The Consolidation of the Financial Statements A Process Type of Input Processing Output

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1 Abstract The Consolidation of the Financial Statements A Process Type of Input Processing Output Alexandra Ana Maria ȘERBAN PhD Student, "Valahia" University, The Faculty of Economics, Targoviste, Romania alex14us2003@yahoo.com The entities involved in the strenghtening process, for succeeding in achieving the proposed objectives, must realise an information system on the structure Input-Processings-Outputs. For the efficiency of the system is nesessary that the OUTPUT structure to correspond with the proposed objectives and also to be conforme to the short and long term group strategies and to respect the regulation of the field. Keywords: Financial statements, consolidation, processing, control, shareholders,entity, mother entity. 1. Introduction Starting from the plural to singular, the process of strenghtening the financial statements represents one of the subsystem components of the generel informational system presented on the same structure. The users of the consolidated/ strenghtened financial information afferent the pulic institutions are two ways: Internal users: leaders of the entities involved in the consoidation process, internal public auditors, internal control bodies; External users: external public auditors (The Auditors Court of Romania ), The Ministry of Public Finances, The National Stats Romanian Institute, EUROSTAT. The obsective of the financial statements can be achieved only if the system inputs and the processings respect the conditions imposed below: inputs case: the individual financial statements to be obtained on time, to be correctly established the consolidation perimeter and to be repected the substance over form principle. processings case: the adjustment, conversion, and restatement precesses of the financial statements to be correctly applied, the processes to be performed in real time and to be used the professional judgement regarding the selection of the consolidation processes there where can be more options

2 The benefits of the process involving the financial consolidation statements are: Providing the useful managenent tools to manage entities; Increassing the efficiency of the business performance analysis and also knowing the results; The determination of the objectives and the performing of the forecast analysis bassed on a normalized and controllable information circuit The grafic representation of the informational system regarding the accounts strenghtening is the following: Fig The informational system regarding the accounts strenghtening. Inputs - Individual financial statement - the consolidation perimeter Processing The processing of the individual financial statements Outputs The obtaining of the financial consolidated statements The source: own conception 2. Interes coordonates in the consoliation system The consolidation system starts with the establishing of the consolidation perimeter through which the involved entities are identified.processing the information from the individual financial statements send, must be performed in an organised way after the chosen mangenent structure chosed by the management- centralized processing or descentralized processing. The establishment of the consolidation perimeter. Exclusive control, common control and notable influence

3 The consolidation perimeter covers all entities that undergo the consolidation operations. Becaouse the criteria which counts for establishing the consolidation perimeter are varied,we can outline them on two concepts: restricted conception, where the consolidation concept covers only thoes entities on which the mother entity is exercising exclusive control (USA specific concept); wide conception,where the consolidation perimeter includes besides the exclusive controled entities also the entities over which is exercitated the influence of common control (European Countries specific concept International Standards include in the consolidation perimeter both exclusively controled entities but thoes entities where the mother entity exercise a common control with other associated. In the publication Analyse financiere et Gestion des Groupes it is performed an analysis of the consolidation perimeter and also an alalysis of the appeared in their.the author speaks about the wide perimeter conception of the entities group refering to the legal, accounting and economic consolidation perimeter and also a perimeter of influence. So,in the notion of the consolidation perimeter we must have into account three dimensions: the content of the consolidation perimeter ; the group influence area or the group involvement zone; the model of the ordination and organisation of the build ensamble; 200

4 The dimensions of the consolidation perimeter Fig 1.2. The dimensions of the consolidation perimeter the content of the consolidation perimeter the group influence area or the group involvement zone the model of the ordination and organisation of the build ensamble constituit Source: Richard, J., Simons, B. et associes, Alpha, S. et associes (2000), Analyse financiere et Gestion des Groupes, Editura Economică, Paris We can group the consolidation perimeter variations in four categories : The inclusion of thoes entities whom the group had never been related with before the date of the acquisition; The take over control of an entity which has never been consolidated before, but in which the group had owened a minority position ; The total assignement of a stake in a consolidated entity; The assignement of the control over a consolidated entity until present and maintained as a minoritary stake in the future; Therewith, the consolidation perimeter can be influenced by: the proces of closing and liquidation of some branches; the proces of building new controlled branches by the mother entity with 100 % control; the contribution in the operations of merge by absorbtion; In the economic perimeter there are all the entities in which the group has minoritary stake. These minoritary stake represent elements which follow to the developement of common branches, respectively to acquisitions which will enlarge the group perimeter. The consolidation 201

5 perimeter is much exceded by the economic perimeter through the enlarged volumen of the integrated business and allows a much more detailed mesurement of real influence of the whole group. Depending on the proposed sistematization for the group wealth management, the content of the consolidation perimeter is diversely structured. The sistematization formula through which the branches are close related to the mother entity report the ensamble of strategies to the group regardind the evolution of the entity and so there will be imposed proper limits. The localization of centra functions separately in each branch drives to the weakening of the group strategie. The operational division regroups the branches within the same sector and can be grouped depending on the market they activate, on clients or by the technological workflow.the principal activity fields traked by the group within it s different branches are defined by the coordination on the operational divisions. Likewise, the geographic division can be a complement or a substituent of the coordination of the consolidation perimeter in operational divisions. Depending on the internal coordination sistem of the consolidation perimeter and on the hierarchy of it s function are reflected the strategic group options both on short term and long term. For the establishment of the consolidation perimeter we must take into account the influence or control exercised by the mother entity over the group branches. Acording to the International Accounting Standards, the control represents the authority of managing the financial and operational polithics for the purpose of gaining benefits from the activity. So, the control can be exclusive or conjugate. The exclusive control is divided in exclusive right control and exclusive de facto control.when the mother entity controls more than 50% from the branch vote rights it is called exclusive right control. The exclusive control appears in fact in the situations in which even if the mother entity has half or more than half of the vote rights, she has a specific authorithy over the branch. According to IAS 27 Consolidated and Separate Financial Statements theeses cases are: the mother entity owns half of the vot rights based on some agreements with other investors; the mother entity is authorised to name or to authorise the majority of the Administration Board members; a contract can offer the mother entity the power to manage the branch s financial and operational politics ; 202

