WEBVTT 1 00:00:00.355 --> 00:00:02.735 We have come to the end of this course devoted 2 00:00:02.735 --> 00:00:04.655 to the consolidation of accounts. 3 00:00:05.555 --> 00:00:08.895 You remember that the objective was to provide a complete 4 00:00:09.315 --> 00:00:12.335 and coherent picture of the financial situation 5 00:00:12.335 --> 00:00:13.935 of a group of companies. 6 00:00:14.695 --> 00:00:18.135 I am now going to offer you some general reflections in 7 00:00:18.135 --> 00:00:20.455 particular on the notion of control. 8 00:00:21.125 --> 00:00:25.095 Then suggests some technical deepenings that seem relevant 9 00:00:25.095 --> 00:00:26.855 to me before mentioning the limits 10 00:00:27.115 --> 00:00:30.255 of consolidation in the production of relevant 11 00:00:30.555 --> 00:00:32.815 and complete financial information. 12 00:00:33.255 --> 00:00:34.575 A few comments to start with. 13 00:00:35.355 --> 00:00:37.975 The objective was of course to provide useful 14 00:00:38.195 --> 00:00:39.375 and relevant information, 15 00:00:39.875 --> 00:00:42.375 but not only for accounting purposes, 16 00:00:42.835 --> 00:00:45.895 but also for financial analysis purposes. 17 00:00:46.075 --> 00:00:49.335 You remember the comments I made on the financial leverage 18 00:00:49.595 --> 00:00:52.575 making the distinction between the consolidated leverage 19 00:00:52.635 --> 00:00:55.695 and the real financial leverage of a company. 20 00:00:57.095 --> 00:01:00.735 A second point is about simple equity stake versus 21 00:01:00.845 --> 00:01:02.135 affiliate companies. 22 00:01:02.905 --> 00:01:04.495 Where is a border? 23 00:01:04.825 --> 00:01:07.655 Where is a boundary between these two categories? 24 00:01:07.675 --> 00:01:10.455 To be honest, it's a little bit blurred. It's a bit fuzzy. 25 00:01:10.805 --> 00:01:13.575 It's not real science, I would say. 26 00:01:14.005 --> 00:01:17.095 What does it mean a mere participation in a company 27 00:01:17.675 --> 00:01:19.295 as opposed to participating 28 00:01:19.295 --> 00:01:21.615 through the decision making process without 29 00:01:21.615 --> 00:01:22.655 controlling the company? 30 00:01:23.275 --> 00:01:26.375 To be honest, the distinction is a little bit fuzzy. 31 00:01:26.745 --> 00:01:31.215 Again, the concept of control itself is a little bit fuzzy 32 00:01:31.675 --> 00:01:33.295 and it's certainly not limited 33 00:01:33.435 --> 00:01:35.375 to the percentage of participation. 34 00:01:36.035 --> 00:01:39.175 Of course, we observe the situation in which you have 100%, 35 00:01:39.715 --> 00:01:42.175 no doubt it's control 70%. 36 00:01:42.645 --> 00:01:44.175 Well, no doubt it's control, 37 00:01:44.395 --> 00:01:46.775 but the reality of control is sometimes a little 38 00:01:46.775 --> 00:01:47.815 bit more complex. 39 00:01:47.885 --> 00:01:50.335 Example, when you discuss with the auditors, they are going 40 00:01:50.335 --> 00:01:52.615 to ask you some questions about the composition 41 00:01:52.795 --> 00:01:54.175 of the board of directors. 42 00:01:54.795 --> 00:01:56.935 Do you have say 40% of the shares, 43 00:01:57.355 --> 00:01:59.415 but 60% of the seats of the board? 44 00:01:59.795 --> 00:02:01.775 Who is the chairman of the board? 45 00:02:02.155 --> 00:02:03.735 Who is electing the chairman 46 00:02:03.735 --> 00:02:05.215 of the board coming from which company? 47 00:02:05.405 --> 00:02:08.655 What are the economic relations between the company 48 00:02:09.195 --> 00:02:13.055 and its various shareholders about transfer pricing, 49 00:02:13.385 --> 00:02:16.735 about management fees, about paying for licenses 50 00:02:17.195 --> 00:02:20.295 or whatsoever, so this is quite important to understand 51 00:02:20.295 --> 00:02:22.815 that maybe you have less than 50%, 52 00:02:23.115 --> 00:02:26.255 but the reality of control is really in your hands, 53 00:02:26.555 --> 00:02:28.615 and then the auditors are going to ask you 54 00:02:28.635 --> 00:02:31.895 to fully integrate even though again, 55 00:02:31.915 --> 00:02:33.895 you have less than 50%. 56 00:02:34.215 --> 00:02:37.615 A few suggestions about deep diving about deepening. 57 00:02:38.085 --> 00:02:40.895 This course was just an introductory course. 