4Consolidated financial statements
4.1Purpose
In many cases, larger businesses do not consist of one legal company only but of many companies, i.e. business is conducted by a group of companies. Each of these companies may have (depending on the rules explained earlier) to prepare financial statements; these individual financial statements cover only the specific part of the group’s business.
To furnish information about the business of the entire group, groups are obliged (under certain conditions – see below) to prepare consolidated financial statements.
§ 297 sect. 3 requires that consolidated financial statements present the financial and performance situation of all group companies as if they were only one company (the so-called one-entity theory). Therefore, the consolidated financial statements follow the economic entity, not the legal entity.221
The purpose of consolidated financial statements is to provide information about the group; additional purposes of individual financial statements, such as serving as a basis for payments (profit distribution to shareholders or taxes), do not exist.222
4.2Legal requirements
4.2.1Mandatory preparation
A legal obligation to prepare consolidated financial statements exists only for
–corporations (and limited liability partnerships, see earlier in Chapter 2.1.4)
–sole proprietorships and partnerships if the Disclosure Act must be applied (see earlier in Chapter 2.1.2.2).
If such a company is a parent company of a group, it must prepare consolidated financial statements. A parent company is any company that can exercise, directly or indirectly, a controlling influence over another company (a so-called subsidiary; § 290 sect. 1).
A controlling influence of the parent company is always assumed (the so-called control concept) if223
–the parent company has the majority of voting rights of the subsidiary (§ 290 sect. 2 no. 1),
–it is a shareholder and has the right to appoint or dismiss the majority of persons that constitute the governing body (e.g. executive board) that determines the business and financial policy of the subsidiary (§ 290 sect. 2 no. 2),
–it has the right to control the business and financial policy of the subsidiary because of an existing controlling agreement with the subsidiary or a specific clause in the articles of association of the subsidiary (§ 290 sect. 2 no. 3) or
–it bears, from an economic perspective, the majority of risks and rewards of a company,which facilitates the realization of a limited and precisely defined goal of the parent company (special-purpose entity; § 290 sect. 2 no. 4).
This is applied to direct interests in subsidiaries as well as to indirect interests, i.e. the rights a parent company has are added directly to the rights other subsidiaries may have; thus, group structures with several levels of subsidiaries are recognized as one group if the ultimate parent company has a controlling influence in them.
A company can therefore be both subsidiary and parent company of a subgroup. Whether this subgroup must prepare consolidated financial statements depends on whether the parent company of the subsidiary prepares so-called exempting consolidated financial statements, i.e. consolidated financial statements that exempt the company from its own obligations.
Exempting consolidated financial statements for a company exist if224
–the parent company of the subsidiary is located within the European Economic Area and prepares and publishes itself consolidated financial statements and a consolidated management report in German (§ 291)225
–that include the company and its subsidiaries,
–that are compliant with the corresponding EU directives or the applicable IFRS and that are audited according to the corresponding EU Directives,
–whose notes include the following information:
–name and location of the parent company that prepares the exempting consolidated financial statements,
–information about the exemption from the requirement to prepare consolidated financial statements for the company,
–explanation of applied recognition, measurement or consolidation rules that deviate from German GAAP.
–the parent company of the subsidiary is not located within the European Economic Area and prepares and publishes itself consolidated financial statements and a consolidated management report in German (§ 292)226
–that fulfils the criteria from above or
– that is prepared and audited in an equivalent manner.227
For small groups, this may be quite a burden, so size-dependent simplifications exist here as well. The logic of the criteria is the same as for individual financial statements (two criteria fulfilled in two consecutive years). A specialty is that consolidated figures or non-consolidated figures can be used. The difference in the values is assumed to cover the consolidation effects.
Larger groups controlled by a proprietorship or a partnership must prepare consolidated financial statements as well according to the Disclosure Act; the limits are identical to those of the individual financial statements. Such groups need not prepare a consolidated cash flow statement and a consolidated changes-in-equity statement unless they are capital market oriented (§ 13 sect. 3 PublG).228
Tab. 4.1: Size classes for consolidated financial statements.
Important differences to IFRS
The general approach of IFRS 10 is also control based, but control is defined differently. It requires (IFRS 10.6 and 7):
–“power over the investee;
–exposure,or rights, to variable returns from its involvement with the investee(...); and
–the ability to use its power over the investee to affect the amount of the investor’s returns (...).”
This can result in a different classification depending on whether control is given over a specific subsidiary.
Special-purpose entities are defined as “structured entities” (IFRS 12.A) in a way that may lead to different conclusions about whether or not control is given.
IFRS 3 or 10 do not provide any size-dependent exemptions.
