GUIDE Basic settings for calculating Minority Interests

Table of contents

• 1 Business Background
• 2 Pre-requisites for Automatic Processing
• 2.1 Setting up the consolidation parameter 'FK'
• 2.2 Update of the Shareholding and the Capital Transaction
• 3 Triggering the Calculation of Direct Minority Interests
• 3.1 First step: Minority interests consolidation within capital consolidation (KK)
• 3.2 Second step: Update Minority Interests (FF)
• 4 Triggering the Calculation of Indirect Minority Interests
• 5 Postings in a Multi-Level Group
• 6 How are the currency conversion differences calculated?

If the group’s share of an interest in a group company is less than 100% then the minority interests have to be shown separately for the capital consolidation. For the technical implementation of the calculation of minority interests, IDL.KONSIS uses the step consolidation technique and operates in accordance with a group share calculation concept where the technical implementation differs slightly from the traditional group share method. This was a deliberate choice in order to be able to obtain greater transparency in terms of the strands of participation and to verify these.

Under the traditional group share method, the own share of interests and the minority interests are calculated from the perspective of the ultimate parent company; however, in IDL.KONSIS, first of all, the shareholdings between the parent company and the subsidiary are calculated (additive percentage rate) and - provided that the parent company is not 100% owned by the group companies - calculates the indirect shareholding that results from this (multiple percentage rate). This means that there is a two-step calculation for minority interests. 1st step: Calculation of direct minority interests (100 minus the additive percentage rate), 2nd step: Calculation of indirect minority interests that still only represent the difference between the direct minority interests and those minority interests calculated from the group share. In IDL.KONSIS this is visualised via the voucher structure. This means that the direct minority interests vouchers plus the indirect minority interests vouchers produce the minority interests from the perspective of the ultimate parent (group share).

In IDL.KONSIS the technical processing of minority interests proceeds in 2 steps:

1st step: at first consolidation, processing of the direct minority interests on the capital on the basis of the historical exchange rate (in an FK voucher)

2nd step: using the "Update Minority Interest" function, calculation of currency conversion effects on the capital and direct minority interests on the current net income for the year and, potentially, on current changes (in an FF voucher with a GES).

3rd step:(runs automatically in parallel when the second step is being executed): Calculation of the indirect minority interests on the currency conversion effects of the capital, on the current net income for the year and, where there is goodwill attributable to minorities, an adjustment of the goodwill that has arisen at the parent company by the direct share at the parent company (in an FF voucher with two companies).

The following processing steps have to be executed in IDL Konsis in order to achieve the automatic calculation of minority interests:

--> Setting up the consolidation parameter 'FK'

--> Updating the shareholding and the capital transactions

To begin with, the consolidation parameter 'FK' must be created in the 'Consolidation Parameters' (KTKPAR) application, without which this function cannot be used. If this function is used for the first time then, in the selection area in the field 'Consolidation Function', it is necessary to select the function abbreviation 'FK' from the selection list shown there and to have it displayed. The overview will initially remain empty. An individual record display will open above the star symbol in the menu bar and you will be able to create the data.

Various accounts can be defined in the consolidation parameter that will then be used for automatic processing. The entries serve the purpose of, firstly, differentiating the posting of the adjustment items to minority interests as well as providing the option of executing very different actions within the automatic calculation of minority interests. What is important, however, is that one account has to entered at least into the mandatory account (colour highlighted field) because, without this entry, no calculation of minority interests will be performed.

Therefore, the entries in the consolidation parameter 'FK' for the calculation of minority interests can be divided into 2 groups:

• Fields for minority interests accounts (if these remain empty then the posting will always be made to the mandatory account)
• Fields for elimination accounts or other situations (if these fields remain empty then no calculation will take place)

Image: Consolidation parameter FK

Significance of the individual fields in the parameter:

[minority interests]:

mandatory entry. This account is used for the posting when minority interests are calculated. If no further differentiation via entries in the following fields (for minority interests in profit or loss and in the currency conversion effects) has taken place then all minority interests issues will be posted to this account. If no account has been entered then the FK parameter will not be created and minority interests will not be calculated. You are only allowed to enter a liability account here (BG account flag = 2).

