How to Handle the Acquisition of Further Equity Interests with SAP® Financial Consolidation 10.0, Starter Kit for IFRS?

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How to handle the acquisition of further equity interests with SAP® Financial Consolidation 10.0, Starter Kit for IFRS?

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TABLE OF CONTENTS

INTRODUCTION ...... 3 WHAT ARE THE REGULATION REQUIREMENTS? ...... 4 PRESENTATION OF THE BUSINESS CASE ...... 5 HOW TO HANDLE THE ACQUISITION OF FURTHER INTERESTS IN THE IFRS STARTER KIT? ...... 7 Reminder ...... 7 Overview of the operating process ...... 7 Conversion rate table ...... 8 Consolidation scope ...... 8 Manual journal entries...... 8 Automatic journal entries ...... 9 Retrieval of consolidated data ...... 10 HOW DOES THE ACQUISITION AFFECT FINANCIAL STATEMENTS? ...... 13 Consolidated Statement of Financial position  Audit trail ...... 13 Consolidated statement of cash flows ...... 14 Statement of changes in equity – > AUDIT TRAIL ...... 15

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How to handle the acquisition of further interests with SAP® IFRS Starter Kits Consolidation Practical Guide N°10– September, 2012

INTRODUCTION

This practical guide is part of a new series of seven guides dedicated to help deal with the most frequent consolidation M&A requirements when using the SAP® Financial Consolidation 10.0, starter kit for IFRS. A first series was published to help deal with those cases when using SAP® Planning and Consolidation 10.0, starter kit for IFRS, version for SAP NetWeaver. In this paper the acquisition of further interests in a subsidiary (equity transaction) is explained through a real use case scenario and presented in three steps:  what the IFRS text says,  how the business use case is handled in Financial Consolidation,  and what impact the CFO should expect on her/his company’s financial statements. You can use this new paper to demonstrate SAP’s supremacy in addressing customers’ most complex and frequent business requirements.

SAP solutions for consolidation, part of SAP enterprise performance management (EPM) solutions, include SAP Financial Consolidation and SAP Business Planning and Consolidation. A starter kit for IFRS has been developed for each solution to perform, validate and publish a statutory consolidation in accordance with IFRS. These starter kits are based on a dynamic configuration easy to customize to specific requirement. They are provided with documentations.

To know more: You will find further regulation analysis on how SAP® Financial consolidation 10.0, Starter kit for IFRS meets IFRS requirements and further indications on how to deal with scope changes in the SAP® Financial consolidation 10.0, Starter kit for IFRS SP2 Operating guide.

To be kept informed of the most recent releases and new documentations: Follow us on SAP Community Network

How to handle the acquisition of further interests with SAP® IFRS Starter Kits Consolidation Practical Guide N°10– September, 2012

WHAT ARE THE REGULATION REQUIREMENTS?

According to IFRS 3 and IFRS10, only a change in control is a significant economic event. Once control has been achieved, any subsequent transactions that do not result in a loss of control are accounted for as equity transactions.

Equity transactions should be accounted for as follows:

 The carrying amounts of the controlling and non-controlling interests should be adjusted to reflect the changes in their relative interests in the subsidiary

 Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid is recognized directly in equity and attributed to the owners of the parent

 No change in the carrying amounts of the subsidiary’s assets (including goodwill) should be recognized as a result of such transactions

IFRS 10 does not give detailed guidance on how to measure the amount to be allocated to the parent and non-controlling interest to reflect a change in their relative interests in the subsidiary. Main issues regard goodwill and accumulated other comprehensive income.

Goodwill In the Basis for conclusions of IFRS 3 (BC218), the Board explains that the adjustment to the carrying amount of non-controlling interests, that will be recognized when the acquirer purchases shares held by non- controlling interests, will be affected by the choice of measurement basis for non-controlling interests at acquisition date (fair value or proportionate share of net assets). It means that, when parent acquires non- controlling interests that have been initially measured at their fair value, goodwill is included in the carrying amount of non-controlling interests that is transferred to group equity. With partial disposals, where the parent disposes part of its interest to non-controlling interest without losing control, the question remains whether part of the parent’s goodwill should be transferred to NCI or not. Interpretations published by professional bodies differ. Some consider that goodwill is part of the transfer whereas others think that no goodwill has to be allocated to NCI (which means that principles apply differently whether the equity transaction is an increase or a decrease of the parent’s ownership interest).

Accumulated other comprehensive income As regards partial disposals, IAS 21 requires that “the entity shall re-attribute the proportionate share of the cumulative amount of the exchange differences recognized in other comprehensive income to the non- controlling interests in that foreign operation” (§ 48.C). IAS 39 has been amended in the same manner regarding hedging reserves. On the other hand, IFRS are silent when it comes to an increase in parent’s ownership interest. SFAS 160 Non-Controlling Interests in Consolidated Financial Statements, which is supposed to be the US GAAP equivalent of IFRS 10, is clearer: “A change in a parent’s ownership interest might occur in a subsidiary that has accumulated other comprehensive income. If that is the case, the carrying amount of accumulated other comprehensive income shall be adjusted to reflect the change in the ownership interest in the subsidiary through a corresponding charge or credit to equity attributable to the parent (§ 34)”. As a consequence, we assume that accumulated other comprehensive income has to be re-allocated between group and NCI according to their new respective shares, regardless of whether there is an increase or a decrease in the parent’s ownership interest.

