Equity evaluation
Introduction¶
Financial investments represent investments in the capital of other companies. Financial investments in controlled entities or associates can be valued according to the cost criteria or for an amount equal to the corresponding fraction of the net equity resulting from those companies’ latest financial statements.
This second method, called the net equity method, provides that the original purchase cost of a financial investment in another company is periodically adjusted to reflect, in the financial statements of the company that holds the financial investment, both the portion of the net profit or loss that due to it, and other changes in the owned entity’s net equity, in the periods subsequent to the purchase date.
For example, for an increase in net equity due to profit, the greater value stated in the Profit and Loss plus a reserve part is allocated. For a decrease in net equity due to losses or the distribution of profit, a reduction of the value originally entered in the financial statements is booked. For a recovery of value, a revaluation is booked.
In CCH Tagetik, the net equity method is associated with the contribution data processing called equity evaluation. This data processing, together with the copy data processing, generates the consolidable amount type.
Copy data processing¶
This data processing copies the converted values onto the consolidable amount for entities that are not subject to equity evaluation but are consolidated line-by-line or on a proportional basis.
Equity evaluation portion¶
There are following types of equity evaluation:
| Type | Description |
|---|---|
| Gross | The minorities accounts, i.e. the net equity and P&L net result of minorities, are also subject to equity evaluation. |
| Group | No minorities accounts, but only group accounts, are subject to equity evaluation. |
The choice of equity evaluation type forms part of the setup of the accounts to be subject to equity evaluation. To run an gross equity evaluation, the minorities accounts must also be defined as to be subject to equity evaluation.
Generation of the consolidable amount¶
The consolidable amount is calculated differently depending on the consolidation type of the entities involved.
| If... | Then... |
|---|---|
| the entities involved are consolidated on a line-by-line or proportional basis. | the data is copied from the converted amount type to the consolidable amount type. Carry forward is ignored |
| the entities involved, or even just one of them in the case of consolidation journals, are consolidated at equity. | the converted amount type is subject to the equity evaluation process. |
CCH Tagetik also considered the category and consolidation journal settings.
| Element | Condition |
|---|---|
| Category | Must be subject to equity evaluation, or defined in the equity evaluation rules. |
| Consolidation journals | The equity evaluation method must not be None. The Many to many relationship option must not be selected. This is to ensure that journals that adjust entities other than those indicated in the header will not be subject to equity evaluation. |
IMPORTANT: For consolidation journals which have the Many to many relationship option active in their header, the consolidable amount type is generated as a copy from the converted amount type, regardless of the equity evaluation method chosen in the header, even if entities consolidated at equity are included among the journal entities.
Data Model dimensions setup¶
In order for the minorities to be calculated correctly, you must prepare and properly set up the following Data Model dimensions. For more details on CCH Tagetik’s Data Model dimensions see .
| Dimension | Settings |
|---|---|
| Account | The list of accounts must contain the following accounts: - normal financial investment accounts, with Use account for setup = Financial investment, and relative variations - normal net equity accounts, with Use account for setup = Net Equity, and relative variations - P&L net result account and BS group result account - P&L net result account and BS minorities result account |
| Variation/Detail type | At least one variation/detail type must be present to allocate the amounts arising from the change to/from the equity method. This is used to create or update variation accounts in the control groups. The attribute for the Change from/to equity method indicates whether the account selected in the control group should be used to allocate amounts arising from the change in equity and from the equity evaluation in the event of a change from line-by-line/proportional to equity. See Variation/Detail types setup. |
| Control groups | The Change from/to equity method attribute, in the definition window and in the deployed Control groups window, tells the system whether, for the control group, the child account should be used to allocate change from/to equity method amounts of the equity evaluation data processing. In the financial investment control group variations. the Reclassification for changed account on equity evaluation method attribute indicates the variation account to be used if the financial investment account changes and it is necessary to reclassify the initial balance of the equity evaluation journal. See Control groups setup. |
| Category | Equity evaluation is controlled by the Equity evaluation method attribute for the Consolidation Journal categories. See Categories setup. |
Variation/detail types and control groups setup¶
The Change from/to equity method field can be set up as follows:
- No (default), the selected account is not used to allocate amounts arising from the change to/from the equity method.
- Entry/Exit, the account is used to indiscriminately allocate the amounts due to the entry into/exit from the consolidation area.
- Entry, the account is used to allocate the amounts due to the entry into the consolidation area.
- Exit, the account is used to allocate the amounts due to the exit from the consolidation area.