6 The common control refers to that established impart through a contract of the control over an economic activity, respectively over an asset or over an entity, whitout any of the asociated to take a decision when there isn t the other agreement. In the case of the less important decisions it may be the posibility of a unilateral decision fron the representative designated by the investors having as argument the smooth functioning of the association. In the publication Achizitions of companies on stock market, the author Gheorghe Hurduzeu contours several theories regarding the holder of the entity control namely: -The management company, in which the Administration Board holds the principal role in the entity management.in fact, thoes who hold the company control are thoes who have the right of choosing the board, to revoke the menbers of the board or to impose their ruling. Theoreticly, such control needs the majority of the share capital of the company in the case when the rest of the shareholders are spread and they don t show much interest for the General Assembly. -The company based on the shareholders, is in view of the shareholders role to control the mangers, either by naming a person to work beside the managers to monitor them, either by downloading the discharge at the end of the period based on the results. Both the mangerial control and the shareholder control must be analized together with the Act of the Foundation of the Society and with the legisation in force, taking into account the participation percentage or the positions held inside the company. In the account consolidation process we calculate two kinds of percentages: the control percentages; the interest percentages; The control percentage represents the voting rights available for the mother entity on the company General Assembly in which it invested,regardless of the participation share to the share capital. Depending on this percentage is set if an entity must be included or not in the consolidation perimeter because it should be equal to 20% and stands at the base of the consolidation method of the entity. The interest percentage represents that share which is owned by the mother entity in the company equities which are next to be consolidated and are used to the sharing of the equities between the company and the rest of the shareholders. In the publication Consolidation methodology and practice, the authors identify four types of asociates percentages namely: a) The group control percentage; b) The group interest percentage; c) The direct ownership percentage; d) The group integration percentage; 203

7 Following next we ll present only the last two percentages because the first two have already been presented. The direct ownership percentages represent the relationship between the participation titles owned by entity X in the capital of the entity Y. This percentage can be calculated in the form of the voting rights, for the determination of the interest percentage or the rights to the results. The direct ownership percentage represents only an intermédiate stage in the calculation of the interest and control percentages. The integration percentage requires the procentage from where the elements of an entity must me taken into consideration regarding the accounts consolidation. The organization of the process of consolidation Every mother entity of a group should have envisioned in the organisation chart.a consolidation service with tasks, procedures and well established methods in order to achieve the consolidation process. The consolidation process can be performed centralised or descentralised. The centralised consolidation process requires that the service with the consolidation powers to perform all the operations necessary for the elaboration of the consolidated financiar statements, starting with the establishment of the consolidation permeter, the centralised downloading of the datas from the system and ending with the elaboration of the consolidated financiar statements. Conclusion If the organization chart is quite complex it might be that the service with the accounts consolidation powers because of the big volumen of datas, to be topped by the sitation and not to be able to respect the time limits of consolidated financiar statements elaboration. That s why, in order to eliminate this aspect we can use the method of the descentralised consolidation process, that requires that a part of some service tasks to be taken over by the consolidted entities. Theese necessary operations to the consolidation can be performed inside every consolidated accounting service of the entity subject to consolidation or can be set up special subordinated departments with preconsolidation responsabilities. The general opinión is to go for the performing of these preconsolidation operations directly through the accountant finalcial service, because the consolidated financial statements usually are elaborated at the same reporting date with the financial statements and so it would be a lack of time with their transmission to the department and at the same time through the implication of many persons it would louse the essence of the information. Since the begining there must be established the rules of operation, the principles and working methods applied and in the same time to be provided the coordination with: - the group managers regarding to the information policies; 204

8 the branches accounting services anh the other associated entities; the internal audit an management control services for checking the received information; the financiar branches services; the tax services of the branches; the legal services of the branches; the informatic service of the consolidated entities; the auditors of the financial statements of moter entity; It is necessary the existence of a consolidation manual which contains information regarding: o the presentation mode of the financiar consolidated statements o the related perimeter of the consolidation; o working methods and principles; o documents which must be submitted by the consolidated entities to the mother entity; This manual should be periodicly revised to respond promptly to the internal and external briefing request regarding the account consolidation. In practice, it was determined that for the mother entity is much more easy to elaborate the financial consolidated statements by eliminating the mutual operations,based on the data (accompanied by the trial balance reports and the elaboration af a consolidation journal) submitted by the entities included in the consolidation scope. Bibliography Bălăceanu C., Bentoiu C., (2007), Macroeconomics, C.H. Beck Publishing House, Bucureşti Hurduzeu,G. (2002), Purchases of capital market firms, Economică Publishing House Matiş, D. (2003), Accounting for Special Operations, Intelcredo Publishing House Nişulescu, I. (1999), Finance and business reorganization, InfoMedica Publishing House Richard, J., Simons, B. et associes, Alpha, S. et associes (2000), Analyse financiere et Gestion des Groupes, Economică Publishing House, Paris Tilea D.M. (2011), Accounting for public institutions, ProUniversitaria Publishing House, București Munteanu V., Tilea D.M., Bleotu V. (2012), Accounting and financial reporting for public institutions, Universitară Publishing House, București IAS 27 Consolidated and Separate Financial Statements EUROSTAT European Institute of Statistics 205