GAS 23 - Accounting for Subsidiaries in Consolidated Financial Statements

• Adopted by the Accounting Standards Committee of Germany (ASCG) on 25 September 2015. Publication of the authoritative German version by the Federal Ministry of Justice and Consumer Protection under section 342(2) of the HGB on 23 February 2016.
• Revised paragraph 5 adopted by the Accounting Standards Committee of Germany (ASCG) on 22 September 2017. Publication of the authoritative German version by the Federal Ministry of Justice and Consumer Protection under section 342(2) of the HGB on 4 December 2017.
• Revised paragraph B23 adopted by the Accounting Standards Committee of Germany (ASCG) on 17 October 2019. (The Basis for Conclusions are not made known by the Federal Ministry of Justice and Consumer Protection).
• Revised paragraphs 86, 117, and B29 adopted by the Accounting Standards Committee of Germany (ASCG) on 9 march 2021. Publication of the German Accounting Amendment Standard no. 11 with amendments to GAS 23 in the authoritative German version by the Federal Ministry of Justice and Consumer Protection under section 342(2) of the HGB on 2 June 2021.

This Standard sets out in greater detail the requirements of sections 301, 307 and 309 of the HGB on the accounting for subsidiaries in consolidated financial statements and the consolidation of subsidiaries using the purchase method of accounting, the accounting for any non-controlling interests and the recognition of goodwill or a negative consolidation difference. A large number of application issues related to initial consolidation, accounting subsequent to initial consolidation, deconsolidation and changes in the method of accounting are also addressed.

This Standard applies to all entities that are required by section 290 of the HGB (if applicable in conjunction with section 264a of the HGB) or by section 11 of the PublG to prepare consolidated financial statements (see also GAS 19.7ff.). The parent-subsidiary relationship that is necessary to apply section 301 of the HGB is therefore determined by these requirements. The concrete duty to consolidate is governed by sections 294 and 296 of the HGB (see also GAS 19.78ff.).

The structure of the Standard is directly aligned with the structure of the requirements of the HGB and with the process of preparing consolidated financial statements. The fundamental requirements of the Standard refer to the base case of a single-level group.

As a general principle, subsidiaries must start being included in the consolidated financial statements from the date on which the conditions set out in section 290 of the HGB are met for the first time. In addition, the carrying amounts at that date are decisive. If interests in a subsidiary have been acquired at different dates (successive share purchases), the date of initial consolidation is generally also the date on which the parent-subsidiary relationship arose. Additionally, the Standard addresses exceptions to these principles.

With regard to the initial consolidation to be performed as at this date, the Standard describes in greater detail the measurement of the carrying amount of the shares held by the parent entity in a subsidiary to be included in the consolidated financial statements and their offsetting against the revalued equity of the subsidiary attributable to these shares.

The accounting for any goodwill or negative consolidation difference in the consolidated balance sheet remaining after offsetting is also specified. If the acquired subsidiary has several lines of business, entities are encouraged to allocate goodwill or negative consolidation differences to the acquired subsidiary’s lines of business.

If there are also non-controlling interests in the subsidiary to be consolidated, a corresponding adjustment item must be recognised in the consolidated balance sheet.

In the consolidated financial statements prepared subsequent to initial consolidation, the hidden reserves and liabilities identified in the course of the revaluation, as well as the assets and liabilities to which they were allocated in the revaluation balance sheet, must be written down, reversed, utilised or retained. The same applies to assets and liabilities that were recognised for the first time in the revaluation balance sheet; these must also be accounted for subsequently in accordance with the general principles.

With regard to the subsequent accounting for goodwill, entities must first examine whether goodwill contains any components that result from the consolidation procedures applied (‘technical’ differences) and that must therefore be accounted for separately. If this is the case, these components can be recognised in the course of initial consolidation as a simplification.

Since goodwill is an asset with a finite useful life, its cost must be amortised in subsequent periods. The amortisation schedule must allocate the cost of goodwill over the financial years in which it is expected to be used. To do this, an amortisation schedule must be prepared as at the date of initial consolidation in which the amortisation method (normally straight-line amortisation) is defined and the useful life is determined by reference to objectively verifiable criteria.

The carrying amount of goodwill must be reduced by write-downs in the event of expected permanent impairment. This is the case if the carrying amount of goodwill is higher than its fair value. A lower carrying amount must be retained at future reporting dates. The Standard presents aspects that are relevant for assessing the question of whether any goodwill impairment is permanent. In addition, the procedure for determining the amount of the write-down is described in detail.

The subsequent measurement or recognition in the income statement of a negative consolidation difference at the subsequent reporting dates depends on its origin. Accordingly, the Standard sets out different requirements for the accounting for negative consolidation differences with equity or debt characteristics and ‘technical’ negative consolidation differences.

The non-controlling interests determined in the course of initial consolidation must be adjusted at each reporting date in subsequent financial years following the same principles used to adjust the equity of the subsidiary in the revaluation balance sheet (including any ‘Currency translation differences’).

For increases and decreases in interests in subsidiaries (transactions not involving a change of control), the Standard permits both recognition as an acquisition or sale transaction and recognition as a capital transaction.

If the transaction is classified as an acquisition, the assets and liabilities must be proportionately revalued to reflect the additional interest acquired. Any difference arising after the cost of the additional shares has been offset against the revalued equity attributable to these shares must be accounted for in accordance with sections 301(3) and 309 of the HGB.

In the event of a partial disposal of shares without any loss of control, the difference between the sale price of the shares and the interest in equity attributable to them at the date of disposal of these shares must be recognised in the income statement. The interest in equity attributable to the sold shares, including any goodwill contained in that amount, must be reported as ‘non-controlling interests’.

If the transaction is classified as a capital transaction, the assets and liabilities do not have to be revalued if the interest is increased. Instead, the cost of the additional shares must be offset against the non-controlling interests in equity attributable to these shares at the date on which these shares are acquired. Any difference remaining after this offsetting must be offset directly against group equity.

Conversely, if a parent entity retains control over the subsidiary when it disposes of part of its interest, the difference between the sale price of the shares and the interest in equity attributable to them at the date of disposal of these shares must be recognised directly in group equity. The interest in equity attributable to the shares disposed of must be reported as ‘non-controlling interests’.

The Standard also sets out how the loss of control over a subsidiary must be accounted for in the consolidated financial statements in the event of the disposal of the entire interest and in the event of a change to proportionate consolidation, the equity method or measurement at (amortised) cost.

The special requirements relating to multi-level group structures are addressed in a separate section. However, the technical procedure to be adopted for the accounting of subsidiaries in multi-level groups is not explicitly specified. Instead, the requirements presented ensure that the procedure that is adopted results in the appropriate presentation of any non-controlling interests and goodwill or negative consolidation differences.

The minimum disclosures in the notes to the consolidated financial statements resulting from the application of this Standard are also defined so as to ensure the appropriate presentation of the accounting policies applied to the items of the consolidated balance sheet and the consolidated income statement.

The requirements of this Standard must be applied for the first time to the initial consolidation of entities in financial years beginning after 31 December 2016. Irrespective of the date of initial consolidation, the requirements of this Standard apply for the first time to all measures relating to accounting subsequent to initial consolidation, deconsolidation and changes in the method of accounting of subsidiaries in financial years beginning after 31 December 2016. Retrospective application is not permitted.

Earlier application is encouraged. In this case, all requirements of this Standard must be complied with.