How to handle the acquisition of further interests with SAP® IFRS Starter Kits Consolidation Practical Guide N°10– September, 2012

PRESENTATION OF THE BUSINESS CASE

This business case is included in the set of data provided with the IFRS starter kit SP2. It is possible to retrieve it using the following settings: - CATEGORY: A- ACTUAL, - DATA ENTRY PERIOD: 2021.12, - CONSOLIDATION CURRENCY: USD - SCOPE: CASE3, - VERSION: IFRSYTD, - REPORTING UNIT: P3, S3

Y 2020 Y 2021

Parent P3 Parent P3

75% 100%

Subsidiary S3 Subsidiary S3

Year 2019 Parent company P3 (USD) purchases a 75% interest in subsidiary S3 for USD90 000 S3 Fair value of the NCI (25% equity interests) is USD28 000 S3 Fair value of net assets is USD100 000 Goodwill is calculated with the full goodwill method = USD18 000 (15 000 attributable to P3 and 3 000 to third party) as follows: The fair value of the non-controlling interest is determined to be USD28 000 Consideration paid + 90 000 Non Controlling interests in the acquiree + 28 000 Identifiable net asset of the acquiree - -100 000 Goodwill = 18 000 Attributable to CI 15 000 Attributable to NCI 3 000

Year 2020 S3 Profit for the year = USD20 000

Year 2021 P3 acquired the 25% equity interests held by NCI for USD35 000 at the beginning of 2021.

How to handle the acquisition of further interests with SAP® IFRS Starter Kits Consolidation Practical Guide N°10– September, 2012

P3 individual accounts in 2021: Acquisition of 25% Before After Investments in S3 90 000 125 000 Y2019 S3 Acquisition 90 000 Cash and cash equivalents 50 000 15 000 Y2021 S3 Acquisition 35 000 Assets 140 000 140 000 125 000

Issued capital 140 000 140 000 Retained earnings Equity & Liabilities 140 000 140 000

S3 individual accounts at 2021 opening: Acq. Date Cash and cash equivalents 120 000 Assets 120 000

Issued capital 20 000 Retained earnings 100 000 Equity & Liabilities 120 000

Equity transaction effect: Fair value of consideration + 35 000 Carrying amount of NCI - 33 000 Negative movement in equity attributable to = 2 000 parent

NCI at acquisition 28 000 Increase (25% x USD20,000) S3 Y2020 net income 5 000 => Carrying amount of NCI 33 000

How to handle the acquisition of further interests with SAP® IFRS Starter Kits Consolidation Practical Guide N°10– September, 2012

HOW TO HANDLE THE ACQUISITION OF FURTHER INTERESTS IN THE IFRS STARTER KIT?

REMINDER

The amounts stored in the database are identified thanks to a set of elements called dimensions. The main dimensions are listed below:  The account dimension indicates which item of the balance sheet or P&L is impacted.  The flow dimension is used to identify and analyze the changes between the opening (flow F00) and closing (flow F99) balances.  The audit ID dimension identifies the origin of the data for input data, local adjustments, manual and automatic journal entries. The in-built dimension (Journal entry number) provides a full audit trail as it retrieves the number of the manual or automatic journal entry. The use of this feature is illustrated in the chapter “How the acquisition of further interests affects financial statements” where we show screenshots of the analysis reports that can be accessed by drill down from the financial statements.

OVERVIEW OF THE OPERATING PROCESS

The actions to perform to deal with an increase in interest rate are listed hereafter. A tick mark indicates which actions apply to case#3. In this business case, we will focus on year 2021.

Conversion rate table Enter daily rate (spot rate) at the acquisition date if the parent company doesn’t report in Parent: the consolidation currency Package data entry Enter the purchase price in schedules PA2100 and PA2300 P Parent: Enter the date for the acquisition on schedules PA2350 if the parent’s currency is different from the consolidation currency Consolidation scope Enter the new financial rate of the subsidiary P Manual journal entries: Correct the allocation of the net income between CI and NCI using audit ID NCI11- Subsidiary: Calculation of NCI - Correction (if occurs during the period) Reclassify the goodwill between NCI and CI (in case of full goodwill) P Consolidation: Run the consolidation processing P Report navigator: Validate the scope change accounting with dedicated preconfigured reports P

How to handle the acquisition of further interests with SAP® IFRS Starter Kits Consolidation Practical Guide N°10– September, 2012

CONVERSION RATE TABLE

By default, for any B/S account, flow F20-Increase/Purchase is converted using the average rate of the period. It is possible to perform a more accurate conversion based on the exact daily rate for the account/flow combination A1810-Investments in subsidiaries, JV and associates / F20, This optional conversion process is based on:  An additional detail by date provided in the package in schedule PA2350,  Daily rates entered in the conversion rate table.

