This article is for you using the accounting principle "cost method", which is the most common method. The purpose is to give you a detailed understanding of how Konsolidator® calculates the four system elimination journal entries.
Selecting your accounting principle
You can use two different accounting principles in Konsolidator: The cost method and the Equity method. You choose the principle in the setup and adjust it in your group structure. If you are in doubt about your accounting principle, you can always contact us in support at support@konsolidator.com
The four system elimination journals entries the article covers are:
- Journal entry: Profit/loss distribution
- Journal entry: Elimination of investments in subsidiaries
- Journal entry: Exchange rate adjustments – net income
- Journal entry: Exchange rate adjustments – equity
You must post the first two journal entries for all subgroups. The reason is that Konsolidator® calculates the elimination journal entries on all group levels and uses a bottom-up consolidation.
System journals
The journal entries we cover in this article are system journals. This means they cannot be edited and will change every time you press "CALCULATE & POST".
Bottom-up Consolidation
Each consolidation starts with the lowest level of the group and goes up, finishing with the ultimate parent company. See the image below of bottom-up consolidation.
NB: Remember to consolidate chronologically due to the currency translation (e.g., January, February, etc.).
Changing ownership percentage during the year
Konsolidator® includes ongoing changes to ownership percentage during the year. For example, if the ownership interest changes from 80% to 90% from one month to the next, Konsolidator® will adhere and use 80% for the first month and 90% for the next when calculating the share of profit/loss.
You can change the ownership percentage in the setup under the group structure
Excel example of Konsolidator®'s calculations:
Click on the link below for an Excel example, which can help clarify how the numbers are calculated - when you go through the article. Appendix_How system Journals are calculated_Cost.xlsx - INDSÆT LINK
1. Journal entry: Profit/loss distribution
This journal entry eliminates any postings on the group accounts included in income from investments in subsidiaries. Further, the journal entry calculates and transfers the consolidated profit/loss to the company's shareholders and non-controlling interests.
Note:
Konsoldiator® eliminates postings on the “Share of profit/loss from subsidiaries” and “Dividend income” accounts included in the income from investments in subsidiaries and posts them to the “Shareholders of the company” account in the profit/loss distribution. The journal entry also includes the postings to the “Profit/loss – current year” account in equity. If you use the above account, the journal entry balances.
Reading the journal entry:
Below you can see a picture of the journal entry in Konsolidator®. The journal will not always balance if the income in investments from subsidiaries is not a dividend.
Rows 1-2 zero out the "Income from investments in subsidiaries" accounts with the "Shareholders of the company" account.
Rows 3-4 transfer the profit/loss for all subsidiaries from the "Retained earnings" account to the "Shareholders of the company" account. ;
Rows 5-6 calculate the profit/loss to the "Non-controlling interests" accounts and transfers this from the "Shareholders of the company" account. ;
Rows 7-8 transfer the dividend from the "Profit/loss - current year" account to the "Retained earnings – at the beginning of the year" account in equity. Rows 7-8 are only visible if income from investment eliminated in row 1 is a dividend.
The text column shows the involved entity.
Konsolidator®'s calculations explained:
Konsolidator® transfers and posts the subsidiary's profit/loss to the company shareholders and non-controlling interests. The journal entry also eliminates dividends received from subsidiaries through distribution accounts. It transfers the current year dividend income from the "Profit/loss - current year" account to the "Retained earnings – at the beginning of the year" account in equity. The journal also eliminates dividends received from subsidiaries through the distribution accounts as well as it transfers the current year dividend income from the account “profit/loss -current year” to the account “retained earnings prior year” in equity.
You must post the journal entry in Konsolidator®
If you do not post the Journal entry, the consolidated profit/loss will not reconcile with the current year’s profit/loss in equity for both shareholders of the company and the non-controlling interests, which will show in the validation report.
2. Journal entry: Elimination of investments in subsidiaries
This journal entry eliminates all accounts regarding investments in subsidiaries with the subsidiaries' share capital, share premium, and treasury shares. Konsolidator® eliminates this difference with the "Retained earnings – at the beginning of the year" account.
