WEBVTT 1 00:00:00.155 --> 00:00:02.525 Welcome to this course, which is devoted 2 00:00:02.545 --> 00:00:06.645 to the consolidation of the company's financial accounts. 3 00:00:07.635 --> 00:00:09.925 What is the purpose of consolidation? 4 00:00:10.425 --> 00:00:13.725 The objective of this accounting process is 5 00:00:13.725 --> 00:00:15.765 to give all those who observe 6 00:00:16.145 --> 00:00:18.965 and analyze the company as complete 7 00:00:19.145 --> 00:00:22.045 and consistent, uh, picture as possible 8 00:00:22.505 --> 00:00:25.085 of its financial situation and 9 00:00:25.085 --> 00:00:27.805 therefore of its scope of activity. 10 00:00:28.905 --> 00:00:30.685 So one might think at first glance 11 00:00:30.685 --> 00:00:32.645 that this course would be reserved 12 00:00:32.865 --> 00:00:34.285 for accounting professionals, 13 00:00:34.285 --> 00:00:37.245 but my opinion is quite different. 14 00:00:38.195 --> 00:00:40.525 Many operational managers are faced 15 00:00:40.555 --> 00:00:44.885 with situations in which a partnership is envisage 16 00:00:44.885 --> 00:00:46.005 with an economic partner, 17 00:00:46.945 --> 00:00:49.485 an operation involving the implementation 18 00:00:49.825 --> 00:00:51.245 of a specific project 19 00:00:51.745 --> 00:00:54.885 or any other decision that will lead the company 20 00:00:54.945 --> 00:00:56.325 to ask it itself. 21 00:00:56.705 --> 00:00:59.365 The question, what is my degree 22 00:00:59.505 --> 00:01:01.845 of involvement in this activity? 23 00:01:02.395 --> 00:01:06.525 What is my operational decision making power? 24 00:01:07.385 --> 00:01:11.045 In this perspective, an operational manager must know not 25 00:01:11.425 --> 00:01:14.245 all the technical dimensions of the process, 26 00:01:14.585 --> 00:01:16.205 but its main concepts 27 00:01:16.385 --> 00:01:19.525 and the link between the consolidation modality 28 00:01:20.025 --> 00:01:24.045 and the operational reality of the operation envisaged. 29 00:01:26.585 --> 00:01:30.005 In this module, I will first propose a discussion on 30 00:01:30.005 --> 00:01:34.725 what the word consolidation consolidate means. 31 00:01:35.355 --> 00:01:38.085 Then we'll have a look at the course objectives. 32 00:01:38.445 --> 00:01:42.205 I will tell you about the process, very gradual process, 33 00:01:42.945 --> 00:01:45.565 and then we'll have a discussion on a knowledge 34 00:01:46.125 --> 00:01:47.165 acquired INSYS course. 35 00:01:48.255 --> 00:01:52.045 First, what does it mean to consolidate you? 36 00:01:52.285 --> 00:01:54.845 Remember that we use this word in very different context. 37 00:01:55.665 --> 00:01:58.845 You consolidate a building to make it stronger. 38 00:01:59.305 --> 00:02:00.605 You consolidate data. 39 00:02:01.585 --> 00:02:03.485 The lawyers, they are going to tell you 40 00:02:03.485 --> 00:02:05.685 that you consolidate use of fraud 41 00:02:05.905 --> 00:02:08.405 and bear ownership, et cetera, et cetera. 42 00:02:08.585 --> 00:02:10.285 But what does it mean to consolidate? 43 00:02:10.305 --> 00:02:12.245 It means that you put together 44 00:02:13.445 --> 00:02:16.485 M in Latin means it's with you. 45 00:02:16.545 --> 00:02:19.965 Gather the pieces of the puzzle to make it stronger, 46 00:02:20.505 --> 00:02:21.725 gather stronger. 47 00:02:21.815 --> 00:02:22.925 These are key words. 