Once upon a time … consolidation
This article takes a look at consolidation over the past decades. It includes some anecdotes which marked the pioneering adventure of the first groups. Our look at the past reveals an extraordinary evolution, primarily resulting from information technology and the culture of groups rather than from consolidation accounting principles themselves. We conclude our overview with an attempt to imagine how consolidation and the environment in which it is carried out may continue to change in the future.
Following subjects will be handled:
- (I) Why consolidate accounts?
- (II) The 1970s: The pencil and eraser age
- (III) The 1980s: The beginnings of the computer age
- (IV) The 1990s: The search for a miracle solution
- (V) The 2000s: Y2K and IFRS
Why consolidate accounts?
History shows that by the end of the 19th century companies, primarily established in the United States, were organising in groups. They were called conglomerates at the time. It soon became apparent how difficult it was to get an economic and financial picture of these groups of companies as a single entity. This was the difficulty faced by the financial world at the time.
Many questions arose as to how to handle, interpret and even obtain information given:
- The diverse activities of the companies
- The variety of currencies used by the countries where they were located
- The level of control or absence of control over the companies
- The range of accounting rules applied to individual accounts
- The many transactions between the companies which partially hid their actual performance outside the group.
In other words, rules soon became necessary.
The slow evolution of consolidation requirements
While the first holding companies, true economic conglomerates present in the international sphere, were already appearing in the second half of the 19th century, it took until 1904 for consolidated accounts to be put on the agenda of the first international accounting congress. Publications on the topic first appeared in the United States in 1918.
It took Europe much longer to become aware of the usefulness of these publications. Great Britain took the lead over other European countries and issued rules for consolidated account publication in 1939, but only made them compulsory much later with the “Companies Act” of 1948.
In France, despite studies and some concrete proposals from 1954 on, a first decree was issued in 1967 which, however, only provided for the possibility of attaching consolidated accounts to the ordinary accounts of holding companies.
A first royal decree was issued in Belgium on 29 November 1977 on the publication of consolidated accounts for companies with portfolios (holding). It was followed much later by the royal decree of 6 March 1990 which formulated rules for the establishment of consolidated accounts for a much larger number of companies.
The latter date was really the starting point for a definitive change in the landscape for groups of companies in Belgium.
It wouldn’t be right to leave out the international actions organised in parallel with these converging national rules, particularly in the 1970s. We should note that:
- In 1973, the International Accounting Standards Committee (IASC), representing the main accounting organisations of a number of countries, issued standard number 3 which states that a parent company must publish consolidated accounts.
- The UN, within a commission of international companies created in 1974, expressed its wish to see the ordinary accounts of large groups completed by consolidated accounts.
- And, lastly, in 1976, the OECD (Organisation for Economic Cooperation and Development) issued recommendations on the publication of consolidated information as part of its declaration on international investments and multinational companies.
However, it took until 13 June 1983 for the 7th European Directive on consolidated accounts to appear. It called for the implementation in all Member States, before 1 January 1988, of the requirement to publish consolidated accounts applicable, however, to the fiscal period beginning after 1 January 1990.
This was the legislative framework in which the first consolidations were done.