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Editor's Notes

1. Consolidated Statements: including IS, BS and CF Elimination of Intercompany Transaction: Usually called Inter-Transaction. Inter-company transaction is the transaction within the group, companies in the group have sales to each other. An Inter-Transaction exercise. Consolidation of Foreign Operations: Different currencies are used. For example, a group has 2 companies, one in Vietnam, the second in US. Vietnam company uses VND and US company uses USD. When group consolidate the 2 financial statements, it needs to be in 1 currency. In different point of time, the exchange rate between these 2 currencies is different, this is the reason why consolidated balance sheet has item “Difference in Foreign Exchange”.
2. The dotted lines present the sales of each subsidiaries. The straight lines present the ownership of each subsidiaries. The big box presents the group and all sales out of the big box are calculated sales of the group. Easily, we can calculate the sales of the group to outside is: 100 + 70 + 120 = 290 Now we have another similar exercise, I will call one of you to the board and do it.
3. Please complete this exercise. Do you have any comments on this group? The comment is, This is the case of Enron’s collapse, internal transaction within the group is very large, but the real sales out is not. In fact, before it collapsed, the group used wrong accounting rules, they did not eliminate the intertransaction. Total revenue was very high. The accounting & auditing company, Arthur Andersen, also found guilty when they did the accounting.
4. Why a group: Easy to cut down Doing business in different territories, with different accounting rules and business laws. … Ownership and Control: This section is about to answer, What the Ownership is, with how many percent mother company own will have the control right. Scope of Consolidation: In this section, we look through a group, which companies (subsidiaries, joint-ventures or investment) we should consolidate. Methods of Consolidation Full consolidation Equity consolidation Joint-Venture we will find out which subsidiaries or companies should be applied this method. The way to apply also will be presented
5. Ownership Control Vietnam ownership of an entity is more than 70%, the entity will have full control right of the company.
6. We will look to the very simple example. A group of 3 companies, M is mother company, A and B are subsidiaries. The chart presents ownership of M on A, A on B and M on B. For example, M owns 60% of total shares of A. M own 5% total shares of B. A owns 10% total shares of B. And they are the same for other examples.
7. Here we will see how the controlling status of M on B based on the M, A, B ownership. We have direct control and indirect control rights. An example of direct control, if M owns 60% of A, then M will have direct controlling right 60% on A. And another example of indirect control, if M owns 60% of A and A owns 10% of B; now what do you think how many percent of controlling right M will have on B?? It should be 10%. And I will explain later when we do some exercises together. In this case, we take the controlling stake is >50%. That means, when mother company owns more than 50% total shares of a subsidiary, they will take control of the subsidiary. This controlling stake will be varied by different companies, different countries and different business laws. Please note that we have the case of indirect controlling right. For example, M own 60% of A, more than controlling stake 50% then M will have the controlling right 100% to A (by Voting). Now A own 10% of B then A would have 10% of controlling to B. Last, we can calculate the percentage of controlling right of M on B, which is equal to 10%+5%=15%. For the indirect controlling, the middle man controlling right will be “Yes” or “No” to calculate the next controlling right. That means, if M owns 60% of A, then M “Yes” control A (controlling right is 100%); if M owns 45% of A, then M “No” control A (controlling right is 0%). The indirect controlling right action with middle will allow us to know through the middle man, in which level the mother company can control the lower subsidiary level. Please try to figure out by yourself before I give you the results.
8. This chart present which companies we should put in to scope of consolidation. They are Mother Company, subsidiaries with mature ownership, associates with high influence and joint-venture which mother co owns 50% and other group owns 50%. But this is only one of the normal cases. When doing consolidation, we have to look to accounting system of each country. It will vary.