Last time, we looked at the topic of whether or not you might have the duty to consolidate from January 1, 2016. If so, and you are seeking an answer for how to consolidate for the first time, then read on.

A consolidated financial statement drawn up for the first time reports about the final balance, as well as the initial one (comparable period). If consolidating for the first time for the accounting period ending as of December 31, 2016, we need to deal with the opening balance as of January 1, 2016 – that is draw up a consolidated “opening balance sheet”. The word deal with is used rightly here, because a considerable part of consolidating adjustments and set-up in consolidation consists in its opening balance sheet. 

The group will define the so-called consolidating whole, that is determine companies, which are part of the consolidation, the structure of their ownership, and based on it the choice of consolidation method – that is the way, in which their assets and liabilities will be reported within the consolidating whole. The method of consolidation derives from the degree of control of the parent company in the given accounting entity, and the higher the control, the greater the percentage of entrance of assets and liabilities (or their difference in the form of equity) into consolidation.  We know from the last time that a consolidating whole needs to unify its rules and accounting periods, as well as define mutual relations for subsequent elimination.  

A thus prepared consolidating whole posts transactions related to an acquisition of a controlled company as of the date of acquisition in fair value. There may have been several acquisitions and they may have taken place gradually. It need not be accentuated that when collecting such data in the distant past, this may be a problem. 

The difference between the fair value of own capital of the purchased accounting entity and the purchase price, for which a stake in this accounting entity was bought, is called a consolidation difference. The consolidation difference is reported in the consolidated balance sheet. The consolidation difference is also depreciated evenly for up to 20 years. With regard to the fact that acquisitions, as well as sale of stakes in consolidated accounting entities occur subsequently as well, the height of the consolidating difference needs to be adjusted not only for depreciation. Loss or profit from an acquisition or sale of stakes in an individual financial statement need not necessarily equal profit or loss realised in consolidation – this is due to taking into account real value of own capital of the participating accounting entity in consolidation. 

For drawing up its first consolidation, a consolidating whole thus needs to answer the question of how far into the past it needs to take into account acquisition transactions, what the fair value was on the date of acquisition, and also assess the influence of deferred taxes on fair value accounting with regard to significance. 

Last but not least, consolidating means work with adjustment of group relations, for which there is the rule that achievement of profit from mutual transactions between companies in the group and the balances from these transactions must be accounted for in the consolidation, as if they did not place at all or as if the consolidating whole posted profit – that is one accounting entity. That means that a consolidating unit posts profit from the sale of its products and services only after they are sold to a third party. Resale of products and services with a margin between companies in consolidation needs to be eliminated.  

Although there is seemingly time for the first consolidation until drawing up the financial statement as of December 31, 2016, we have illustrated that it is necessary to keep a number of issues in mind and mainly to prepare for drawing up the opening balance, in which a definition of the consolidating whole and calculation of the consolidation difference plays the key role. We will be glad to help you with any questions you may have on this subject.