58 00:02:41.355 --> 00:02:42.415 We went quite far, 59 00:02:42.875 --> 00:02:45.495 but basically there are two technical details, 60 00:02:45.825 --> 00:02:48.655 which I suggest you deep dive in. 61 00:02:48.995 --> 00:02:52.295 The first one is about intangible assets related 62 00:02:52.365 --> 00:02:55.975 with the acquisition of control of a company. 63 00:02:56.435 --> 00:02:58.295 You remember that we identified 64 00:02:58.855 --> 00:03:01.365 A, a gap in the consolidation of 240 65 00:03:01.385 --> 00:03:03.325 and we said part of it is about brands. 66 00:03:03.435 --> 00:03:05.005 Part of it is about goodwill. 67 00:03:05.715 --> 00:03:08.165 It's absolutely fundamental to understand how you 68 00:03:08.765 --> 00:03:11.605 evaluate brands, how you evaluate a goodwill, 69 00:03:11.605 --> 00:03:14.005 and how you run impairment test each 70 00:03:14.025 --> 00:03:16.245 and every year when your auditors are in charge 71 00:03:16.245 --> 00:03:18.005 of signing your accounts. 72 00:03:18.475 --> 00:03:20.125 This is a very important topic 73 00:03:20.545 --> 00:03:24.285 and as a topic, maybe even more important is problems 74 00:03:24.285 --> 00:03:27.725 related with the consolidation of foreign subsidiaries. 75 00:03:28.065 --> 00:03:30.285 The parent company operates in a country 76 00:03:30.705 --> 00:03:31.725 and is communicating 77 00:03:31.725 --> 00:03:34.285 and publishing its accounts in its working currency, 78 00:03:35.185 --> 00:03:38.885 but maybe there is a foreign subsidiary which is operating 79 00:03:39.185 --> 00:03:41.925 in another context with another currency. 80 00:03:42.745 --> 00:03:44.245 Now, you have to consolidate, 81 00:03:44.545 --> 00:03:47.005 but you have to take into account in the consolidations the 82 00:03:47.005 --> 00:03:48.365 evolution of the parities 83 00:03:48.555 --> 00:03:50.645 between one currency and the other. 84 00:03:51.175 --> 00:03:53.565 Maybe there are different taxation rules. 85 00:03:53.825 --> 00:03:56.445 You have to take that also into consideration, 86 00:03:56.945 --> 00:03:58.125 et cetera, et cetera. 87 00:03:58.425 --> 00:04:00.565 The problems related with the consolidation 88 00:04:00.565 --> 00:04:03.485 of foreign subsidiaries are very important 89 00:04:03.785 --> 00:04:05.205 and quite technical as well. 90 00:04:06.015 --> 00:04:08.805 These are two topics I suggest for deep diving, 91 00:04:08.865 --> 00:04:10.965 but there are plenty of others, of course. 92 00:04:11.825 --> 00:04:14.125 Now, what about the limits of consolidation? 93 00:04:14.465 --> 00:04:17.085 You remember, we hold 100% of the shares. 94 00:04:17.625 --> 00:04:19.365 The company is a subsidiary, 95 00:04:19.365 --> 00:04:22.165 which is fully integrated in terms of decisions, 96 00:04:22.765 --> 00:04:24.245 strategic operational decisions. 97 00:04:24.835 --> 00:04:27.045 Then we go for global integration 98 00:04:27.305 --> 00:04:29.645 and we aggregate all the accounts. 99 00:04:29.645 --> 00:04:33.245 We have more complete information as far 100 00:04:33.245 --> 00:04:34.525 as the group is concerned. 101 00:04:34.745 --> 00:04:35.965 We know about the scope, 102 00:04:36.185 --> 00:04:38.005 we know about the perimeter of activity. 103 00:04:38.185 --> 00:04:40.125 We know the size and we have information 104 00:04:40.125 --> 00:04:41.165 about the performance. 105 00:04:41.795 --> 00:04:43.285 That is absolutely great, 106 00:04:43.865 --> 00:04:47.685 but sometimes in a group there is some diversity between 107 00:04:48.285 --> 00:04:50.645 businesses, between geographical areas, 108 00:04:51.265 --> 00:04:54.565 and then we need more information about this diversity 109 00:04:55.195 --> 00:04:58.605 because we lose information when we aggregate all the 110 00:04:58.605 --> 00:05:01.285 accounts and in a diversified group, 111 00:05:01.375 --> 00:05:03.645 there is a concept which is absolutely fundamental, 112 00:05:03.695 --> 00:05:06.125 whose name is business segment. 113 00:05:07.445 --> 00:05:09.085 A segment is a kind of entity, 114 00:05:09.085 --> 00:05:11.605 which is a little bit different from the other 115 00:05:11.765 --> 00:05:12.925 segments of the group. 