CONSOLIDATION SCOPE

The financial rate variation is calculated automatically after having entered the closing financial rate, by difference with the financial rate of the opening consolidation scope.

MANUAL JOURNAL ENTRIES

A manual journal entry is posted to declare the reclassification of goodwill attributable to NCI to CI using the dedicated audit ID GW01 –Disclosure of goodwill (gross value and impairment) and bargain purchase - Man

(a) Posted on S3

(b) Using dedicated audit ID for goodwill GW01

(a) (d) On the dedicated technical (b) account for goodwill posting

(e) On flow F92 (change in (c) interest rate)

(f) Reclassification between P3 and TP-999 (full goodwill)

(d) (e)

(f)

How to handle the acquisition of further interests with SAP® IFRS Starter Kits Consolidation Practical Guide N°10– September, 2012

AUTOMATIC JOURNAL ENTRIES

 Elimination of the increase in investment at parent’s using audit ID INV10 – Elimination of investment. Posting of the impact at subsidiary using flow F92- Change in interest rate and audit ID INV10  Reclassification of equity accounts between controlling interests and NCI according to the change of financial rate is posted on flow F92 for all audit IDs (except goodwill).  Reclassification of goodwill allocation triggered by the manual journal entry entered on technical account XA1310 (see screenshot hereafter)

Figure 1- Report C33-10: Journal entries for 1 reporting unit and 1 audit ID

How to handle the acquisition of further interests with SAP® IFRS Starter Kits Consolidation Practical Guide N°10– September, 2012

RETRIEVAL OF CONSOLIDATED DATA

After running the consolidation, the consolidated balance sheet is as follows:

(a)

(c)

(d) (b)

(e)

(a) F00 shows the consolidated opening balance sheet of P3 + S3

(b) Purchase price of 25% of S3 and the related cash outflow

(d) Clearing accounts used to post investment eliminition are balanced

(e) NCI are equal to zero at the end of the period

Figure 2- Report C31-05: Balance Sheet by flow

How to handle the acquisition of further interests with SAP® IFRS Starter Kits Consolidation Practical Guide N°10– September, 2012

The equity movements are explained below:

(a)

(a) (b) (c) (a)

(b) (a)

(a) Reclassification of the 25% NCI to CI -> Share capital (20 000 x 25% = 5 000) -> Retained earnings (100 000 x 25% = 25 000)

(b) Goodw ill reclassification

Figure 3- Report C31-12: Balance Sheet by flow, audit ID and reporting unit (extract)

How to handle the acquisition of further interests with SAP® IFRS Starter Kits Consolidation Practical Guide N°10– September, 2012

Analysis of account E1610 Retained earnings

(a)

(b)

(c)

(a)

(b)

(c)

(a) Automatic entries processed by rules (AUTOCO - 5 & 6) to reclassify equity between NCI and CI

(b) Automated entry trigerred by the manual reclassification of goodwill (AUTOCO - 2) with detail by share

Figure 4- Report C32-05: General Ledger by audit ID, share, JE number

How to handle the acquisition of further interests with SAP® IFRS Starter Kits Consolidation Practical Guide N°10– September, 2012

HOW DOES THE ACQUISITION AFFECT FINANCIAL STATEMENTS?

CONSOLIDATED STATEMENT OF FINANCIAL POSITION  AUDIT TRAIL

The increase in interest of S3 impacts the cash and the equity (Attributable to owners of parent and to NCI) You can drill down from an item (e.g. retained earnings) to the detail by account, entity, and code / description of the automatic or manual journal entry.

Figure 5- Report C11-05: Statement of financial position => Report C32-05: General ledger by audit ID, share, JE number

How to handle the acquisition of further interests with SAP® IFRS Starter Kits Consolidation Practical Guide N°10– September, 2012

CONSOLIDATED STATEMENT OF CASH FLOWS

(a)

(a) The cash outflow is due to the acquisition of 25% of S3 by P3

Figure 6- Report C11-25: Statement of Cash Flows

How to handle the acquisition of further interests with SAP® IFRS Starter Kits Consolidation Practical Guide N°10– September, 2012

STATEMENT OF CHANGES IN EQUITY – > AUDIT TRAIL

(a) (b)

(a) Difference between the 25% of NCI acquired (33 000) and the purchase price (35 000) = -2 000 (b) NCI outgoing (- 33 000)

Figure 7- Report C11-30: Statement of Changes in Equity

You can drill down to the detail by account and flow of the amounts displayed in the Statement of Changes in Equity

Figure 8- Report C23-25: Statement of Changes in Equity breakdown