[minority interests in profit or loss]:

optional entry. When an account is entered in this field the direct minority interests in profit and loss will be posted to this account. If no account has been entered then the posting will be made to the 'Minority Interests' account. You are only allowed to enter a liability account here (BG account flag = 2).

[minority interests in currency conversion effects]:

optional entry. When an account is entered in this field the minority interests in the currency conversion effects will be posted to this account. If no account has been entered then the posting will be made to the 'Minority Interests' account. You are only allowed to enter a liability account here (BG account flag = 2).

[indirect minority interests]:

optional entry. When an account is entered in this field then all the indirect minority interests that have been calculated (currency conversion effects from capital and, if no separate 'Indirect Minority Interests Profit or Loss' account has been provided, likewise from net income for the year) are posted to this account. If no account has been entered then, as previously, the posting will only be made to the 'Minority Interests' mandatory account. You are only allowed to enter a liability account here (BG account flag = 2).

[indirect minority interests in profit or loss]:

optional entry. When an account is entered in this field the indirect minority interests in profit and loss will be posted to this account. If no account has been entered then the posting will be made to the 'Indirect Minority Interests' account. You are only allowed to enter a liability account here (BG account flag = 2).

[indirect minority interests in currency conversion effect]:

optional entry. When an account is entered in this field the indirect minority interests in the currency conversion effects will be posted to this account. If no account has been entered then the posting will be made to the 'Indirect Minority Interests' account. You are only allowed to enter a liability account here (BG account flag = 2).

[elimination net Income for the year]:

optional entry: When an account is entered in this field the minority interests in the profit or loss on the P/L side will be eliminated from this account. The account can be both a balance sheet account (BG account flag=2) as well as a P/L account (BG account flag 3/4). If the account is a balance sheet account that is flagged 'Reposting Carry- Forward' then the carry-forward posting takes place from this account to the carry-forward account that has been defined either in the account master, or with the account flag 1=X. If the account is a P/L account then the minority interests in the net income for the year on the P/L side will be posted to this account and thus affect net income. The carry-forward posting then takes place from the 'Net Income for the Year' account [account flag=E] against the carry-forward account flagged with an 'X' or the carry-forward account that has been entered in the FAC. If, here, NO account has been entered then the minority interests in the net income for the year will NOT be calculated. This will then apply to all companies in the group or sub-group for which this consolidation parameter 'FK' has been created.

[elimination net income for the year, indirect]:

optional entry: Use is analogous to the use of the 'Elimination Net Income for the Year' account, only here for the indirect share of the profit or loss. If, here, NO account has been entered then the indirect minority interests in the net income for the year will NOT be calculated. This will then apply to all companies in the group or sub-group for which this consolidation parameter 'FK' has been created.

[elimination of income-affecting consolidation postings]:

optional entry: When an account is entered in this field the minority interests in the previously flagged net income-affecting consolidation postings will be posted to this account. The account can be both a balance sheet account (BG account flag=2) as well as a P/L account (BG account flag 3/4). If the account is a balance sheet account that is flagged 'Reposting Carry-Forward' then the minority interests in the net income-affecting consolidation posting on the P/L side will be posted to this account. The carry-forward posting then takes place from this account to the carry-forward account that has been defined either in the account master, or with the account flag 1=X. If the account is a P/L account then the minority interests in the net income-affecting consolidation posting on the P/L side will likewise be posted to this account. However, the carry-forward posting then takes place from the 'Net Income for the Year' account [account flag=E] against the carry-forward account flagged with an 'X' or the carry-forward account that has been entered in the FAC. If NO account has been entered here then the minority interests in the net income-affecting consolidation posting will NOT be calculated.. This will then apply to all companies in the group or sub-group for which this consolidation parameter 'FK' has been created.

[elimination of income-affecting consolidation postings, indirect]:

optional entry: Use is analogous to the use of 'Elimination of Net Income-Affecting Postings' account, only here for the indirect share of the net income-affecting consolidation posting. If NO account has been entered here then the minority interests in the net income for the year will NOT be calculated. This will then apply to all companies in the group or sub-group for which this consolidation parameter 'FK' has been created.

