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Simona Catuogno » 4.Assessment of excluded investments. Corporate case studies

Non-significant subsidiaries

Relevance is judged in terms of presenting a true and correct consolidated financial statement, and is assessed on an individual basis by comparing the financial data of the company to be excluded with corresponding data on the consolidated financial statement.
If subsidiaries are not to be consolidated on the basis of their not being significant then a note must be attached indicating their exclusion and the reasons behind it and the reporting company’s investment in that subsidiary should be assessed using direct net asset adjustment method or cost method.

Subsidiaries excluded through serious and lasting restrictions

  • currency restrictions on repatriation of invested capital or dividends;
  • nationalisation or expropriation is under way;
  • bankruptcy, controlled administration or liquidation procedures are under way.

Where a subsidiary is not consolidated because of serious and lasting restrictions, a note must be attached highlighting the exclusion and the reasons behind it. The reporting company’s share in that subsidiary can only be assessed using the cost method, which can lead to write-downs attributable to declines in value.

Information impossible to obtain

  • companies that acquire control during the preparation of the financial statement;
  • companies working in under-developed countries or those at war;
  • practical difficulties like ICT problems;
  • unaudited financial statements or those with negative assurance or those where no assurance can be issued

Where subsidiaries are not consolidated because the relevant information cannot be found in time, the attached note should highlight their exclusion and the reasons for it. Should it be impossible to gather the information necessary for equity method reporting, then the reporting company’s share in that particular subsidiary should be assessed using cost method, with the relevant write-down if there has been a lasting decline in value.

Assets destined for sale

Non-strategic control

Where exclusion from consolidation is on the grounds that the asset is being held solely with a view to a future alienation, the attached note must highlight the exclusion and the reasons behind it. The reporting company’s share in the excluded company should be valued as the lower of cost and net realisable value.

Equity method

With this valuation procedure, the value of an asset, initially set at its cost price, is adjusted up or down to reflect the reporting company’s share in the profits and losses of a subsidiary after acquisition.
Equity method is therefore applied:

  • to closely-held entities;
  • to subsidiaries that have been excluded by choice (as an alternative to cost method);
  • to joint venture companies not proportionally consolidated.

Corporate case-study 1

We use the Luxottica group to illustrate which subsidiaries are excluded from consolidation.

Corporate case-study 2

The Mediaset group is a further example of how certain subsidiaries fall outside the scope of consolidation.

Corporate case-study 3

The Fiat group is also used as an example to illustrate exclusion from consolidation.

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Progetto "Campus Virtuale" dell'Università degli Studi di Napoli Federico II, realizzato con il cofinanziamento dell'Unione europea. Asse V - Società dell'informazione - Obiettivo Operativo 5.1 e-Government ed e-Inclusion

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