The Reclassification for changed account on equity evaluation method can be set up as follows:
The possible values are:
- No (default), the selected account is not used for the reclassification.
- Decrease/Increase, the account is used to indiscriminately allocate the amounts due to reclassification.
- Increase, the account is used to allocate the amounts due to the increase reclassification.
- Decrease, the account is used to allocate the amounts due to the decrease reclassification.
Categories setup¶
The Equity evaluation method field can be set up as follows:
- None, for manual journals where you do not want to edit the journal (overrides etc.). The consolidable amount type is generated by copying from the converted amount type, even if companies consolidated at equity are included among the journal entities.
- Delete, for IC elimination journals between costs and revenues, receivables and payables. If at least one of the entities involved is consolidated at equity, the consolidable amount type will not be generated.
- Evaluate with equity method: single Entity journals, for consolidation journals which have more than one entity in their header, whose rows are only attributed to entity 1 of the relationship: for example, the elimination of a dividend or the elimination of the write-off of a financial investment. In this case, entity 2’s consolidation type is ignored. If entity 1 is line-by-line or proportional, then the consolidable amount type is obtained by copying. However, if entity 1 is at equity, the journal is subject to equity evaluation. If associated with journals that are not single entity, or which contain rows on entity 2, only the entity 1 rows are subject to equity evaluation, and the anomaly will be reported.
- Evaluate with equity method: if entity 2 is at equity, only for financial investment/net equity eliminations. In this type of journal, net equity should impact on entity 2, but the NE could also be adjusted for entity 1 (e.g. FX rate differences on the financial investment account at the historical FX rate). In this case the entity 1 rows are also subject to equity evaluation.
Data related to Amount and Entity Journals categories relative to entities to be consolidated at equity are subject to equity evaluation if the category is included in the categories to be subject to equity evaluation indicated in the equity evaluation rules, otherwise they are only copied from the consolidable amount type.
Example: entity 1 non-equity/entity 2 equity
This is the most common case. The impact of the net equity is subject to equity evaluation and the financial investment is adjusted on entity 1.
Example: entity 1 equity/entity 2 equity
The same as the previous case. However, the financial investment is not adjusted for entity 1, but rather the non-equity owners of entity 1. The same thing also happens for any net equity adjustments on entity 1.
Example: entity 1 non-equity/entity 2 non-equity
In this case, there is no equity evaluation to be done; the journal is copied.
Example: entity 1 equity/entity 2 non-equity
In this case, a “dummy” equity evaluation is performed. Entity 2 is not to be subjected to equity evaluation, but it is not possible to eliminate the financial investment on entity 1 because, since it is at equity, the financial investment is not taken into consideration. In this case, the journal is split over non-equity owners of entity 1, based on their percentage interest in entity 1 itself.
Single entity journals¶
Single entity consolidation journals are journals in which every row contributes to a single entity. For example, the elimination of a financial investment revaluation, or a write-down: in both cases the effect on the P&L is normally eliminated against the financial investment account, all in contribution to the entity that holds the financial investment.
The same thing may happen for the elimination of earnings from dividends received. Typically, the consolidator eliminates the profit towards the net equity of the entity recognising the profit, instead of towards the net equity of the distributing entity.
When you want to insert journals, including manual journals, if one of the two entities involved must be evaluated at equity in any perimeter, it is good practice to split the journal in two, making it single-entity in contribution, even if both entities are still reported in the header.
Consolidation area¶
In consolidation scenarios/periods, it is necessary to indicate the at Equity consolidation method for the entities to be consolidated according to that method.
In the Equity Owner Entities window, the equity ratio percentages and the relationships with every non-equity owner entity are indicated.
To create an entity’s equity evaluation journals, CCH Tagetik must adjust the owner entity’s financial investment in relation to the counterparty. If the entity at equity’s financial investments are all line-by-line or proportional, the financial investment is moved to the owner entities. If one or several of an entity at equity’s owners are also consolidated at equity, CCH Tagetik cannot adjust the value of an entity that is not consolidated. Therefore, whenever an entity is consolidated at equity, CCH Tagetik searches for its “line-by-line” owners, and makes the financial investment adjustment in relation to them.
By processing the ownership percentages, CCH Tagetik attributes, to each of the line-by-line owners of entity X, a portion of that entity X’s equity ratio percentage. This portion is then used when an equity evaluation must be attributed to more than one line-by-line owner entity.
For more details on how to define the consolidation area...