[indirect difference amount]:

optional entry: This account is a suspense account to which the indirect share of the calculated difference amount (from the first consolidation) can be posted. The amount that has been calculated and posted to this account will be automatically distributed using the 'Minority Interest Updating' (FF) function analogous to the posting in capital consolidation (KK). If NO account is entered then, despite the execution of the calculation of minority interests, no indirect minority interests in the difference amount will be calculated.You are only allowed to enter an asset account or a liability account here (BG flag = 1 or 2) with the account flag 'T'.

[dividend income/same period or different period]:

optional entry: When a profit account is entered in this field and, at the same time, this account is used for the posting of dividend income at the parent company (IC details required) then the system calculates the minority interests in the dividend income posting at the parent company and, thereafter, assigns the minority interests to the minority interests account specified in the parameter. If NO account is entered here then no minority interests in the dividends will be calculated.. This will then apply to all companies in the group or sub-group for which this consolidation parameter 'FK' has been created. You are only allowed to enter a profit account (BG flag 3) that is simultaneously an 'I' account and has been assigned to the consolidation function 'SK' (same period) or 'SD' (different period).

[guaranteed dividend]:

optional entry: in the event that the minority interests in the annual profit or loss have been stipulated in a contract as a fixed amount (guaranteed dividend) then, by entering an account, this can be controlled here so that precisely this amount is included in the minority interests calculation. If NO account is entered here then, despite the execution of the minority interests calculation, no guaranteed dividend will be calculated. This will then apply to all companies in the group or sub-group for which this consolidation parameter 'FK' has been created. You are only allowed to enter an asset account or a liability account here (BG flag =1 or 2).

[retained earnings]:

you have the option of entering a retained earnings account (BG flag =2) to which the net income-affecting share of the consolidation posting for the preceding accounting period would be carried forward. We recommend using a group retained earnings account that differs from the company financial statements and the HBII financial accounts. If no account is entered here then the carry forward-posting will be made to the retained earnings account that has been defined in the consolidation parameter 'KK'.

[neutralisation]:

you have the option of entering a neutralisation account (account flag=N). When you enter an account, additional postings to the neutralisation account will be automatically generated in the related consolidation vouchers. These postings neutralise shifts in the balance sheet and P/L profits or losses between the two companies mentioned in the voucher. By including the neutralisation postings in the group report it is possible to precisely match the company details of the profit or loss with the company financial statements.

In order to correctly calculate the minority interests it is important for the shareholding transactions to match the capital transactions. The following entries affect the correct calculation of minority interests:

• the transaction date: the transaction date in the shareholding transactions and in the capital transactions, for each situation that has to be processed, must be the same . If the transaction data differ from one another then either an erroneous calculation or no calculation will take place. A strict audit of the transaction data is necessary in order, for example, to enable a correct capital consolidation even for a successive acquisition of a shareholding.
• The Posting Key Usage Tag: the posting key usage tag: for the shareholding transaction and capital transaction, for each situation that has to be processed, must be the same . If the posting key usage tags differ from one another then either an erroneous calculation or no calculation will take place. This concerns, in particular, the posting key usage tags B02 (addition of a participation) and B08 (capital increase)

The first step involves the calculation of the minority interests in the capital accounts. This happens as part of the capital consolidation (KK). When executing the action 'Automatic First Consolidation'/ 'Form Entry for Capital Consolidation' the own share of interests as well as the minority interests in the capital are posted. The own share of interests in the capital is posted in a KK voucher and the minority interests in the capital are posted in an FK voucher. The minority interests voucher includes the company number of the subsidiary and the voucher abbreviation 'FK' (Subsidiary__FK).

The second step involves updating minority interests. The function 'FF' (update minority interests)can be found in group companies + monitor under the action 'Update Minority Interests' - 'Post Update of Minority Interests'

Within the ‘Post Update of Minority Interests’ function, the following calculations are executed for the 'direct minority interests' and generated in one voucher that has the company number of the subsidiary and the voucher abbreviation 'FF' [Subsidiary__FF]:

• Calculation of the direct minority interests in the currency conversion effects (in the following period always only the difference in relation to the previous period)
• Calculation of the direct minority interests in the net income for the year
• Calculation of the direct minority interests in income-affecting consolidation postings (optional)

The direct minority interests are derived from the participation relationship between the parent company and the subsidiary, however, the indirect minority interests are presented on the basis of the participation relationship from the perspective of the ultimate parent company(Grandparent company - Parent company - Subsidiary). In IDL.KONSIS, the indirect minority interests that have to be posted result from the difference between the additive and the multiplicative participation percentage rates from the group companies + monitor. The indirect minority interests are automatically posted when the 'Update Minority Interests' action is triggered in the group companies + monitor.