4.2.2Applicable rules
Consolidated financial statements can be prepared either
–according to the Commercial Code (§§ 290–315):
This is what the following explanations will focus on;
or
–according to IFRS (§ 315a)229:
Capital-market-oriented parent companies must prepare their consolidated financial statements according to those IFRS that have been adopted by the EU. Other parent companies can choose to apply IFRS.
4.3Elements and content
Consolidated financial statements consist of (§ 297 sect. 1)230
–a consolidated balance sheet,
–a consolidated income statement,
–consolidated notes (see Chapter 4.7),
–a consolidated cash flow statement (see Chapter 3.4) and
–a changes-in-equity statement.
The consolidated financial statement may be extended by a segment reporting.
In addition to the consolidated financial statements, a consolidated management report must be prepared (see Chapter 3.5).
Apart from the changes-in-equity statement and a possible segment reporting, all other elements have the same content as individual financial statements.
According to § 297 sect. 1a the name, location, commercial register and number of registration of the parent company must be reported. If the parent company is in a liquidation process, this must be reported as well.
The Commercial Code provides no specific details about the changes-in-equity statement. DRS 22 recommends that corporations present the changes-in-equity statement in the following way.231
Columns:
| Subscribed capital | |
| − | Own shares (treasury shares) |
| − | Non-called-up capital |
| = | (Corrected) subscribed capital |
| + | Capital reserves |
| + | Revenue reserves |
| ± | Equity difference due to currency conversion |
| ± | Consolidated net profit/loss attributable to parent company |
| = | Consolidated equity of parent company |
| + | Minority interests |
| = | Consolidated equity |
Lines:
| Opening balance | |
| ± | Capital increases/decreases |
| + | Call for/payment of non-called contributions |
| ± | Allocation to/withdrawal from reserves |
| − | Dividends/profit distribution |
| ± | Currency conversion |
| ± | Other changes |
| ± | Changes in consolidation scope |
| ± | Consolidated net profit/loss |
| = | Closing balance |
The bases for the changes-in-equity statement are the consolidated balance sheet and the consolidated income statement. The balance sheet provides the structure of the columns and the first and last lines, i.e. the opening and closing balances of the individual items. All changes are reported in the lines in between; the consolidated net profit/loss must match the figure in the consolidated income statement.232
Segment reporting is an optional element and – like the management report – an addition to the consolidated financial statements. Its purpose is to give more details about the segments in which a group operates in order to supplement the consolidated financial statements.233
The Commercial Code does not specify any details about segment reporting. DRS 3 defines segments as follows:234
–The definition of segments follows the management approach, i.e. the organizational structure that is used to manage the company (DRS 3.9).
–The typical structures to report are product-oriented segments and geographical segments (DRS 3.8).
–Segments must be reported if they fulfil one of the following criteria (DRS 3.15):
–External sales are at least 10% of total external and intersegmental sales,
–The segment result is at least 10% of all positive or negative segment results,
–The segment assets (not netted with liabilities) are at least 10% of all segment assets.
For each segment that must be reported, the following information needs to be given:
–sales revenues (divided into third parties and intersegmental revenues);
–segment results (typically earnings before interest and taxes (EBIT) or earnings before interest, taxes, depreciation and amortization (EBITDA) are used); depending on results figures, additional information must be given;
–cashflows per segment (recommended);
–segment assets and investments in non-current assets (without netting with liabilities);
–segment liabilities.
A reconciliation from the segment data with the data in the consolidated financial statements must be given; typically, there will be consolidation effects between the segments that need to be reported.
Important differences to IFRS
Segment reporting is mandatory according to IFRS (IFRS 8).
4.4General principles235
Tab. 4.2: Principles of consolidated financial statements.