Reading the journal entry:
Below you can see a picture of the journal entry in Konsolidator®. This journal entry always balances.
Rows 1-4 always balance. As part of the elimination process for the parent companies, Konsolidator® zeros out all accounts regarding investments in subsidiaries. The software zeros out all accounts regarding share capital, share premium, and treasury shares for subsidiaries and subgroups. Afterward, Konsolidator® posts any difference to the "Retained earnings – at the beginning of the year" account. Therefore, the group must post journal entries regarding purchase price allocation for each acquisition.
Rows 5-15 all concern non-controlling interests.
- Rows 5-6 balance and transfer the part of the prior year's non-controlling interests from the "Equity attributable to owners of the company" account to the "Non-controlling interests" account. The numbers do not include the current period's net income and exchange rate adjustment for the profit/loss.
- Rows 7-8 balance and transfer the part of the net income of the weighted non-controlling interests for the subsidiary/subgroup to the non-controlling interests at the exchange rate at period end.
- Rows 9-11balance and translate the profit/loss for non-controlling interests for each subsidiary and subgroup with a different currency than the parent company. The journal entry translates from the exchange rate at period-end to the average exchange rate while considering any changes in ownership percentage.
- Row 9 calculates the FX adjustment for the parent company's current profit/loss.
- Row 10 calculates the FX adjustment for the subgroup's profit/loss of the non-controlling interest.
- Row 11 adds rows 9 and 10.
- Rows 12-13 balance and transfer the part of a subgroup's exchange rate adjustment calculated for that subgroup's subsidiary. The software calculates and posts an exchange rate adjustment in the subgroup if relevant. If the subgroup is not 100 % owned, this part of the journal entry transfers some of that exchange rate adjustment to the non-controlling interests. The journal entry also transfers exchange rate adjustment from shareholders of the company to the non-controlling interests.
- Rows 14-15 balance and calculate the exchange rate adjustments for the beginning equity. This is done by taking the difference between the exchange rate from the period-end and the exchange rate from the year-end. The system then multiplies this difference with the opening equity for the non-controlling interest from the previous year's consolidation.
The first two rows in the journal post the profit or loss for all subsidiaries to the retained earnings account in the distribution of profit/loss to zero out the account (the entity’s profit/loss has been booked to this account and transferred to equity during the upload). In rows 3 and 4, The journal splits the profit/loss for the group between shareholders of the company and the non-controlling interests. In the text column, Konsolidator shows the entity involved.
Non-controlling interest calculations explained:
The journal entry calculates and posts the non-controlling interest. Konsolidator® calculates the non-controlling interests by multiplying the total equity attributable to owners for each company and subgroup with the ownership percentage of the non-controlling interests in the group structure. Furthermore, it also includes calculating and posting profit/loss of the non-controlling interests and exchange rate adjustments (before current profit/loss and any exchange rate adjustments).
Konsolidator® calculates the total non-controlling interest of the subsidiary/subgroup at period-end.
How to deselect journal entries if you do not have foreign subsidiaries:
If you do not have any foreign subsidiaries, you can deselect the elimination of journal entries regarding exchange rate adjustments, thereby fastening your calculations.
Press "CALCULATE & POST" in the Journals menu, and deselect the two journal entries in the pop-up box (shown below).
3. Journal entry: Exchange rate adjustments – net income
This journal entry calculates the net income's exchange rate adjustments going from average to period-end rate. The average rate is used for translating profit/loss, and the period-end rate is used for translating the balance sheet. You can find the exchange rate adjustment for each subsidiary/subgroup in the journal entry.
Note:
Find the calculation of the exchange rate adjustment for the non-controlling interests in the journal entry "Elimination of investments in subsidiaries".
Reading the journal entry:
Below you can see a picture of the journal entry in Konsolidator®. The journal entry always balances.