The following situations will thus be taken into account for the indirect minority interests calculation:

1. Indirect minority interests in the net income for the year
2. Indirect minority interests in the currency conversion effects for net income for the year
3. Indirect minority interests in the currency conversion effects for the capital (in the following period always only the difference in relation to the previous period)
4. Indirect minority interests in the income-affecting consolidation postings (optional)
5. Indirect minority interests in the difference amount from the first consolidation in the direct relationship between the grandparent company and the parent company in the group.

Note on the Difference Amount: The minority interests in the difference amount are automatically posted within the 'FF' function (update minority interests) against the offsetting account posted in the first consolidation. Additional distribution via the 'VUB' would thus only be necessary if the posting of the difference amount had not yet happened in the first consolidation. You can disable the calculation of minority interests in goodwill by removing the offsetting account specified for this in the consolidation parameter FK. This will then apply to all the companies in the group/sub-group.

To enable the automatic calculation of minority interests for a multi-level group, too, the 'Update Minority Interests' action must be newly triggered for each group level. Here, the system cancels the minority interests vouchers of the underlying sub-group (posting text 'Cancel Group/TK: NAME_TK') within the new voucher (in the posting record number 10) and re-calculates the minority interests on the basis of the current level.

The 'Update Minority Interests' action then also has to be triggered once again if there are no more minority interests on a higher level. This is because it is only by triggering the 'Update Minority Interests' action that the minority interests vouchers in the level below are cancelled.

In an FK voucher the pro-rata amount for minority interests, per capital account, is posted against the minority interests account that has been entered in the consolidation parameter 'FK' (or defined in the account master of the capital account). This is done at the exchange rate at which the capital was converted (normally at the historic exchange rate). Since the minority interests are always posted at the closing rate, the currency conversion differences arising from the different exchange rates (historic rate vs. closing rate) have to be calculated and posted. This is done within the 'Post Update of Minority Interests' (FF) action and is documented in the FF voucher . In the FF voucher the pro-rata currency conversion effect (historic value vs. closing rate) is calculated for each balance sheet account. The amount is posted against the "Cumulative Conversion Differences Balance Sheet" account in the currency conversion header record for the company.

The total for each account from the postings of the FK and FF vouchers thus results in the converted value at the closing rate that is posted to the 'Minority Interests Adjustment Items' account.For the verification of the individual currency effects for each account it is recommended to make a comparison with the account currency conversion statement in the KTOUMR application. The minority interests function calculates the currency conversion effects for each account from this overview.

Sample calculationfor the "Subscribed Capital" capital account for a company that reports in USD:

What happens in the next period?

The period carry-forward function produces a carry forward voucher (FK__V voucher) on the basis of the balance arising from the FK voucher and the FF voucher from the previous period. Balances are generated for each posting key and account. This means that capital values for each account and the net income for the year as well as circumstances related to currency conversion effects are carried forward individually in each case.

While the values in the capital accounts and their currency conversion effects continue to be updated, the situation with respect to the JÜ share attributable to external shareholders and the currency conversion effects on it is somewhat different.

The JÜ share attributable to external shareholders and the currency conversion effects on it are initially carried forward on a 1:1 basis. The JÜ share attributable to external shareholders (PDK value) is reposted in a carry-forward voucher to the retained earnings account. The balance of the retained earnings account, like all other capital accounts, will continue to be carried forward at the updated average exchange rate (FDK) and the new currency conversion effect arising thereafter will be calculated (FDK vs. SK). The pro-rata currency conversion effect on the JÜ share attributable to external shareholders from the previous year is cancelled in a new FF voucher after the execution of the 'Update Minority Interests' function [posting text: 'Currency Conversion Effect STO VP'].