| Principle | Content | Codification |
| Completeness | The parent company and all subsidiaries must be included to give a true and fair view of the financial and performance situation of the group. This implies that for all companies included all assets and liabilities are recognized and included in the consolidated financial statements. | § 294 sect. 1 § 300 |
| Clarity and transparency | The consolidated financial statements should be clear and transparent (like the individual financial statements). This applies to all elements, in particular to those not relevant to invidual financial statements (cash flow statements, changes-inequity statement and eventually segment reporting). If the corresponding DRS are applied, this is assumed to be clear and transparent. | § 297 sect. 2 |
| One-entity theory | The consolidated financial statements present the information of the consolidated companies as if they were one entity, i.e. all transactions within the consolidation scope must be eliminated by consolidation procedures. | § 297 sect. 3 sent. 1 |
| Uniform closing date | Resulting from the one-entity theory, all companies within the consolidation scope should prepare the consolidated data at the same closing date as the parent company (simplifications see below). | § 299 sect. 1 |
| Uniform recognition and measurement | Resulting from the one-entity theory, all consolidated companies should apply the same recognition and measurement methods; otherwise the consolidated data will (at least partially) not be comparable. The consequence is that recognition and measurement options can be applied differently in individual and consolidated financial statements (i.e. the individual financial statements may have to be restated for consolidation based on the group accounting policy). | § 300 sect. 2 § 308 |
| Comparability of consolidation procedures | The applied consolidation procedures must be applied in the same way as in the earlier consolidated financial statements. If a deviation is necessary, this must be described and explained in the notes. | § 297 sect. 3 sent. 2 |
| Materiality | Because the consolidated financial statements are used for information purposes only, materiality is more important than for individual financial statements. This principle is codified in many specific rules that are intended to keep the effort for preparation in line with the additional information gained. | Codified in many specific rulesa |
a Beck’scher Bilanzkommentar, § 297, no. 195
4.5Consolidation scope
The consolidation scope comprises all subsidiaries that need to be included and the parent company. § 294 sect. 1 requires that the parent company and all subsidiaries, i.e. all companies that can be controlled by the parent company according to § 290, must be included.
A subsidiary need not be included (§ 296 sect. 1 and 2)236 if
–there exist substantial and continuing restrictions in exercising the rights of the parent company with regard to the management or transfer of assets,
–information necessary for the preparation of the consolidated financial statements can be provided only with disproportionately high costs or delays in time,
–shares of the subsidiary are held for the sole purpose of reselling them or
–the subsidiary is not material for the consolidated financial statements.
If a subsidiary is not included in the consolidated financial statement, this must be justified in the consolidated notes.
Further readings
DRS 19 “Pflicht zur Konzernrechnungslegung und Abgrenzung des Konsolidierungskreises” – Mandatory consolidated financial statements and definition of consolidation scope
4.6Consolidation procedures
The Commercial Code provides several methods of consolidation: Full consolidation, proportional consolidation and at-equity consolidation. The regular case, in cases where an entity is controlled, is full consolidation.
4.6.1Full consolidation
If an entity is controlled, it is included completely in the consolidated financial statements. That is done by the method of full consolidation (§§ 300–309).
4.6.1.1Comparability of data
A consequence of the one-entity theory is that the financial statements that are consolidated must be prepared applying identical methods, i.e. the data need to be comparable. Typically, this leads to adjustments in the financial statements of the subsidiaries (so-called adjusted financial statements; the only purpose of these financial statements is integration with the consolidated financial statements237).This means:
Identical closing date238
The consolidated financial statements must be prepared for the closing date of the parent company (§ 299 sect. 1).
The financial statements included in the consolidated financial statements should be prepared for the closing date of the parent company. A consolidation is acceptable if the closing date of the subsidiary is not more than 3 months earlier than the closing date of the parent company. Otherwise, interim financial statements must be prepared for consolidation purposes. Because this is an extra burden for the subsidiary, the closing dates are usually changed to the closing date of the parent company (if possible according to local GAAP).
If financial statements with a different closing date are included in the consolidated financial statements and incidents of particular importance for the financial or performance situation of the subsidiary occur between its own closing date and the closing date of the parent company, these effects must be reported in the consolidated balance sheet and income statement (i.e.must be included additionally) or in the consolidated notes.239
Assets and liabilities in the financial statements that will be consolidated by the parent company must be recognized in a uniform way (§ 300 sect. 2).240 This means:
–Application of the Commercial Code
Foreign subsidiaries applying their national GAAP for accounting must restate the adjusted financial statements according to German GAAP. All assets and liabilities that must be recognized according to the Commercial Code must be included (independently of local GAAP).
–Uniform use of recognition options
Any recognition options in the Commercial Code must be applied according to the accounting policy of the parent company.
This implies that recognition options can be used differently in the individual financial statements and in the consolidated financial statements.
Example
A subsidiary recognizes internally generated software in its individual financial statements according to § 248 sect. 2. The parent company follows a different accounting policy and does not recognize such assets. For the consolidated financial statements, the subsidiary must restate its individual financial statements to adjusted financial statements that comply with the group accounting policy: The asset is derecognized; the expenses recognized in the balance sheet in the first year remain expenses, any amortization in subsequent years must be reversed.
Uniform measurement
Assets and liabilities in the financial statements that will be consolidated by the parent company must be measured in a uniform way (§ 308).241 This means:
–Application of the Commercial Code
Foreign subsidiaries applying their national GAAP for accounting must restate the adjusted financial statements according to German GAAP. All assets and liabilities that must be measured according to the Commercial Code (independently of local GAAP).
–Uniform use of measurement options
Any measurement options in the Commercial Code must be applied according to the accounting policy of the parent company.
