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:

  1. Enter the divestiture in the financial reporting tables (select Indiv.Fin.Stmts ® Data transfer ® Additional financial data).
  2. – 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 -

     

  3. Calculate the group shares (select Consolidation ® Cons. investments ® Group shares).
  4. Enter zeros in the balance sheet of the divested company. This is most easily done using a form for blanket entries.
  5. Allocate the total value zero to the relevant transaction types in all areas with horizontal developments (such as asset history sheets).
  6. 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)

     

  7. Set the values to zero per partner in all balance sheet entry forms for the divested company which are broken down by trading partner.
  8. 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").

  9. Make entries to the income statement for the key date of the company’s divestiture (or enter zeros).
  10.  

    Steps 3 through 6 must be performed in order to ensure that the group’s summarized financial statements are correct.

  11. Enter zeros for the divestiture period in the financial reporting table of group inventories, for all inventories which show the divested company as the vendor or inventory manager should be filled with. You should do this as part of the elimination of intercompany profit/loss in inventory.
  12. Reverse (individually or as balances) posting level 1 entries made to the divested company in previous periods, as long as they affected at least one balance sheet account.
  13. 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.

  14. Steps 6 and 8 ensure that precisely those records with posting level 2 are reversed when you run the program for intercompany elimination (by selecting Consolidation ® IC elimination) for relevant elimination sets in the balance sheet (for example, Receivables / Payables).
  15. 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.

  16. Step 7 ensures that precisely those elimination entries for the previous period posted with posting level 2 are reversed when you run the program for the elimination of intercompany profit and loss will be exactly reversed in the inventory of the posted eliminations of the previous period in posting level 2 (by selecting Consolidation ® Elim. of IC profit ® Inventory).
  17. Manually reverse all documents with posting level 2 in which the divested company appears as a company or partner and which were entered manually or using the reclassification program (Consolidation ® Reclassifications) or the program for the elimination of IC profit/loss in transferred assets (Consolidation ® Elim. of IC profit ® Transferred assets). The same applies for the cross-company postings with posting level 3 or 4, of which at least one document line related to the divested company.
  18. Run automatic consolidation of investments (select Consolidation ® Cons. investments ® Execute)
  19. 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).

  20. You no longer need to carry forward balances from the current to the new fiscal year for the divested company. If, for reasons of simplification, you did carried forward balances, you need to delete the company from the subgroup for the new fiscal year (select Master data ® Subgroups ® Change).
  21. 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:

  22. As with complete divestiture, you must enter the percentage decrease in investment and the actual value for this in the Changes in Investments table (select Indiv.Fin.Stmts ® Data transfer ® Additional financial data). You then need to calculate the shares of all internal trading partners ( select Consolidation ® Cons. investments ® Group shares).
  23. Deactivate the automatic consolidation steps in Subgroup Maintenance for the affected company (select Master data ® Subgroups ® Change). The activity has to be posted completely manually.
  24. 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).

  25. In order to be able to carry out the consolidation of investments automatically in the subsequent period, you may need to manually update existing entries for the divestiture period in the table of Eliminated Hidden Reserves (FVAs) so that they are correct for the following period (select Indiv.Fin.Stmts ® Data transfer ® Additional financial data).
  26. 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).

  27. The reduction of the group share in a the company has an effect on the group share of other investees. The Consolidation of Investments program recognizes this activity as a change in indirect investment, which is treated in a similar way to first consolidation (differential etc.). You should check whether the proposed postings are correct and adjust them if necessary when you process the batch input.
  28. 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

  29. Enter the divestiture of B at A in the Changes in Investee Equity table (-80%) (select Indiv.Fin.Stmts ® Data transfer ® Additional financial data).
  30. Enter the divestiture of C at B (-60%) in the Changes in Investee Equity table
  31. 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).

  32. Determine the group share of all companies (select Consolidation ® Cons. investments ® Group shares).
  33. Run automatic consolidation of investments for C
  34. 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).

  35. Run automatic consolidation of investments for B
  36. 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.

  37. Delete any entry made in step 2 is.
  38.  

    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

  39. B sells D to C
  40. A sells B to an "external organization"

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:

  1. Enter the divestiture of B at A in the Changes in Investments table. You should enter the decreasing investment value (for the purpose of a validation check etc.), however, you need to enter the percentage share as zero (select Indiv.Fin.Stmts ® Data transfer ® Additional financial data). This percentage share will not be completed until step 6.
  2. Enter the investment transfer for the divestiture of D at B in the Changes in Investments table
    (–80%, transfer company C)
  3. Enter the investment transfer for the acquisition of D at C in the Changes in Investments table (+80%, transfer company B).
  4. Calculate the group share (select Consolidation ® Cons. investments ® Group shares).
  5. Run automatic consolidation of investments for D.
  6. 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).

  7. Entry of the divestiture from B to A (see step 1) in the Changes in Investments table to complete the percentage share (here: -80%)
  8. Calculation of the group share.
  9. Automatic consolidation of investments for B

The Consolidation of Investments program is run separately for the company. Next, you should deactivate the automatic consolidation of investments in Subgroup Maintenance.