116 00:05:13.145 --> 00:05:15.925 Let me give you an example, which is very classical. 117 00:05:16.635 --> 00:05:18.365 What about the automotive industry? 118 00:05:18.745 --> 00:05:21.525 You sell cars, trucks whatsoever, 119 00:05:22.145 --> 00:05:24.565 but this is an industrial activity very often 120 00:05:24.665 --> 00:05:26.045 for this kind of business. 121 00:05:26.465 --> 00:05:28.365 You complement this industrial activity 122 00:05:28.515 --> 00:05:32.125 with providing a service, which is sales financing. 123 00:05:32.735 --> 00:05:34.365 Sales financing is about lending. 124 00:05:34.825 --> 00:05:36.645 You understand that the financial economics 125 00:05:36.645 --> 00:05:37.765 and the financial structure 126 00:05:38.305 --> 00:05:41.405 of a sales financing activity is completely different from 127 00:05:41.405 --> 00:05:45.485 manufacturing goods, which are cars or trucks or whatsoever. 128 00:05:46.395 --> 00:05:50.205 Then of course, you have to globally integrate the accounts 129 00:05:50.205 --> 00:05:51.685 because it's one unique group, 130 00:05:52.025 --> 00:05:54.885 but you need to provide information by segment, 131 00:05:55.415 --> 00:05:56.885 which kind of information is 132 00:05:57.205 --> 00:05:58.205 Relevant. By segment 133 00:05:58.205 --> 00:06:01.925 revenues, obviously operating income, the ebit, 134 00:06:02.545 --> 00:06:04.565 the depreciation and amortization so 135 00:06:04.565 --> 00:06:08.245 that you can calculate the ebit, duh, operating assets, 136 00:06:08.975 --> 00:06:12.045 gross or net of operating liabilities, cash, 137 00:06:12.455 --> 00:06:14.685 industrial investment, capital expenditures, 138 00:06:14.905 --> 00:06:16.485 and so on and so forth. 139 00:06:16.875 --> 00:06:19.605 This is absolutely fundamental to provide this kind 140 00:06:19.605 --> 00:06:24.325 of information by activity and by geographical area. 141 00:06:25.235 --> 00:06:28.325 Then you have a very good idea not only about the group, 142 00:06:28.665 --> 00:06:31.125 but also about the competence of the group. 143 00:06:31.555 --> 00:06:34.365 When you analyze the financial communication, which is 144 00:06:34.645 --> 00:06:39.125 provided by groups, you can observe a great diversity in the 145 00:06:39.125 --> 00:06:40.605 quality of information. 146 00:06:41.385 --> 00:06:42.605 Of course, quality means 147 00:06:42.675 --> 00:06:45.605 that it's true information which is approved, signed 148 00:06:45.605 --> 00:06:49.325 by the auditors obviously, but is it precise enough? 149 00:06:49.715 --> 00:06:52.765 What is the level of granularity of the information? 150 00:06:53.505 --> 00:06:55.885 Do you need more information or not? 151 00:06:56.465 --> 00:07:00.085 And you understand that for companies there's a huge trade 152 00:07:00.105 --> 00:07:04.325 off between transparency, providing accurate information so 153 00:07:04.325 --> 00:07:06.965 that the financial analyst know what is happening 154 00:07:06.965 --> 00:07:10.405 inside the group, but confidentiality, you don't want 155 00:07:10.405 --> 00:07:13.525 to disclose too much, especially for your competitors. 156 00:07:14.275 --> 00:07:17.085 This trade off is extremely complex to manage 157 00:07:17.785 --> 00:07:21.245 and there is always a difficulty in the optimization 158 00:07:21.465 --> 00:07:25.205 for companies between transparency and confidentiality. 159 00:07:25.745 --> 00:07:28.205 Now we are at the end of this pedagogical process. 160 00:07:29.445 --> 00:07:33.365 Understanding how consolidation impacts the financial 161 00:07:33.365 --> 00:07:36.605 statement of a company is a competence which is 162 00:07:36.705 --> 00:07:38.365 of utmost importance. 163 00:07:38.595 --> 00:07:40.805 This is true of course for the finance 164 00:07:40.985 --> 00:07:42.165 and accounting function, 165 00:07:42.705 --> 00:07:47.405 but also for managers who in business operations develop 166 00:07:47.745 --> 00:07:50.405 and run industrial projects, 167 00:07:50.705 --> 00:07:54.285 but it is also a very technical and difficult topic. 168 00:07:55.105 --> 00:07:59.045 You went through the entire process. Bravo, well done.