48 00:02:23.785 --> 00:02:25.645 Now, when I teach in executive programs, 49 00:02:25.865 --> 00:02:29.405 I'm very often asked usual accounting question, 50 00:02:29.905 --> 00:02:31.525 do we consolidate? 51 00:02:31.665 --> 00:02:35.325 And the answer is yes. We always consolidate. 52 00:02:35.865 --> 00:02:38.045 The question is not do we consolidate, 53 00:02:38.065 --> 00:02:39.845 but how do we actually 54 00:02:40.485 --> 00:02:42.365 consolidate the accounts of the company? 55 00:02:43.465 --> 00:02:46.125 And the objective of accounting, you remember, is 56 00:02:46.125 --> 00:02:48.205 to give the most sincere 57 00:02:48.505 --> 00:02:50.885 and true picture possible of the economic 58 00:02:51.145 --> 00:02:53.405 and financial situation of the company. 59 00:02:54.525 --> 00:02:57.525 Consolidation, consolidating the accounts, 60 00:02:57.605 --> 00:02:58.845 participates to this 61 00:02:58.925 --> 00:02:59.925 Process. 62 00:03:00.585 --> 00:03:03.485 Now, in this context, what are the objectives of the course? 63 00:03:04.105 --> 00:03:06.285 The first one is to give you a reminder on 64 00:03:06.285 --> 00:03:07.325 accounting statement. 65 00:03:07.425 --> 00:03:09.685 You remember the PA, the balance sheet, 66 00:03:09.745 --> 00:03:10.925 the cashflow statement. 67 00:03:11.865 --> 00:03:14.845 But we are also going to do some financial forecasting 68 00:03:15.315 --> 00:03:16.805 because I am going to 69 00:03:17.325 --> 00:03:19.485 consolidate the accounts the day you make the 70 00:03:19.485 --> 00:03:20.765 investment itself. 71 00:03:21.265 --> 00:03:22.605 But we are going to observe 72 00:03:22.715 --> 00:03:25.405 what happens in the consolidated accounts 73 00:03:25.405 --> 00:03:27.005 of the acquiring company 74 00:03:27.755 --> 00:03:31.085 when the target is moving from one year to the other. 75 00:03:32.145 --> 00:03:35.165 The second objective is to raise your awareness of the 76 00:03:35.725 --> 00:03:38.285 strategic dimension of consolidation. 77 00:03:38.955 --> 00:03:40.925 It's not only is it a core business 78 00:03:41.145 --> 00:03:43.525 or is it at the periphery of our strategy, 79 00:03:43.905 --> 00:03:46.765 but what is our decision power 80 00:03:48.605 --> 00:03:50.675 Third objective, which is very much a consequence 81 00:03:50.675 --> 00:03:51.755 of decision power. 82 00:03:52.715 --> 00:03:54.635 I have to show the coherence 83 00:03:54.635 --> 00:03:57.555 between the different consolidation modalities 84 00:03:58.295 --> 00:04:02.195 and the economic reality from one to the other. 85 00:04:02.975 --> 00:04:05.875 Of course, I will introduce a technical processes 86 00:04:05.895 --> 00:04:09.315 of consolidation on their impact on the accounting 87 00:04:09.315 --> 00:04:11.915 statements for the company, which is making an acquisition, 88 00:04:11.965 --> 00:04:14.435 which is investing in equity stake. 89 00:04:15.175 --> 00:04:19.355 But I will conclude also this course on a reflection on 90 00:04:19.355 --> 00:04:22.035 biases and limitations of the process, 91 00:04:22.565 --> 00:04:26.235 especially when we discuss financial risk and leverage. 92 00:04:27.535 --> 00:04:28.995 Now, the pedagogical process 93 00:04:29.515 --> 00:04:32.155 consists in first presenting the rbs. 94 00:04:32.625 --> 00:04:35.355 There's a company which is buying an equity stake, 95 00:04:35.575 --> 00:04:37.675 the investor company I, 96 00:04:38.095 --> 00:04:40.635 and there is a target, the company in which you are going 97 00:04:40.635 --> 00:04:45.475 to take an equity stake target T then one after the other. 