liability elimination 5843.2.3 Goodwill 5853.2.4 Other comprehensive income 5883.2.5 Consolidation tasks 5883.2.6 Journal entries 5903.3. Special cases 5983.3.1. Statement of cash-flow 5983.3.2 Fixed asset schedule 5993.3.3 Group-internal transactions 6003.3.4 Multiple arrangements and misuse 6004. Discontinued operations 6014.1 Step 1 – IFRS 5 Check 6034.2. Step 2 – The decision date 6094.3. Step 3 – Measurement 6104.3.1. Measurement scheme and timing 6104.3.2. Individual assets 6124.3.3. Disposal groups 6164.3.4. Impairment losses 6174.4. Step 4 – Life as a discontinued operation 6194.4.1. Presentations 6194.4.2. Subsequent measurement 6234.5. Step 5 – Sale of discontinued operations 6244.6. Step 6 – Deconsolidation 6254.7. Special cases 6274.7.1. Distributions to owners 6274.7.2. Changes to sales plan, criteria not any longer met 6274.7.3. Purchase of subsidiary for immediate sale 6284.7.4. Disposal groups without any non-current assets 629K Special areas 6311. Currency translation of foreign operations 6321.1. Basics 6321.2. Translation to the functional currency 6351.2.1. Monetary items 6361.2.2. Non-monetary items 6371.2.3. Translation tasks and techniques 6371.2.4. Changes in the functional currency 6401.2.5. Special cases 6401.3. Translation to the presentation currency 6411.4. The exchange rate 6461.5. Currency translations in practice 6481.6. Taxation 6501.7. Special cases 6501.7.1. Goodwill and non-controlling interests 6501.7.2. Currency effects of intercompany relationships 6511.7.3. Disposal of foreign operations 6531.7.4. Currency translation in multi-level groups 6541.8. Classifications of balance sheet items for translations 6552. Deferred taxes in groups 6562.1. Basics 6562.1.1. The temporary concept 6562.1.2. Accounting for deferred taxes – Recognition 6582.1.3. Accounting for deferred taxes – Measurement 6602.2. Differences 6612.2.1. Inside basis differences I 6612.2.2 Inside Basis Differences II 6632.2.3. Outside basis differences 6652.3. Special cases 6672.3.1. Intangible assets and goodwill 6672.3.2. Unused tax credits and tax losses 6682.3.3. Foreign currency translation 6692.3.4. Tax groups 6702.3.5. Partnerships 6732.3.6. Associates 6742.3.7. Restructuring 6762.4. Tax reconciliation 6762.5. Classification of deferred tax elements 6773. Cash flow statements 6793.1. Basics 6793.2. Group effects 6813.2.1. Changes in the group composition 6823.2.2. Consolidation 6833.2.3. Foreign currency translations 6833.2.4. Associates companies and joint ventures 6853.3. Other effects 6853.4. Preparation techniques 6863.5. Classification of cash flow elements 6894. Partnerships 6915. Restructuring of groups 6935.1. Basics 6935.2. Types of restructuring 6955.3. Restructuring methods 6995.3.1. Sales 7005.3.2. Mergers 7015.3.3. Splits 7045.4. Special case: Shareholder initiated restructurings 707l Management consolidation 7111. Basics 7122. Business units 7143. Projects and cost units 7263.1 Projects 7273.2 Cost units 7283.3 Consolidation tasks and techniques 7294. Dependency between management consolidations and consolidated financial statements 730M Consolidated financial statements 7331. The basics 7342. Statements 7353. Notes & group disclosures 7383.1. Structure of notes 7383.2. Accounting policies and group disclosures 7393.3. Disclosures 7413.4. Other disclosures 7433.5. Preparation process 7444. Management report 746N Appendix I: Fair value measurement 7511. History 7512. Definition 7523. Measurement 7533.1 Market approach 7553.2. Cost approach 7563.3. Income approach 7564. Measurement techniques for selected assets and liabilities 758Appendix II: IFRS – US-GAAP comparison 760Appendix III: IFRS 7661. List of IFRS 7662. IFRIC and SIC interpretations 768Reference list 771Glossary 773Index 779