Divestiture
Definition
A divestiture is the activity of completely or partially selling an investment in an internal trading partner to an "external organization", that is to a company that does not belong to the subgroup or consolidated group.
The sale of an investment to another company in the same subgroup is referred to as a transfer posting. This means that a transfer posting within the consolidated group must be dealt with as divestiture in one subgroup and as a new first consolidation in another subgroup.
Methods
Purchase, proportional
Divestiture of a company in the consolidated group
Business principles require that neither the aggregated nor the consolidated balance sheet contain values for the divested company. Horizontal developments (such as asset history sheets) do take the divestiture into account, however.
Aggregated and consolidated income statements, as calculations over a certain time period, should contain all revenue and expense items with their values at the time of the company’s divestiture. In practice, however, values for the divested company are often excluded from the income statement.
A divested company still belongs to the subgroup in the year of divestiture, but you need to delete it from the subgroup the following year. You do this once the balance is carried forward, by selecting Master data ® Subgroups ® Change subgroups in the consolidation menu.
When consolidation is sub-annual and the divestiture of a company takes place in a period P < 012, the problem arises that the assignment of the company to the subgroup in Subgroup Maintenance can only be maintained by year. It cannot be changed for the current year, in spite of the divestiture. The following therefore applies from period P+1:
The single disadvantage of this procedure is that the lists of subgroup companies for the following periods still (erroneously) contain the divested company.
You perform divestiture accounting for a company in the divestiture period in the following steps:
– Enter the divestiture in the Changes in Investments table at the respective parent company/ies.
– Enter the divestiture in the Changes in Investee Equity table:
In order to ensure the necessary agreements between the database and the Changes in Investee Equity table (historical currency translation, validation check and changes in investee equity), you need to make entries in this table which result in a zero balance for each item for the divested company (the same procedure as performed for the database in step 3). This is normally done in the current period using an E indicator (for first consolidation). You must record annual net income still shown in the income statement and any distributions in the appropriation of retained earnings with the indicator F (subsequent consolidation) and invert them with an E entry.
Entries in the Changes in Investee Equity table
1994 |
012 |
01 |
E |
Retained earnings |
1,000 |
1995 |
012 |
01 |
F |
Retained earnings |
1,000 |
1996 |
012 |
01 |
F |
Retained earnings |
500 |
In the database, the company still shows an annual net income of 500- and a distribution of 200+ in 1997. This results in an F entry of 300 monetary units (MU). A total of 2500 MU from the previous years and 300 MU from the current year must be inverted as an E entry.
The Changes in Investee Equity table therefore has to be maintained as follows:
1997 |
012 |
01 |
F |
Retained earnings |
300 |
|
02 |
E |
Retained earnings |
2,800 - |
TTy Opening balance (APC): |
1,000 (carried forward) |
TTy Accumulated depreciation (amortization): |
500 - (carried forward) |
TTy Acquisitions: |
200 (from 006) |
TTy Depreciation (Amortization): |
250 - (from 006) |
TTy Retirement (Divestiture): |
1,200 - (new 012) |
TTy Depreciation (amortization) for retirements (divestitures): |
750 (new 012) |
All balance sheet values entered at the other internal trading partners should be handled as follows:
– With a partial breakdown of the item, you should change the trading partner to company 999999 (statistical company "External").
– In other cases, you should post a transfer to the relevant balance sheet item (for example, from item "Receivables from affiliated companies" to item "Trade receivables from external organizations").
Steps 3 through 6 must be performed in order to ensure that the group’s summarized financial statements are correct.
You should also reverse posting level 1 entries made to the other companies, which were posted with the trading partner <divested company>.
This step ensures a correct corporate valuation for the consolidated group.
It is theoretically possible to manually post records with posting level 2, however this is not recommended because of the time and effort required. If you do post manually, note that you should specify the company and trading partner in the posting program in the same way as for programs which generate postings (for example, small company ID for a company and a large company ID for trading partner for intercompany elimination). If you do not do this, the adjustment to net income will not be handled correctly.
Steps 9 through 11 ensure that at the moment you start the consolidation of investments program (with the exception of different breakdowns) only records with posting level 3 exist in the database of the divested company. Their balance is the same as the elimination of investment at the (direct) parent company.
The divestiture posting sets the retained earnings of the divested company to zero, whereby the adjustment to net income is generated on the one hand by the posting of revenue/expense from the divestiture (selected item with the classification key ERL) and on the other hand by posting to the selected item with the classification key MIK in the appropriation of retained earnings.