This implies that measurement options can be used differently in the individual financial statements and in the consolidated financial statements.
No adjustment is necessary if there is no material effect on the true and fair view or if there are specific reasons for not adjusting. The latter case must be reported and explained in the consolidated notes.
Example242
A subsidiary measures its inventories using the FIFO method. The parent company applies the periodic average. If there are no specific reasons that would justify a deviation (e.g. the subsidiary handles perishable goods for which FIFO is more adequate than an average), the subsidiary must restate its inventories using the periodic average method.
Group accounting manual
To fulfil these requirements, parent companies typically furnish their subsidiaries with a group accounting manual (or guideline) that explains the accounting procedures to be used by subsidiaries. On the one hand, it defines how any recognition or measurement options are to be used for the adjusted financial statements. On the other hand, it defines the consolidation procedures and any preparatory steps (e.g. a reconciliation of intercompany transactions; see below).
Further readings
IDW RS HFA 44 “Vorjahreszahlen im handelsrechtlichen Konzernabschluss und Konzernrechnungslegung bei Änderung des Konsolidierungskreises” – Prior year figures in consolidated financial statements according to Commercial Code and changes in consolidation scope
DRS 13 “Grundsatz der Stetigkeit und Berichtigung von Fehlern” – Principle of comparability and correction of errors
4.6.1.2Currency conversion
Subsidiaries prepare their financial statements typically in their local currency, whereas the consolidated financial statements must be prepared in Euros according to the Commercial Code (§ 298 sect. 1 in combination with § 244).
Therefore, the adjusted financial statements of the subsidiaries that are prepared in another currency must be converted to Euros. § 308a defines the method of currency conversion:243
–Assets and liabilities are converted with the average spot rate on closing date (i.e. the average between bid and ask rates).
–Equity is converted with historic rates, i.e. the rate that was relevant when the specific equity item was recognized. The net result of the reporting period is converted using the average rate of the reporting period.
–Income and expenses of the reporting period are converted using the average rate of the reporting period; typically, a weighted monthly average rate is used.244
Because different rates are used to convert the different parts of the financial statements, typically a difference arises in equity (the converted net result of the income statement does not match the equity difference in the balance sheet). This difference is reported as a separate item, “Equity difference from currency conversion”, in equity.
If a subsidiary leaves the consolidation scope partially or completely, the corresponding part of the equity difference must be posted to the income statement (i.e. is transferred backed to equity via income or expense).
Important differences to IFRS
IAS 21 defines a functional currency for the financial statements. For simplicity, it is assumed that any subsidiary will prepare its financial statements in its functional currency. The conversion to a different presentation currency is then done in the following way (IAS 21.39):
–Assets and liabilities are converted using the spot rate at closing date.
–Income and expense are converted using an average rate for the reporting period.
–Any differences are recognized in OCI.
4.6.1.3Capital consolidation
The first step of the consolidation procedure is the so-called capital consolidation: The shares of a subsidiary recognized by the parent company (typically as shares in affiliated companies) are offset with the corresponding portion of equity acquired. This must be done a first time when control is gained (a so-called initial consolidation); the results of the initial consolidation must then be updated for subsequent periods.
Initial consolidation245
Whereas the acquisition costs of the shares are known because they are recognized at that value in the financial statement of the parent company, the corresponding equity must be calculated.
The Commercial Code prescribes in § 301 the so-called acquisition (or purchase) method, i.e. it is assumed that by gaining control over a subsidiary all assets and liabilities of this subsidiary are acquired and therefore consolidated in the consolidated financial statements. The acquired equity is therefore calculated in the following way:
Assets at time value (including any deferrals, accruals and deferred taxes)
− Liabilities at time value (including any deferrals, accruals and deferred taxes)
= Acquired equity.
The measurement at time value implies that any hidden reserves or burdens are disclosed and included in the measurement.
A positive difference between the acquisition costs of the shares and the corresponding proportion of the acquired equity is goodwill (i.e. if 100% of the share capital of the subsidiary is acquired, the complete acquired equity is used; if the percentage is less, only the corresponding fraction of the acquired equity is used). A negative difference (a “lucky buy” or “badwill”) must be reported on the credit side of the balance sheet below equity as “Difference from capital consolidation”.
The date of initial consolidation is the date when the parent company gains control over the subsidiary. This implies that the subsidiary must prepare financial statements at the date of initial consolidation. If consolidated financial statements are prepared the first time, the values at the point in time when the subsidiary is included must be used. The same applies if a subsidiary was excluded from the consolidation scope and is then included again (§ 301 sect. 2).
Subsequent consolidation
The initial consolidation must be repeated at the initial values, i.e. the acquired equity does not change, because it reflects the acquisition costs from a group perspective.
