Accounting consolidation consists of producing financial statements (balance sheet, income statement, etc.) which represent an entire group of companies. It makes it possible to provide a more objective assessment of the financial state of a company.

Commercial companies exceeding certain thresholds must establish and publish consolidated accounts each year as well as a report on the management of the group, as long as they control one or more other companies exclusively or jointly. On the other hand, companies which only exercise “significant influence” over the companies they own are not required to publish consolidated accounts.

In all cases, the preparation of consolidated accounts is a complex operation which cannot be carried out, in principle, without the intervention of a chartered accountant.

We will therefore briefly explain what accounting consolidation is through the following points:

• The main points to observe before proceeding with consolidation operations
• Accounts consolidation operations

I – The main points to observe before proceeding with consolidation operations

1 – Definition of consolidated accounts

Consolidated accounts designate summary financial documents which, regular and sincere, give a faithful image of the assets, the financial situation as well as the results of the group made up of the companies included in the scope of consolidation.

The European framework adopted by the European Commission is applicable to the consolidated accounts of French companies whose equity securities are admitted to trading on a regulated market as well as companies that issue debt securities.

Companies not listed on a regulated market required to prepare consolidated accounts or voluntarily establishing consolidated accounts may opt to prepare their consolidated accounts using IFRS. They are not required to establish and publish accounts that comply with French rules.

It should be noted that the French framework for consolidated accounts specifies that: “Entities not required to prepare consolidated or combined accounts and deciding to prepare such accounts may apply the French rules or, for example, choose to apply the IFRS standards. If they refer to the regulations of the ANC (Accounting Standards Authority), this requires them to apply all its provisions (ANC art. 111-2)”.

2 – Consolidation exemption thresholds

A company is exempt from the obligation to publish consolidated accounts if the total of the cumulative and non-consolidated figures on the basis of the last annual accounts drawn up, does not exceed, for two consecutive financial years, amounts determined by reference to two of the three following criteria:

• balance sheet total => €24 million
• net amount of turnover => €48 million
• average number of employees => 250

On the other hand, credit institutions and financing companies, insurance and reinsurance companies and people and entities that appeal to public generosity cannot benefit from this exemption.

In addition, the Commercial Code makes it possible to exempt from the obligation to establish and publish consolidated accounts companies themselves placed under the control of a company which establishes and publishes its own consolidated accounts.
However, this exemption does not apply if the company issues:

• transferable securities admitted to trading on a regulated market (with the exception of Euronext);
• negotiable debt securities.

3 – Consolidation scope (Périmètre de consolidation)

These are all the companies that are included when establishing the consolidated accounts produced by the consolidating company.

Thus, the consolidating company must include in the consolidated accounts the companies in which it operates directly or indirectly:

• Exclusive control => It is the power to direct the financial and operational policies of a company in order to benefit from its activities (ANC, regulation 2020-01, art. 211-3). This exclusive control may be de jure, de facto, contractual or statutory;
• Or joint control;
• Or a notable influence => Here are some examples of significant influence, according to ANC regulation 2020-01, art. 211-5:
  • representation in management or supervisory bodies;
  • participation in strategic decisions;
  • existence of significant transactions with other companies in the consolidation scope;
  • exchange of management personnel with other companies in the consolidation scope;
  • technical dependency links with the group.

The consolidated appendix must provide all useful information on the scope of consolidation, in particular the identification of the consolidated companies and the effects on the consolidated accounts of the variation in the scope of consolidation.

Case of mandatory exclusion from the consolidation scope:
Subject to justification in the appendix, a subsidiary or a participation is excluded from consolidation when severe and lasting restrictions substantially call into question the control or influence exercised over this subsidiary or participation.

4 – Account closing dates

The closing date of the consolidated accounts is normally the closing date of the consolidating company. When the majority of consolidated companies close their financial year on another date, the closing date of the consolidated accounts may be that used by the majority of consolidated companies for their own accounts.

The consolidation of entities which do not close on the date used for the consolidated accounts is carried out on the basis of interim accounts closed on the date chosen for consolidation (unless their closing date is not earlier or later than three months to the closing date of the consolidation exercise).

II – Accounts consolidation operations

1 – Consolidation methods

They depend on the degree of control that the consolidating company exercises over its subsidiary. In the case of exclusive control, the consolidation method applied will be full integration, for joint control we practice proportional integration and in the case of significant influence, we will use the equity method.

The most commonly used method is global integration, however we will provide a brief definition of each below.

