Audience: Admins who manage models that have consolidation enabled.
In multi-entity companies, a parent company owns some percentage of subsidiary companies. The parent company can use a consolidation method to account for the ownership. When the ownership exceeds a certain percent (generally over 50%), the parent has controlling interest. The subsidiary has minority, or non-controlling, interest.
How your company consolidates depends on the accounting standards you follow. In general, the method determines what portions of the subsidiary's accounts roll up to the parent, when they roll up, and how they roll up.
You can use any combination of consolidation methods:
- Cost: Used when the parent owns a smaller portion of the company.
- Equity: Used when the parent owns a large portion of the company, but does not have controlling interest. Use manual journal entries to record the equity pickup.
- Proportional: Used when the parent owns a percent of subsidiary's account values. Used often in Europe, Asia, and joint ventures.
- Full : Used when the parent has controlling interest (generally over 50%) and owns all the subsidiary' s assets and liabilities with a minority interest adjustment.
How Consolidation Ownership Works
Adaptive Insights consolidation uses a combination of:
- Level hierarchy: Determines the relationship between the parent companies and subsidiaries.
- Consolidation percentages sheet: Indicates the percentage of the parent's ownership.
- Consolidation methods: Determines how and when the accounts roll up in parent levels, if at all.
Level Hierarchy and Ownership
Setting up consolidation ownership starts with the level hierarchy. With consolidation, the level hierarchy models the ownership hierarchy of a multi-entity company. Parent levels are parent companies that own some percent of their child levels. Child levels are subsidiaries.
In the example Company A, B, and C are subsidiaries of Total Company. The account data in Company A, B, and C rolls up, or contributes, to the data displayed for Total Company.
Child levels aren't necessarily subsidiary companies. Company A has child levels that represent departments, not subsidiaries. See Levels for details about creating new levels and level rollups.
Consolidation Ownership Percentages
Next, define the percent of ownership on the Consolidation Percentages sheet.
- Find the sheet in Modeling in the Others menu.
- It's pre-built and pre-defined when you activate consolidation in your model. You can't edit the sheet's structure.
- It includes all your levels down the rows and your smallest time period across the columns.
In the example, Total Company owns 80% of Company A, 55% of Company B, and 20% of Company C as of January 2017. Company A's child levels are departments, not subsidiaries. Company A has 100% ownership of the departments. This means that the parent owns the departments completely.
Consolidation methods determine how subsidiary accounts roll up to the parent. For each method, you define what percent of ownership triggers the method. You can trigger different methods based on the percent of ownership.
With no consolidation, the subsidiary levels don't roll up to the parent for any account. Trigger this method if you're using the equity or cost method.
- Equity method is ideal when the parent owns 20-50%. With this method, you would enter the investment value in your asset account. If the subsidiary makes a profit, use journal entries to debit the the investment and credit your income.
- Cost method is typical when the parent owns less than 20%. You might have the investment listed as a Lower of Cost or Market (LCM) asset. With LCM assets, use journal entries to adjust for losses only.
Proportional is a simple method that rolls up a portion of all the accounts to the parent level. The portion is proportional to the percent of ownership. If a parent company owns 80% of a subsidiary, then 80% of all the subsidiary's accounts roll up.
The table simplifies the account tree and how the values roll up with proportional consolidation:
|Account Tree||Company A (80%)||Total Company|
Full consolidation reflects common standard consolidation accounting principles for parent companies that own the majority of a subsidiary. See Automate Minority Interest Adjustments.
- 100% Rollup: All accounts of the subsidiary level roll up 100% of the values to the parent level.
- Automatic Minority Interest Calculation: The calculation uses the percentage of ownership and the value of the net income account. If Total Company owns 80% of Company A and Company A's net income is $100,000, then the minority adjustment is 20% of $100,000, or $20,000.
- Minority Interest Adjustment System Account: The system account holds the calculated adjustment. Set up the system account to roll up to Net Income. The sign flips to the inverse of the net income. For example, the system account value would be -$20,000 in a credit account.
- Automatic Net Income Adjustment: Create two child accounts of your Net Income, one for Net Income prior to adjustments, and one for the minority interest adjustment system account.
The table simplifies the account tree and how the values roll up with full consolidation:
Net Income Pre-Adjustment
Minority Interest Adj (system account)