In a second step, any uncovered hidden reserves or burdens must be transferred to income and expense depending on the development of the underlying items, e.g. if at the date of initial consolidation there existed a hidden reserve in a machine, this hidden reserve is depreciated corresponding to the machine.
In a third step, goodwill must be amortized according to § 309 over its useful life. If the useful life cannot be estimated (in rare cases), it must be amortized over 10 years. A “difference from capital consolidation” may be reversed to income if that corresponds to a true and fair view (basically, depending on whether it is judged as a lucky buy or as badwill).
Shares of a consolidated company that are not owned by the parent company must be reported as “non-controlling interests” in the equity (separately from the equity of the parent company). The share of the net result corresponding to the “non-controlling interests” must be reported separately in the income statement below the net result (§ 307).246
Further readings
DRS 4 “Unternehmenserwerbe im Konzernabschluss” – Business combinations in consolidated financial statements
DRS 23 “Kapitalkonsolidierung” – Capital consolidation
DRS 24 “Immaterielle Vermögensgegenstände im Konzernabschluss” – Intangible assets in the consolidated financial statements
Important differences to IFRS
The general logic of IFRS 3 is identical to that of the Commercial Code, but there are differences in the details (which are out of scope of the discussion here).
According to IFRS 3.19, there exists an option to account for goodwill either by including the fair value of non-controlling interests (i.e. a so-called full goodwill) or by including non-controlling interests as a proportionate share of identifiable net assets (i.e. as proportionate goodwill). The resulting goodwill is not amortized but tested only for impairment according to IAS 36.
For the following topics (see Chapters 4.6.1.4–4.6.1.7) there are no material differences to IFRS.
4.6.1.4Liability consolidation
§ 303 states that any borrowings and receivables, provisions and liabilities as well as corresponding deferred items (so-called intercompany transactions) that exist between companies within the consolidation scope must be eliminated.247 An elimination can be neglected if the effect is not material for a true and fair view.
Basically, any intercompany receivable of one group company should have a corresponding intercompany liability of another group company. Thus, an exact elimination should be possible. The basis for that is a detailed and precise reconciliation of all intercompany transactions.
In real life, differences often exist:248
–Formal or temporary differences
Usually, these differences result from different dates of delivery and reception (before and after closing date).
–Substantial differences
A typical example are intercompany provisions: One company recognizes a provision (due to the principle of prudence), whereas the other cannot recognize a receivable yet (because there is no asset).
–Currency differences
Using different exchange rates, intercompany differences can result.249
Based on the one-entity theory, a judgement must be made as to how these differences can be resolved and which way the consolidated financial statements need to be adjusted.
4.6.1.5Consolidation of intercompany profits
Assets that have been acquired from a group company must be measured as if the group were one legal entity, i.e. intercompany profits must be eliminated; put differently: assets must be measured using the group acquisition or production costs (§ 304). Elimination of intercompany profits may be neglected if it is not material for a true and fair view.250
Important differences to IFRS
Because the group production costs for the assets must be determined, there may be differences to the extent that IFRS and Commercial Code define production costs differently (see Chapter 2.4.2.2).
4.6.1.6Income consolidation
The income statement needs to be consolidated in two ways (§ 305)251:
- Sales revenue resulting from deliveries or services to group companies must be consolidated with the corresponding expenses (in the financial statements of the receiving company) unless they are recognized as inventories or non-current assets.
- Any other income resulting from deliveries or services to group companies must be consolidated with the corresponding expenses (in the financial statements of the receiving company) unless they are recognized as inventories or non-current assets.
Any intercompany income that is recognized as inventory or non-current assets must be reclassified as a change in inventory or own work capitalized; in addition, any intercompany profits must be eliminated (see above).
The elimination of intercompany income and expenses may be neglected if it is not material for a true and fair view.
4.6.1.7Deferred taxes on consolidation procedures
§ 306 extends the concept of deferred taxes from § 274 to the consolidation procedures; the basic logic is the same as for individual financial statements (see Chapter 3.1.10.2).252
Because the consolidation procedures may change the value of balance sheet items, these changes can result in a temporary difference in the tax base. If that happens, deferred taxes must be recognized. The following differences exist compared to the individual financial statements:
–The rules of § 306 apply only to temporary differences resulting from consolidating procedures.
–There is no accounting option for deferred tax assets, i.e. any deferred tax must be recognized.
–There is no recognition of a deferred tax for goodwill.
Further readings
DRS 18 “Latente Steuern” – Deferred taxes
4.6.2Proportional consolidation
For joint ventures, a consolidation option exists. According to § 310, they can be included by
–proportional consolidation or
–at-equity consolidation (see below).
