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INTRODUCTION TO THE CONSOLIDATION OF ACCOUNTS IN ACCOUNTING

What is consolidation in accounting?

Consolidate (consolidation) is the combining of assets, liabilities, and other financial items of two or more companies into one. In the context of financial accounting, the term “consolidate” often refers to the consolidation of financial statements. Where all subsidiaries report under the umbrella of a parent company. The consolidation also refers to the merger of smaller companies into larger companies through mergers and acquisitions.

When we find ourselves faced with a group of companies. All under the control of the same management, each with its own accounts. It is a question of grouping the individual accounts of each of these companies into one.

We will see that this consolidation process is carried out in several stages and while respecting certain rules.

The aim of this article is to be able to identify the criteria. This leads to an obligation to present consolidated accounts, i.e. group accounts. And to define the basic principles of this process. According to the Code of Obligations, it is articles 963 and 964. Which defines the basis of the consolidation of the accounts.

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When should present the consolidated accounts?

Article 963 of the Code of Obligations stipulates that ” any legal person required to draw up accounts. Which controls one or more companies required to draw up accounts. Must include in its management report consolidated annual accounts covering all of the companies it controls. ”

There are a few things in this first article that require us to look into certain details. First, what is a legal person? Which companies require to establish accounts? And how do you control the another business?

Definition of a legal person

According to the definition found on Wikipedia, a legal person is an entity with a legal personality. Which allows it to directly hold rights and obligations. SAs, public limited companies, SARLs, limited liability companies. Or foundations, to name but a few of the most important, are legal persons.

The obligation to keep accounts

Article 957 paragraph 1,  of the Code of Obligations, defines this obligation: “must keep accounts and present accounts:

  1. sole proprietorships and partnerships which achieved a turnover of more than CHF 500,000 during the last financial year;
  2. legal persons. “

Keeping accounts involves, among other things, keeping double-entry accounts. Respecting the principle of regularity according to Articles 957a. paragraph 2. As well as article 958c. paragraph 1 of the Code of Obligations.  Where we speak of clarity, completeness, reliability, prudence. Mention also made of the conservation of books according to article 958f. of the Code of Obligations. “the books and accounting documents  kept for 10 years.”

The annual accounts of a group  made up of the following elements   :

  • Balance sheet
  • Income statement
  • Cash flow statement
  • Table of changes in equity
  • Annex

The two articles of the Code of Obligations dealing with the presentation of consolidated accounts. Do not contain any detailed prescription as to the consolidation process. This is why, within the framework of the training leading to the federal certificate of specialist in finance and accounting. Reference is made to the Swiss GAAP RPC 30 standard and, in addition, to the IFRS standards. This only concerns the treatment of goodwill under IFRS.

In the introduction to Swiss GAAP FER 30, it is stated that “small entities which. On a consolidated basis, do not exceed two of the following values in two successive financial years. May limit themselves to applying the fundamental RPCs and the Swiss GAAP RPC 30.  For example, values greater than 10 million for the balance sheet total, 20 million for the turnover. And 50 full-time jobs for the workforce. ”

This standard No. 30, therefore, applies to any group of companies. That is subject to Swiss GAAP FER and which, by virtue of the value limits. Can be satisfied with applying the fundamental RPCs, i.e. standards No. 1 to 6. Otherwise, the group will have to apply all the standards.

Consolidated accounts: Group and control

When is there control over another company? Control of another company by a legal person is deemed to be. When one of the three conditions of article 963 paragraph 2 is observed.

It directly or indirectly has the majority of votes within the supreme body. Corresponding to the general meeting of shareholders, the highest body of a public limited company. This majority is obtained by acquiring more than 50% of the company’s shares or shares. Either by direct purchase of the securities. Or by a contract which grants a share of the votes greater than 50%. This is the case in point 3: it can exercise a dominant influence by virtue of the statutes. The deed of foundation, a contract, or similar instruments. It is quite possible, for example, to own 40% of the shares of an SA, 40% of the economic rights. But that a contract confers 60% of the voting rights, ie the majority of the votes.

This diagram explains direct and indirect holding. We call the parent company the company which holds stakes in daughter companies which we call subsidiaries. This set of companies constitutes a group. The parent company owns shares in subsidiaries F1 and F2 directly. And indirectly in subsidiaries F3 and F4 through these subsidiaries F1 and F2. In the consolidation process, this set of companies, the group,  considered the scope of consolidation. It is within this perimeter that the various consolidation work will carry out.

Consolidated accounts: Release from the obligation to consolidate

Can a legal person released from the obligation to draw up consolidated accounts? According to article 963a. of the Code of Obligations. This is possible if one of the three conditions below  met:

First condition:

If during two successive years, the legal person and the companies that it controls. Do not together exceed two of the following values:

  • balance sheet total greater than 20 million francs,
  • turnover exceeding 40 million francs,
  • and a workforce of over 250 full-time jobs on an annual average.

Take the example of a group, parent company, and its subsidiaries. Which in 2015, cumulatively, had a balance sheet of 25 million and a turnover of 42 million. The following year, in 2016, there is only one of the criteria that is exceeded, there are 260 employees. In 2017, two criteria were exceeded again: a turnover of 50 million and 255 employees. In 2018, for the second consecutive year, two criteria were exceeded. The balance sheet is 23 million and the turnover 42 million. In 2018, there is, therefore, an obligation to present group accounts.

Two last conditions:

The two other conditions that can release the obligation to present the consolidated accounts are:

  • if the other company in Switzerland or abroad by itself own this parent company. And the consolidation is done upstream;
  • if this parent company transfers this obligation to prepare the consolidated accounts to one of the subsidiaries that it controls.

However, the section 963b. of the Code of Obligations indicates that it is mandatory to consolidate. If one of the four conditions below met:

  1. this operation is necessary to guarantee a reliable assessment of its economic situation;
  2. partners representing at least 20% of the share capital. 10% of the members of the cooperative society. 10% of the members of the association, so require;
  3. a partner or member of the association, personally liable for the debts of the company. Or subject to an obligation to make additional payments requires it;
  4. the foundation’s supervisory authority requires it.

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