Group Consolidations in South Africa: A Practical Guide

Group consolidations in South Africa have a reputation for swallowing the back end of every reporting cycle. The subsidiaries close on time, then the group sits waiting while intercompany balances are argued over, and the board pack lands three weeks after month end when the decisions it should have informed are already made.

It does not have to work that way. Consolidation is a mechanical process with a fixed sequence. What makes it slow is almost never the mechanics: it is unaligned accounting policies, an intercompany cut-off nobody enforces, and subsidiary ledgers that were never designed to be added together.

When a South African company must consolidate

The starting point is the Companies Act, which requires a holding company to prepare group financial statements where it has subsidiaries, read together with the reporting framework you apply. Under IFRS the relevant standard is IFRS 10, and under IFRS for SMEs the equivalent section deals with consolidated and separate financial statements. If you are unsure which framework applies to you, our comparison of IFRS for SMEs against full IFRS covers the eligibility test.

Control is the test, not the shareholding

Owning more than half the voting rights is the common case, but it is evidence of control rather than the definition of it. Control has three elements, and all three must be present:

• Power over the investee, meaning the existing rights that give you the current ability to direct the activities that most affect its returns.
• Exposure or rights to variable returns from your involvement.
• The ability to use that power to affect those returns.

That definition catches structures a shareholding test misses: a shareholder holding under half the votes who controls in practice because the rest is widely dispersed, a special purpose entity directed by contract, or an entity where potential voting rights are substantive. Document the control assessment for every entity in the group and revisit it whenever a shareholders agreement changes.

The elimination steps, in order

Consolidation adds the individual financial statements together line by line, then removes everything that is internal to the group. Run the eliminations in this sequence and the working papers stay reviewable.

1. 1Eliminate the parent's investment against its share of the subsidiary's equity at acquisition, recognising goodwill or a gain on bargain purchase.
2. 2Eliminate intercompany balances: loans, current accounts, trade receivables and payables between group entities.
3. 3Eliminate intercompany trading: internal sales and purchases, management fees, royalties and interest charged between entities.
4. 4Eliminate unrealised profit in closing inventory and in transferred fixed assets, and adjust the related depreciation.
5. 5Eliminate intragroup dividends declared and received within the group.
6. 6Allocate profit and equity to non-controlling interests in the subsidiaries that are not wholly owned.

Non-controlling interests, goodwill and foreign subsidiaries

Three areas account for most consolidation errors we are asked to fix. Non-controlling interest is a component of equity and shares in profit and in other comprehensive income, and it must be measured consistently with the policy chosen at acquisition. Goodwill is measured at acquisition and then either amortised or tested for impairment depending on the framework, and it cannot be recalculated each year on current numbers.

Foreign subsidiaries add translation. Assets and liabilities translate at the closing rate, income and expenses at rates approximating those at the transaction dates, and the resulting differences go to a foreign currency translation reserve within other comprehensive income rather than through profit. Intercompany loans that form part of a net investment in a foreign operation get their own treatment, and getting that wrong moves real volatility into the wrong line of the income statement.

Closing a group without adding three weeks

The consolidation itself should take a day. Everything upstream of it is where the time goes, so that is where to fix it.

• One chart of accounts across the group. Mapping four different ledgers into a group format every month is a permanent tax on your close.
• Aligned accounting policies and one group policy manual. Different depreciation or revenue policies in subsidiaries must be adjusted on consolidation, every period.
• A hard intercompany cut-off, several working days before the subsidiaries close, with a nominated owner on each side of every reciprocal balance.
• A standing intercompany matrix that must agree to nil before any entity submits its pack.
• A standard reporting pack from every entity, in the same format, with the same supporting schedules.
• Aligned year ends and month end calendars, so nobody is waiting on an entity that closes a week later.

If the underlying entity closes are not yet disciplined, fix those before touching the consolidation. Our month end close checklist sets out the sequence, and the ledger structure that makes group mapping painless is covered in our guide to building a chart of accounts.

Groups do not close late because consolidation is difficult. They close late because two subsidiaries disagree about a loan account and nobody owns the answer.

Rishen Narsing, CA(SA)

How Synergy helps

We run group closes end to end: the control assessments, the group policy manual, the intercompany matrix, the elimination workings and the consolidated pack, on a calendar your board can rely on. That is our close, consolidate and report service, and where the group needs a technical opinion on control, goodwill or translation, our technical accounting team prepares it alongside.