A joint venture is defined as a company253
–that is managed by at least two so-called parent companies.
Joint ownership is not sufficient, but current management must be done jointly. Typically, joint management implies that each of the parent companies owns the same share of the joint venture; unequal shares are possible if management is based on mutual understanding and if this is contractually agreed; and
–that is owned by at least one shareholder not included in the consolidated financial statements.
If proportional consolidation is chosen for a joint venture, the financial statements of the joint venture are included only according to the relative share the parent company owns, i.e. if a parent company owns 50% of a joint venture, 50% of the financial statements of the joint venture are included in the consolidated financial statements.254
This implies:
–Capital consolidation
Hidden reserves and burdens are only recognized proportionally; resulting goodwill (or badwill) is recognized on this basis;
–Liability consolidation
Receivables and liabilities are consolidated only proportionally, i.e. the portion of the other owners of the joint venture remains unconsolidated and must be reclassified to receivables/liabilities from/to third parties;
–Income consolidation/elimination of intercompany profits
The same applies to the income consolidation and intercompany profits: only the proportional values are eliminated.
Further readings
DRS 9 “Bilanzierung von Anteilen an Gemeinschaftsunternehmen im Konzernabschluss” – Accounting for shares in joint ventures in consolidated financial statements
Important differences to IFRS
IFRS 11 describes joint arrangements: A joint arrangement is a contractual arrangement that gives two or more parties joint control over an arrangement (IFRS 11.5):
–Joint operations
A joint operation is an arrangement in which the partners have not only joint control but rights to the assets or liabilities of the arrangement (IFRS 11.15);
In contrast to joint operations, in a joint venture, the partners have rights only to the net assets of the joint venture (IFRS 11.16).
For joint operations, proportional consolidation is required (IFRS 11.20), whereas for joint ventures at-equity consolidation is required (IFRS 11.24).
4.6.3Associated companies/at-equity consolidation
An associated company is a company in which the parent company has a substantial share (typically assumed at more than 20%), has substantial influence on its conduct of business, but cannot control it (§ 311).255
An associated company must be included in the consolidated financial statements on an at-equity basis (§ 312). This means that the acquisition costs of the participation are replaced by the proportionate equity of the associated company (so-called one-line consolidation).
Based on the most recently available financial statements of the associated company, hidden reserves and burdens are identified in the corresponding balance sheet items. Based on that, goodwill (or badwill) is calculated. These values are amortized over time corresponding to the balance sheet items.
In addition, changes in the equity of an associated company are added or subtracted. This results in the following scheme:
For the initial consolidation:256
| Share of accounted equity | |
| + | Share of hidden reserves/burdens |
| + | Goodwill |
| = | Acquisition costs of participation |
The sole purpose of this calculation is to identify the hidden reserves/burdens and the goodwill. The initial measurement is nevertheless the acquisition costs of the particpation.
For the subsequent consolidation, the different preceding components must be adjusted for any changes:257
| Acquisition costs of participation | |
| −/+ | Amortization of hidden reserves/hidden burdens |
| − | Amortization of goodwill |
| +/− | Portion of net profit/loss of associated company |
| − | Received dividend payments of associated company |
| − | Impairment of participation |
| + | Reversal of impairment |
| = | At-equity value of participation |
An adjustment of the financial statements of the associated company to the group accounting policy (uniform recognition and measurement) is not mandatory (§ 312 sect. 5).
At equity consolidation may be neglected if it is not material for a true and fair view (§ 311 sect. 2).
Further readings
DRS 8 “Bilanzierung von Anteilen an assoziierten Unternehmen im Konzernabschluss” – Accounting for shares in associated companies in the consolidated financial statements
Important differences to IFRS
IAS 28 requires a method that differs in its details and that might lead to different initial values. Because goodwill is not impaired according to IAS 36 (impairment only approach) and it is not reported separately in case of an associated company, the whole investment must be tested for impairment. IAS 28 requires uniform recognition and measurement, if possible; otherwise, this information must be disclosed in the notes.
4.7Consolidated notes
Consolidated notes are a mandatory component of consolidated financial statements (§ 297 sect. 1). As a simplification, the notes of the individual financial statements of the parent company and the consolidated notes can be combined. If that is done, the individual financial statements of the parent company and the consolidated financial statements must be published together, and there must be clear indications about which information refers to the parent company and which to the whole group (§ 298 sect. 2).258
The function of the consolidated notes is comparable to the notes of the individual financial statements (see Chapter 3.3.1).