The Consolidation of Investments program calculates the additional revenue/expense from the group point of view as the following two elements:
– Earned but not distributed profits (balance of the F entries in the Changes in Investee Equity table from the period interval of first consolidation to the period interval of divestiture).
– Amortization of goodwill in the past (period interval of first consolidation to the period interval before the divestiture, information from the table of Eliminated Hidden Reserves (FVAs)).
This calculation of revenue/expense from the group point of view is incorrect in the following cases, and you therefore need to correct it manually by changing the values for the ERL and MIK items:
– The sum of amortization in the table of Eliminated Hidden Reserves does not correspond to the actual past expense (because manual additional postings have been made).
– The entries in the table of Eliminated Hidden Reserves result from a proportional elimination that does not adjust net income.
– During the time the divested company belonged to the group, the F entries were not recorded as revenue/expense nor distributed. Instead they result from activities not affecting net income (especially currency translation differences).
The system posts minority interest in profit from divestiture to the selected items MIG and MIS, based on the minority interest in annual net income for the previous periods (selected item MIG).
Open issues
Various problem areas are discussed in the following section, with suggestions for semi-automatic or manual handling in the FI-LC System.
Partial divestiture of companies
This process is currently not supported as a function, however the following procedure provides an initial solution:
At this point you should decide between a partial divestiture, keeping the same consolidation method, or a change of method (such as a change from the purchase method to equity consolidation).
Company A holds a 100% investment in company B.
First consolidation on 01/01/93 resulted in goodwill of 1000 monetary units (MU), which is to be amortized over 4 years. For 1994, the system predicts an opening remaining book value of 750 MU and ordinary amortization of 250 MU. With a partial divestiture of 50% on 12/31/1994, a new entry with an opening remaining book value of 250 MU and ordinary amortization of 125 MU should be entered in the table of Eliminated Hidden Reserves (FVAs).
Complete divestiture of a subgroup
When a company is divested which itself holds investments within the group, divestiture accounting for the dependent companies does not take place automatically, but rather the Consolidation of Investments program recognizes a change in indirect investment. Although this perception is correct for the partial divestiture of companies (as described above), it is almost always wrong for a complete divestiture. You can make corrections by adjusting entries in the Changes in Investee Equity table and a performing divestiture accounting step by step for all the affected companies.
Data
Companies: |
A, B, C |
Investment of A in B: |
80% |
Investment of B in C: |
60 % |
Event
Company A sells company B to an "external organization".
Necessary steps
This entry is also temporarily required if a zero balance was not entered in B’s balance sheet (see the above guidelines for "Divestiture of a company in the consolidated group", step 3).
You need to run the Consolidation of Investments program separately for the company (select Consolidation ® Cons. investments ® Execute). Next, you should deactivate the automatic consolidation of investments in Subgroup Maintenance (select Master data ® Subgroups ® Change).
You need to run the Consolidation of Investments program separately for the company. Next, you should deactivate the automatic consolidation of investments in Subgroup Maintenance.
The following points are significant from the point of view of more general group structures:
·
The system must be able to recognize a divestiture, even for dependent companies (company C in the example). To help it do this, a temporary entry is made in step 2.·
Divestiture accounting for a company must always take place after the divestiture accounting for all of the companies which it controls. When the Consolidation of Investments program is started for the complete subgroup, this sequence is only guaranteed if a parent always has a higher company ID than all of its subsidiaries.The process described above always fails if there are cyclical investment structures (multiple-level investments with return investments) within the divested company. In this case you would need to resort to complete manual posting.
Complete divestiture of a company after the transfer of its investments to another internal trading partner
Data
Companies: |
A, B, C, D |
|
Investments: |
A in B |
80% |
|
A in C |
80% | |
|
B in D |
60% |
Events
Necessary steps
As in the above situation ( "Complete divestiture of a subgroup", the system has problems in recognizing the correct activity for company D (here a transfer without a changing in minority interest). Again, you can only solve this by following a step by step procedure:
The Consolidation of Investments program is run separately for the company ( menu path Consolidation ® Cons. investments ® Execute). Next, you should turn off the automatic consolidation of investments in Subgroup Maintenance (menu path Master data ® Subgroups ® Change).
The Consolidation of Investments program is run separately for the company. Next, you should deactivate the automatic consolidation of investments in Subgroup Maintenance.