Equity investments in consolidated companies
The assets, liabilities, income and expenses of companies subject to line-by-line consolidation are incorporated fully in the consolidated financial statements; the book value of the equity investments is eliminated against the corresponding portion of shareholders’ equity.
The shareholders’ equity of these investee companies is determined by attributing to each asset and liability its current value at the date of acquisition of control. If positive, any difference from the acquisition cost is posted to the asset item “Goodwill”; if negative, it is posted to the income statement.
The shares of equity and profit attributable to minority interests are recorded in the appropriate items of shareholders’ equity and the income statement. Where total control is not acquired, the share of equity attributable to minority interests is determined based on the share of the current values attributed to assets and liabilities at the date of acquisition of control, net of any goodwill (partial goodwill method). Alternatively, the full amount of the goodwill generated by the acquisition is recognised, therefore also taking into account the share attributable to minority interests (full goodwill method). In this regard, minority interests are expressed at their total fair value including their attributable share of goodwill2. The choice of how to determine goodwill (partial goodwill method or full goodwill method) is made based on each individual business combination transaction.
Where equity investments are acquired subsequent to the acquisition of control (acquisition of minority interests), any positive difference between the acquisition cost and the corresponding portion of equity acquired is posted to shareholders’ equity. Similarly, the effects of selling minority interests without losing control are posted to shareholders’ equity.
Business combinations whereby the investing companies are controlled by the same company or companies before and after the transaction, and where such control is not temporary, are classed as transactions under common control.
Such transactions are not governed by IFRS 3 or by other IFRS. In the absence of a reference accounting standard, the selection of an accounting standard for such transactions, for which a significant influence on future cash flows cannot be established, is guided by the principle of prudence, which dictates that the principle of continuity be applied to the values of the net assets acquired. The assets are measured at the book values from the financial statements of the companies being acquired predating the transaction or, where available, at the values from the consolidated financial statements of the common ultimate parent. Where the transfer values are higher than such historical values, the surplus is eliminated by reducing the shareholders’ equity of the acquiring company.
All financial statements of consolidated companies close at 31 December.
Unrealised gains from transactions between consolidated companies are eliminated, as are receivables, payables, income, expenses, guarantees, commitments and risks between consolidated companies.
Intragroup losses are not eliminated because they effectively represent impairment of the asset transferred.
2 The adoption of the partial or full goodwill method is also used in the business combinations, which involves the disclosure of the negative goodwill in the income statement (gain or bargain purchase).