Information can be omitted if the information might lead to disadvantages for the group or the subsidiary; this is not possible for capital-market-oriented companies. Information may be omitted if it is not material for a true and fair view (§ 313 sect. 3).259
General information
Tab. 4.3: General information in consolidated notes.
| § 313 sect. 1 no. 1 | Description of recognition and measurement methods applied to items in consolidated balance sheet and consolidated income statement. |
| § 313 sect. 1 no. 2 | Any changes in recognition, measurement and consolidation methods must be described and justified. The effects on the financial and performance situation of the group must be reported separately. |
Information on consolidation scope
Tab. 4.4: General information in consolidated notes.
| § 297 sect. 1a | Name, location, commercial registry and registration number of parent company must be reported. If the parent company is in liquidation, this must be reported. |
| § 313 sect. 2 no. 1 | For all subsidiaries: |
| –name and location, | |
| –share capital owned by parent company, | |
| –share capital owned by persons acting for these companies. If a subsidiary is not included in the consolidation scope, this must be reported. | |
| § 313 sect. 2 no. 2 | For all associated companies: |
| –name and location, | |
| –share capital owned by parent company and other subsidiaries, | |
| –share capital owned by persons acting for these companies. | |
| § 313 sect. 2 no. 3 | For all proportionally consolidated companies: |
| –name and location, | |
| –share capital owned by parent company and other subsidiaries, | |
| –share capital owned by persons acting for these companies. | |
| § 313 sect. 2 no. 4 | For any other participation (according to § 271): |
| –name and location, | |
| –share capital owned by parent company and other subsidiaries, | |
| –share capital owned by persons acting for these companies, | |
| –total share capital of participation. | |
| § 313 sect. 2 no. 6 | For any company whose general partner is the parent company or another company that is included in the consolidated financial statements: |
| –name and location, | |
| –legal form. | |
| § 313 sect. 2 no. 7 | Name and location of company that prepared the consolidated financial statements with the largest consolidation scope in which the parent company is included and the place where these consolidated financial statements can be accessed. |
| § 313 sect. 2 no. 8 | Name and location of company that prepared the consolidated financial statements with the smallest consolidation scope in which the parent company is included and the place where these consolidated financial statements can be accessed. |
Tab. 4.5: Additional information about consolidated balance sheet.
| Balance sheet | |
| § 313 sect. 4 in combination with § 284 sect. 3 | Development of non-current assets from opening balance to closing balance for all items (for details see Chapter 3.1.3.3). |
| § 313 sect. 4 in combination with § 284 sect. 2 no. 4 | Description of whether borrowing costs are included in production costs. |
| § 314 sect. 1 no. 20 | Explanation of useful lives used to amortize goodwill. |
| § 314 sect. 1 no. 14 | If internally generated, non-current, intangible assets are recognized: The total amount of research and development costs and the portion that is recognized as asset. |
| § 314 sect. 1 no. 10 | For non-current financial instruments not impaired because of a temporary decrease in value: |
| –book value and fair value of the assets, | |
| –reasons for classifying the decrease in value as temporary. | |
| § 314 sect. 1 | For each category of financial instruments not measured at fair value: |
| no. 11 | –category and amount, |
| –fair value, if it can be derived reliably, including the method used, | |
| –book value and balance sheet item in which it is recognized, | |
| –reasons why a fair value cannot be derived.a | |
| § 314 sect. 1 | If plan assets are deducted from pension provisions: |
| no. 17 | –Acquisition costs and fair value of assets, settlement amount of provision and any netted income and expenses, |
| –methods and assumptions for measurement of fair value. | |
| § 314 sect. 1 | If hedge accounting is used: |
| no. 15 | –description of valuation units, |
| –description of hedged risks, | |
| –description of transactions expected with high probability. | |
| For details see Chapter 3.1.10.3. | |
| § 314 sect. 1 | If deferred taxes are recognized: |
| no. 21 and 22 | –differences from which deferred taxes result and applicable tax rates, |
| –structure and development of deferred taxes in reporting period. | |
| § 314 sect. 1 no. 26 | Proposal on how profit should be used or decision on how profit is used. |
| § 314 sect. 1 | For the company’s own shares acquired by the parent company or a subsidiary: |
| no. 7 | –number and nominal capital of acquired shares, |
| –portion of total capital. | |
| § 314 sect. 1 no. 7a | For issued shares of parent company based on authorized capital increase within reporting period: |
| –number of shares, | |
| –category of shares. | |
| § 314 sect. 1 | For all debt and payables and each category: |
| no. 1 | –portion with remaining term of less than 5 years, |
| –portion with remaining term of 5 years or more, | |
| –portion collateralized and a description of collateral. | |
| Compare to Chapter 3.1.8. | |
| § 314 sect. 1 | If pension provisions exist: |
| no. 16 | –actuarial calculation methods, |
| –assumptions behind calculation, such as interest rate, salary trends, mortality probabilities. | |
| § 314 sect. 1 no. 7b | If any profit participation certificates, convertible bonds, option bonds, options or similar securities or rights exist: |
| –volume of these financial instruments and | |
| –claims on company they involve. |
a Further reading: IDW RH HFA 1.005 “Anhangangaben nach § 285 Nr. 18 und 19 zu bestimmten Finanzinstrumenten” – Disclosures according to § 285 nos. 18 and 19 about specific financial instruments.
