Consolidation of accounts is an accounting method for grouping the accounts of a group of companies relative to the degree of control over one another.
Consolidation is a concept of accounting closely linked to that of society
In France, the consolidation of accounts is a legal obligation, which is closely regulated by law, provided that an enterprise exercises control or significant influence over one or more others.
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In this way, the leader gains in efficiency and profits from a global vision of the capital and the profitability of the group of society. In other words, consolidation makes it easier to make decisions on restructuring or divestiture, for example.
The consolidation of the accounts can take place either:
- Internally, led by the group finance department.
- Externally, by calling on chartered accountants.
There are three methods of consolidation, the consolidation method by global integration, by proportional integration, or by the equity method.
The consolidation method by global integration
Full consolidation is applied when the consolidating company has exclusive control (de jure or de facto) over the company to be consolidated, ie more than 50% of control of right or 40% if no other shareholder holds the same proportion were more than the consolidated company (de facto control).
If the consolidating company complies with one of these criteria, then consolidation consists of completely grouping the balance sheet items (assets and liabilities) and the income statement (income and expenses) with the consolidated company or companies.
The proportional consolidation method
In the case of proportionate consolidation, the parent company has joint control over the subsidiary company.
In this case, the consolidation consists of merging the balance sheet items (assets and liabilities) and the income statement (income and expenses) with the consolidated company or companies to the extent that the controlling company owns in terms of control.
In other words, for this method, the corporation must hold the same proportion of the capital of the consolidated corporation as the other shareholders.
The consolidation method using the equity method
The equity method is applied when the consolidating company has only a significant influence on the target company, namely that it holds less than 20% of voting rights.
In the case of significant influence, no grouping is possible. The company can not, therefore, integrate the balance sheet and income statement items of the company it wishes to consolidate with its own.
Define the scope of consolidation
Before consolidating and provided that the consolidating company can not benefit from an exemption from consolidation, the definition of scope of consolidation is a mandatory step.
The consolidation scope makes it possible to generate an overview of the group companies to be included in the consolidated financial statements by the parent company. It will also help determine the consolidation method to apply.
Since 1 January 2016, companies under the significant influence in a consolidated group must be included in the consolidation process if the parent company does not benefit from an exemption to consolidate its accounts.