The journal also calculates and posts the non-controlling interest. Konsolidator calculates the non-controlling interests by taking the total equity attributable to owners for each company and sub-group (before current profit/loss and any FX adjustments) and multiplying it by the ownership percentage of the non-controlling interests found in the group structure. Konsolidator also calculates and posts FX adjustments and profit/loss of the non-controlling interests.
Rows 1-3 calculate the exchange rate adjustments for each subsidiary/subgroup and transfer the total amount from "Profit/loss - current year" in equity. When posted, the distribution of profit/loss reconciles to the "Profit/loss – current year" in equity.
Konsolidator®'s calculations explained:
Konsolidator® calculates the difference between the average exchange rate used to translate the profit/loss and the period-end exchange rate used to translate the “Profit/loss – current year” account in equity. To show the same number in the "Profit/loss – current year" account in equity as the profit/loss for the period, Konsolidator automatically transfers the difference from the "Profit/loss – current year" account to the "Exchange rate adjustments for the year" account in equity.
To calculate the exchange rate adjustments for net income, Konsolidator®:
- Translates profit/loss for the period using a weighted average exchange rate.
- Translates the "Profit/loss – current year" account in equity using a period-end exchange rate.
- The difference between these two translations is your currency adjustment for the net income.
Konsolidator® translates the income statement using a weighted average method and takes the ownership percentage into account.
Exchange rate adjustments calculated for subsidiaries and subgroups
Konsolidator® calculates the exchange rate adjustments for subsidiaries by taking the difference between the translated profit/loss in the income statement and the translated profit/loss for the period-end in equity. For subgroups, the software calculates the exchange rate adjustments by taking the difference between the translated profit/loss in the income statement for the non-controlling interest and the translated non-controlling interest profit/loss for the period-end in equity. Both consider the difference in the non-controlling interest percentage from period to period.
Cumulative translation adjustment
When preparing the journal entry at the beginning of the year, we recommend you re-classify each entity’s cumulative translation adjustment (CTA). You can do this in the Group account “Exchange Rate Adjustment at the beginning of the year” from the group account “Retained Earnings at the beginning of the year”.
Since the exchange rate adjustment journal entries calculate the current year’s translation adjustment - all prior years’ accumulated adjustments need to be posted manually to the account for exchange rate adjustments at the beginning of the year. You must update the journal entry at the beginning of every financial year. If there is no other posting to equity during the year, then the CTA will be available in Konsolidator® for each subsidiary.
Be aware that Konsolidator® calculates exchange rate adjustments on profit/loss and opening equity. You will need to manually calculate and post the exchange rate adjustments if, e.g.:
- a dividend is paid
- a capital increase occurs during the year
- any new companies are acquired or established during the financial year.
You can do this by preparing a separate exchange rate adjustment journal entry for the remaining month of the financial year.
4. Journal entry: Exchange rate adjustments – equity
This journal entry calculates the exchange rate adjustment between the exchange rate used for equity at the previous financial year-end and the period-end exchange rate for the current financial year. Subsequently, it transfers the difference from retained earnings to the "Exchange rate adjustments for the year" equity account. The journal includes the ownership percentage from the previous financial year-end when calculating the exchange rate adjustment.
Note:
Find the calculation of the exchange rate adjustment for the non-controlling interests in the journal entry "Elimination of investments in subsidiaries".
Reading the journal entry:
Below you can see a picture of the journal entry in Konsolidator®. This journal entry always balances.
Rows 1-3 calculate the exchange rate adjustment for each subsidiary/sub-group and transfer the total amount from the "Retained earnings – at the beginning of the year" account to the company's shareholders.
Konsolidator®'s calculations explained:
Konsolidator® calculates an exchange rate adjustment for the opening equity. The opening equity used for calculating the journal entry is from the year-end consolidation from the previous financial year. The journal entry calculates the difference between the period-end and year-end exchange rates multiplied by the opening equity. Further, the journal entry posts the exchange rate adjustments from subgroups, taking the posted subgroup's exchange rate adjustments and multiplying them with the subgroup's ownership percentage.