APPLICABILITY OF CONSOLIDATED TECHNIQUES IN THE VIEW OF ROMANIAN ACCOUNTING REGULATIONS

The accounting regulations are more and more interested in groups of companies. In some cases, these regulations require for preparing the consolidated financial statements. This is the task of the parent company who keeps the consolidated accounts. To accomplish its goals, the consolidated accounting uses a couple of, so-called, consolidation techniques. These are applied in the case of groups of companies with a complex structure. Their goal is to elaborate the consolidated financial statements using a set of methods and empirical skills. In this article we synthesize and apply the consolidation techniques in the view of Romanian accounting regulations. The Romanian practice has revealed, especially, two techniques: one based on direct consolidation and another one based on multiple levels (phased consolidation). Therefore, this work regards only the technical side of consolidated accounting, accounting records being evaded. Furthermore, we focus only on the preparation of the consolidated balance sheet in the case of some hypothetical groups of companies.


Introduction
The Romanian Dictionary defines the concept of "technique" as a set of procedures and skills specific to a certain field (www.dexonline.ro).Consolidated accounting, as a branch of financial accounting applied to group of companies, uses, as an instrument to accomplish its goal (preparation and presentation of consolidated financial statements), a so-called consolidation technique.Therefore, consolidation technique refers to a set of procedures and skills used, especially, to prepare and present consolidated financial statements.The first Romanian regulations related to consolidated accounting, approved by O.M.F.no.772/2.000,stipulate two consolidation techniques, namely phased consolidation and direct consolidation (O.M.F.no.772/2.000,art.60).Some authors mention two others consolidation techniques: one based on modular consolidation and another one based on fluctuations methods (Feleagă and Ionaşcu, 1998, pp. 686-687).Modular consolidation technique consists in modular division of subsidiaries' financial statements, after which, these are regrouped, according to group's management strategy, by activity type, geographical area, production sector etc.The technique based on fluctuations methods consists in the integration of previous consolidation data with current consolidation data, which allows solving two problems at once: evaluation of consolidation area year by year and accountancy of consolidation operations specific to current year.Consolidation techniques are applicable to complex groups (Figure 1) which are characterized also by indirect affinities between parent company and its subsidiaries.

Figure 1 Group of companies with a complex structure
Source: Own processing Consolidation techniques are applied together with consolidation methods, both pursuing the same objective: preparation and presentation of consolidated financial statements.
The following, we present the main characteristics of both consolidation techniques stipulated by the Romanian regulations.

Phased consolidation technique
According to phased consolidation's rules, consolidated financial statements are prepared for each subgroup of the group of entities applying, at each level, the appropriate consolidation method (according to control percent).The first subgroup includes the entity (ies) that is (are) placed at the end of the affiliations chain (according to affiliations' flow chart) and its (their) parent entity.The subgroup's parent entity, in this case, is the very next entity (according to affiliations' flow chart) towards the parent entity of the entire group.The consolidated financial statements of the next subgroup are prepared based on last subgroup's consolidated financial statements and the individual financial statements of the next parent entity and so on towards parent entity of the entire group.At this final level the consolidated financial statements of the entire group are prepared.Thus, in Figure 1, at the first consolidation level, the D and E entities are consolidated within their parent entity namely A for D and B for E. Next level is consolidation of these two subgroups together with C entity within the M entity.In preparation of consolidated financial statements of each subgroup they are used the participation (interest) percent owned by the parent company of that subgroup in the consolidated entity (ies), while the consolidation method depends on the control percent owned by the parent company of the entire group in the consolidated entity (ies).

Direct consolidation technique
Direct consolidation consists in consolidation of each subsidiary directly within the parent company of the group.Thus, a single set of consolidated financial statements is prepared.For that purpose, the shareholders' equities of each subsidiary are divided between the parent company and minority shareholders (non-controlling interest) based on their participation percent in each subsidiary.However, when eliminate the carrying amount of investment in each subsidiary they are used the participation percent of both, the parent company of group and the minority shareholders, in the entity that owns the investment that are eliminated.Therefore, when the parent company owns indirectly the investment, the participation percents, used in either case, are different.In Figure 1, the A, B, C, D and E entities are directly consolidated within the parent company.When divide the shareholders' equity of D and E entities they are used the participation percent owned in these entities by both, M company and minority shareholders.Instead, when eliminate the carrying amount of A's and B's investments in D and E, they are used the participation percent of both, M company and minority shareholders, owned in A and B entities.

Phased consolidation versus direct consolidation
In this section, we present, comparatively, some characteristics of both consolidation techniques together with their main advantages and disadvantages (Table 1).

Applicability area
Small and medium groups of companies; the groups flow charts are simple and contain at least two dependency levels.
Small, medium and large groups of companies; the groups flow charts are complex and very complex and contain at least two dependency levels.

Procedure
Consolidation based on multiple levels in accord with group's flow chart; at each level one or more subgroups are constituted and for each subgroup the consolidated financial statements are prepared.
Direct consolidation of each subsidiary within the parent company, whatever the number of dependency levels; a single set of consolidated financial statements is prepared.

Principles
Consolidations start with the entity placed at the end of the affiliations chain (according with affiliations' flow chart) and continue, consecutively, until the parent entity of the entire group is one of the consolidated entities.
The order of consolidations is not essential.

