2 Consolidation principles
Equity investments in consolidated companies
The assets, liabilities, income and expenses of fully consolidated companies are incorporated fully in the consolidated financial statements; the book value of the equity investments is eliminated against the corresponding portion of shareholders’ equity.
Business combinations are recognised using the acquisition method. The consideration transferred in a business combination is determined at the date on which control is assumed, and equals the fair value of the assets transferred, the liabilities incurred or assumed, and any equity instruments issued by the acquirer. Costs directly attributable to the transaction are posted to the income statement when they are incurred.
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 the goodwill generated by the acquisition is recognised, therefore also taking into account the portion attributable to minority interests (“full goodwill method”). In this case, minority interests are expressed at their total fair value including the attributable share of goodwill3. The choice of how to determine goodwill (partial goodwill method or full goodwill method) is made based on each individual business combination transaction.
If control is assumed in successive stages, the acquisition cost is determined by adding together the fair value of the equity investment previously held in the acquired company and the amount paid for the remaining portion. The difference between the fair value of the equity investment previously held and the relative book value is posted to the income statement. Moreover, when control is assumed, any components previously booked as other components of comprehensive income are recognised in the income statement.
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 of the Group. Similarly, the effects of selling minority interests without loss of control are posted to shareholders’ equity. Otherwise, the selling of interests entailing loss of control requires the posting to the income statement of: (i) any capital gains or losses calculated as the difference between the consideration received and the corresponding portion of consolidated shareholders’ equity transferred; (ii) the effect of the revaluation of any residual equity investment maintained, to align it with the relative fair value; and (iii) any amounts posted to other components of comprehensive income relating to the former subsidiary. The value of the equity investment maintained, aligned with the relative fair value at the date of loss of control, represents the new book value of the equity investment, and therefore the reference value for the successive valuation of the equity investment according to the applicable valuation criteria4.
Business combinations whereby the investing companies are definitively 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. The portion pertaining to the Group of unrealised gains with companies valued using the equity method are eliminated. In both cases, intragroup losses are not eliminated because they effectively represent impairment of the asset transferred.
3 The adoption of the partial or full goodwill methods is also used in the case of business combinations that entail recognition in the income statement of negative goodwill (“gain on bargain purchase”).
4 The same applies in the case of disposals entailing the loss of combined or associated control.