• Full integration => This method consists of:
  • integrate into the accounts of the consolidating entity the elements of the accounts of the consolidated entities after restatements;
  • distribute the equity and the result between the interests of the consolidating entity and the interests of the other shareholders;
  • proceed with the elimination of reciprocal accounts and internal results.
• Proportional integration => This involves integrating into the accounts of the consolidating entity the fraction representing the interests of the holding entity in the accounts of the consolidated entity after possible restatements (elimination of reciprocal accounts and internal results).
  
  
• Equity method (Mise en équivalence) => In this case, the acquisition value of the securities held is replaced by the corresponding share of equity (including the result for the financial year determined according to the consolidation rules).
  
  In other words, the securities of the companies concerned are revalued in the accounts of the consolidating company. Securities consolidated using the equity method are isolated under assets in a special section labeled “Securities accounted by using the equity method”.

2 – Consolidation restatements

The global integration method being the most commonly used, we will only indicate here the main restatements concerning this method.

• Harmonization of accounting methods => For certain operations, companies have the choice between several accounting or evaluation methods. For consolidated accounts, it is necessary to use only one method and to restate the accounts of companies which have made another choice for their individual accounts (let us cite for example the choice of the depreciation method).
  
  Please note that the method used for consolidation is not necessarily that of the parent company.
  
  
• Elimination of regulated provisions => These are in fact only recognized for tax reasons (exempt depreciation, provision for price increases, etc.). They do not correspond to any economic reality and must therefore be eliminated.
  
  
• Deferred taxation => In France, deferred taxes are not recorded in accounting. This restatement brings it closer to international practice in terms of accounting for income tax expense.
  
  
• Leasing => The reprocessing of assets financed by leasing is optional for companies that do not publicly call for savings (it is obligatory for other companies). A restatement is carried out in order to standardize the accounts.
  
  This restatement consists of showing the fixed asset financed by leasing on the assets side of the balance sheet, as if it had been acquired with a loan. A debt is recorded as a liability as well as financial expenses in the income statement. Finally, we eliminate the rental charge for leasing.
  
  
• Elimination of reciprocal accounts => It is necessary to completely eliminate reciprocal transactions between the consolidated companies and the consolidating company.
  
  In this area there are two categories of operations:

• • Operations with no impact on the result, but reciprocal accounts resulting from internal group operations appear:
    • at balance sheet level => customers and suppliers, loans and borrowings;
    • at the income statement level => purchases and sales, interest paid and received.
      The corresponding amounts must be eliminated in consolidation by settling the corresponding accounts.

• • Operations with an impact on the result.
    
    The elimination of certain intra-group operations has an impact on the consolidated result, here is an example:
    
    Dividends paid by a subsidiary to its parent company are recorded as a financial product in the accounts of the parent company. However, they correspond to the profit made the previous year by the subsidiary. Thus, in order not to recognize the same profit twice, it is necessary to eliminate the income recognized at the parent company and reintegrate it into the consolidated reserves.
    
    There are still many other cases such as the elimination of internal results on the sale of assets or internal provisions for depreciation of securities or debts.

• Elimination of consolidated securities => An explanation of this operation would involve complex developments which we will not discuss here. We are of course prepared to provide you with any information on the subject upon request.

3 – Conversion of the accounts of a foreign subsidiary

There are two methods to perform this conversion:

• The historical course method
  In this case, the conversion is carried out as follows:
  • non-monetary elements, including shareholders’ equity, are converted at the historical rate, that is to say at the exchange rate on the date of entry of the elements into the assets and liabilities of the company;
  • monetary items are converted at the exchange rate on the closing date of the financial year;
  • income and expenses are, in principle, converted at the exchange rate in effect on the date they are recorded or at an average rate for the period.

• The closing course method
  This method is practiced as follows:
  • all assets and liabilities, monetary or non-monetary, are converted at the exchange rate in effect on the closing date of the financial year;
  • income and expenses are converted at the average rate for the period.

Accounting for conversion differences: The rules are common to both methods. They provide that conversion differences be allocated to equity (group share) under “Conversion differences” and to minority interests.

Note however, that the closing course conversion method results in two differences:

• using the closing price of the financial year to convert the opening net assets generates a conversion difference due to the variation in the exchange rate between the opening and closing of the financial year;
• the use of an average price to convert the income statement gives rise to a difference between the result converted in this way and the result converted at the closing price.

All the team of French Business Advice is at your disposal to help you on this subject, so do not hesitate to contact us!