Tab. 4.6: Additional information about consolidated income statement.
| Income statement | |
| § 314 sect. 1 no. 3 | Splitting up of sales revenue according to |
| –different industries/business units, | |
| –geographical markets, | |
| if material differences exist. | |
| This is not necessary if segment reporting is prepared (§ 314 sect. 2). | |
| § 314 sect. 1 no. 23 | Amount and kind of extraordinary income or expenses, if material. |
| § 314 sect. 1 no. 24 | Amount and kind of income or expenses related to prior periods, if material. |
| § 314 sect. 1 no. 9 | Remuneration of auditors: |
| –total amount, | |
| –portion for auditing of financial statements, | |
| –portion for tax consulting, | |
| –portion for other services, | |
| if not included in consolidated notes.a |
a Further reading: IDW RS HFA 36 and ERS HFA 36 “Anhangangaben nach §§ 285 Nr. 17, 314 Abs. 1 Nr. 9 über das Abschlussprüferhonorar” – Disclosures according to §§ 285 no. 17, 314 sect. 1 no. 9 on the remuneration of auditors – current and draft version.
Tab. 4.7: Additional information not included in balance sheet or income statement.
| Transactions not included in consolidated financial statements | |
| § 314 sect. 1 no. 2 | For transactions by parent company or subsidiaries not included in consolidated financial statements: |
| –kind and purpose of transactions, | |
| –risks and rewards of transactions, | |
| if the risks and chances are material and the disclosure is necessary to provide a true and fair view.a | |
| § 314 sect. 1 no. 2a | Total amount of other financial obligationsb not included in consolidated balance sheet and not a contingent liability, if material. Obligations for retirement benefit and to affiliated or associated companies must be reported separately. |
| § 298 sect. 1 | Description and amounts of contingent liabilities: |
| § 314 sect. 1 | –total amount, |
| no. 19 | –for each category and in relation to retirement benefits separately, |
| –reasons why a claim of contingent liability is not probable. | |
| § 314 sect. 1 | For subsequent events not included in the consolidated balance sheet or income |
| no. 25 | statement, if material: |
| –kind of subsequent event and | |
| –its financial effects. | |
| Additional information | |
| § 314 sect 1. | Number of employees: |
| No. 4 | –total average for reporting period, |
| –split into relevant groups, | |
| –separately for proportionally consolidated companies. | |
| If not reported separately in the income statement: expenses for | |
| –salaries and wages, | |
| –social security and | |
| –retirement benefits. | |
a Further reading: IDW RS HFA 32 “Anhangangaben nach §§ 285 Nr. 3, 314 Abs. 1 Nr. 2 HGB zu nicht in der Bilanz enthaltenen Geschäften” – Disclosure according to §§ 285 no. 2, 314 sect. 1 no. 2 on transactions not included in balance sheet.
b These are typically pending transactions, e.g. orders of assets (not fulfilled by both parties and for which no future loss is expected).
Tab. 4.8: Additional information on corporate governance.
| Governance | |
| § 314 | For members of executive board, supervisory board or similar bodies of governance:a |
| sect. 1 | –total salary breakdown into various components, |
| no. 6 | –total salary breakdown into various components for former members, |
| –advance payments or loans granted. | |
| § 314 sect. 1 no. 8 |
For any listed stock company included in consolidated financial statements: That the declaration of conformity with the German Corporate Governance Code was given and where it is available for the public. |
| § 314 sect. 1 no. 13 |
Any transactions with related parties (persons or companies) that are not agreed to or performed under market conditions, if material; 100% wholly owned subsidiaries included in a consolidated financial statement may be excluded. The transactions may be aggregated if separate reporting is not necessary to assess the effects on the financial position.b |
a This is a fairly complex and detailed requirement; for an overview it is simplified here. For the full details, see Beck’scher Bilanzkommentar, § 314, nos. 70–118.
b Further reading: IDW RS HFA 33 “Anhangsangaben nach §§ 285 Nr. 21, 314 Abs. 1 Nr. 13 zu Geschäften mit nahe stehenden Unternehmen und Personen” – Disclosures according to §§ 285 no. 21, 314 sect. 1 no. 13 about transactions with related parties.