Instruments
At each consolidation level, the participation (interest) percent owned by the parent company of each subgroup in the consolidated entity (ies).
The participation (interest) percent owned by the parent company of the entire group in each consolidated entity, regardless of dependency level.

Distribution of shareholders' equities
At the level of each subgroup, according to participation percent in consolidated entity, between subgroup's parent entity and minority shareholders (and others entities within the consolidation area, but out of subgroup).
Between the parent company of the entire group and minority shareholders, according to their participation percents in consolidated entity.

Distribution of carrying amount of the investment (together with their elimination)
At the level of each subgroup, its entire value is attributed to parent entity of subgroup, as a consequence of direct affiliation.
At the level of group, between the parent company of group and the minority shareholders, according to their participation percent in the entity that owns the investment that is eliminated.

Advantages
-Allow to divide the financial information within the group as a result of preparation the consolidated financial statements at the level of each subgroup.
-Provide, directly, promptly and low-priced information about the financial position, performance and changes in financial position of group of companies; -Allow to better control the distribution of shareholders' equities between the parent company of the group and minority shareholders.

Disadvantages
Imply: -high volume of work for preparation the consolidated financial statements of each subgroup; -high cost; -non-applicability for all types of groups of entities.

It does not allow:
-analysis within the group which can satisfy the objectives of internal management (provide information to make good decisions); -group segmentation by activity type, geographical area etc.

Studies regarding the applicability of consolidation techniques
In this section, we present the applicability of consolidation techniques preparing the consolidated balance sheet of some hypothetical groups of companies (the same rules are applied also when prepare income statement).Considering this work regards only the technical part of consolidated accounting, we ignore the accounting records.As a consequence, to simplify the following examples, we assume that the parent company has owned subsidiaries' shares since their incorporation.Therefore full subsidiaries' retained earnings are post-acquisition, and between entities of the group there are no transactions.
Note 1: We use the report form of the balance sheet but in a very simplified version, considering that, regardless of the items number of balance sheet, the rules of consolidation techniques and of consolidation methods remain the same.

Example 1
The "M" company has owned 80% shares of "A" company and the "A" company has owned 40% of "B" company.Below there are the separate financial statements, as at 31 December N, of these three entities that compose the group.The chart of group "M" is as below: 80% 40% The first step in preparation the consolidated balance sheet is to establish how the M company controls (mostly through voting power) the others two companies.For that purpose they are calculated the voting power or the, so-called, control percent owned in each subsidiary (CP) on the basis of is established the consolidation method.Thus: -CP M→A = 80% → requires Global integration method -CP M→B = 40% → requires Equity method A. Preparation of balance sheet using phased consolidation technique 1 st consolidation level: Consolidation of "B" entity within the "A" entity The participation (interest) percent (PP) used for this consolidation level is: PP A→B = 40% 2 nd consolidation level: Consolidation of subgroup "A" within the parent entity "M".
The participation (interest) percent (PP) used for this consolidation level is:

B. Preparation of balance sheet using direct consolidation technique
In order to prepare the consolidated balance sheet using direct consolidation technique, we use two intermediate tables by means of which we divide the shareholders' equities of each subsidiary between the parent company and minority shareholders (non-controlling interest) based on their participation percent in each subsidiary.Also, when eliminate the carrying amount of investment in each subsidiary, we divide it between the parent company and minority shareholders, according to their participation percent in entity who owns the investment that is eliminated, together with the elimination of parent's portion of share capital of each subsidiary.
The participation (interest) percents (PP) used for each consolidation are: 1 st consolidation: PP M→A = 80%; 2 nd consolidation: PP M→B = 32%  Note 2: The parent entity ("M") does not control its investee in "B" entity.Therefore, she is entitled (according with her participation percent in "A") only to "A"'s portion of "B"'s equities.

Example 2
The "M" company has owned 25% shares of "A" company and 60% shares of "B" company."A" company has owned 30% of "B" company.Below there are the separate financial statements, as at 31 December N, of these three entities that compose the group.The chart of group "M" is as below: 25% 30%

B. Preparation of balance sheet using direct consolidation technique
The participation (interest) percents (PP) used for each consolidation are: 1 st consolidation: PP M→A = 25%; 2 nd consolidation: PP M→B = 67.5%

Conclusions
Preparation of the consolidated financial statements, in the case of complex groups of societies, is a technical issue of the parent entity of the entire group, as we show in this article.However, preparation of the consolidated financial statements is based on accounting records.In this article we ignore them and we focuses on the technical side of the consolidated accounting.In a following work, we will approach also the accountant side of consolidated accounting.Consolidation techniques are applicable in the case of complex group of societies.In this article we have applied two consolidation techniques that are recognized in Romanian regulations, namely phased consolidation and direct consolidation.
The direct consolidation technique is mostly used in the case of group of companies with a complex and very complex flow chart because it promptly allows preparing the consolidated financial statements only at the level of parent company of the group.The phased consolidation technique is applied, especially, in the case of group of companies with a simple flow chart, this technique requiring the preparation of consolidated financial statements at each dependency level.
In a particular case of group of entities, whatever the consolidation technique that they are applied, the consolidated financial statements of the group are exactly the same.