98 00:04:45.635 --> 00:04:47.275 I will introduce a different modalities. 99 00:04:47.965 --> 00:04:50.635 First, it's a simple equity investment. 100 00:04:51.455 --> 00:04:53.475 My equity stake is very limited. 101 00:04:54.145 --> 00:04:56.795 It's a financial investment in which I am a 102 00:04:56.795 --> 00:04:57.955 passive investor. 103 00:04:58.155 --> 00:05:01.555 I don't participate at all to the decision making process. 104 00:05:02.775 --> 00:05:05.475 Second, it's not negligible and limited. 105 00:05:05.625 --> 00:05:10.235 It's a significant equity investment, but I don't control. 106 00:05:10.575 --> 00:05:12.995 If I don't control, I don't decide. 107 00:05:13.375 --> 00:05:16.395 But I am so strong in the equity investment 108 00:05:16.905 --> 00:05:19.595 that I participate with the decision making process, 109 00:05:20.095 --> 00:05:22.155 the modalities name equity method. 110 00:05:23.205 --> 00:05:25.675 Third, I have the total control of the company. 111 00:05:26.275 --> 00:05:28.435 I hold 100% of the shares. 112 00:05:28.615 --> 00:05:30.795 And as a consequence, I decide, 113 00:05:31.215 --> 00:05:34.835 but I not only decide by myself, but for myself 114 00:05:34.835 --> 00:05:36.035 because I am going 115 00:05:36.055 --> 00:05:39.755 to be fully involved in the consequences of the decision. 116 00:05:40.805 --> 00:05:44.035 False. I have more than 50% of the shares, 117 00:05:44.215 --> 00:05:46.595 but less than 100, which basically means 118 00:05:46.595 --> 00:05:48.395 that I take the decisions. 119 00:05:48.615 --> 00:05:51.715 But these decisions will have an impact not only on myself, 120 00:05:52.175 --> 00:05:56.715 but also on other shareholders named minority shareholders, 121 00:05:56.945 --> 00:05:58.445 Non-controlling interests. 122 00:05:58.625 --> 00:06:01.725 And they are going to suffer, quote, the consequences 123 00:06:01.865 --> 00:06:03.085 of my decision. 124 00:06:04.325 --> 00:06:05.605 I will end this course 125 00:06:05.635 --> 00:06:08.605 with some concluding reflections about 126 00:06:08.675 --> 00:06:10.405 control and about leverage. 127 00:06:11.095 --> 00:06:12.805 Which kind of knowledge are you going 128 00:06:12.805 --> 00:06:14.365 to acquire through this process? 129 00:06:15.255 --> 00:06:18.445 First, we are going to be back to accounting statements 130 00:06:18.825 --> 00:06:20.485 and financial forecasting. 131 00:06:20.515 --> 00:06:21.925 It's a good refresher. 132 00:06:22.745 --> 00:06:26.245 Second, you will have a very precise view about the 133 00:06:26.245 --> 00:06:28.645 different methods of consolidation. 134 00:06:29.065 --> 00:06:31.645 And again, they are linked to economic reality. 135 00:06:32.505 --> 00:06:33.765 But we are also going 136 00:06:34.005 --> 00:06:37.925 to have some reflections on the control, the concepts linked 137 00:06:37.925 --> 00:06:41.725 with control and financial leverage measurement, 138 00:06:41.725 --> 00:06:43.805 which is quite important in that respect. 139 00:06:44.585 --> 00:06:46.325 Now this is the end of the introduction. 140 00:06:46.355 --> 00:06:47.885 This is the end of this first module. 141 00:06:48.265 --> 00:06:50.525 Now let's move to the second one, which is a presentation 142 00:06:50.525 --> 00:06:53.805 of the firms, the investor, and the target.