How to assess whether the consolidated company's equity complies with the law?

Year-end is the time when the management of every company must ensure that the company’s equity complies with the minimum net asset requirements set out in the Commercial Code (Section 176 for private limited companies and Section 301 for public limited companies).

For consolidating companies, the assessment involves additional layers – the basis is not consolidated equity, but adjusted unconsolidated equity. This special rule arises from Section 20(3) of the Accounting Act and is intended to prevent consolidated companies from drawing incorrect conclusions about their financial position.

What needs to be assessed as at the balance sheet date?

The parent of a consolidation group must verify whether the adjusted unconsolidated equity meets the minimum requirements set out in the Commercial Code.

It is important to perform this assessment before the balance sheet date so that, if shortcomings appear, there is time to react (e.g. make contributions, cover losses, or take other necessary measures).

You can read more about how to bring equity into compliance with the law here.

How is adjusted unconsolidated equity calculated?

The starting point is the company’s unconsolidated equity. Two main adjustments are then made.

1. Deducting the carrying amount of subsidiaries and associates

The value of investments in subsidiaries and associates (entities under control or significant influence) recorded in the balance sheet must be deducted.

2. Adding back the value of these investments using the equity method

This means that the parent’s equity is increased by its share of the equity of the subsidiary or associate. It is important that the accounting principles of subsidiaries and associates are aligned with those of the parent before calculating the equity method value.

If the investor’s share of losses of an equity-accounted investee exceeds the carrying amount of the investment, the carrying amount is reduced to zero and further losses are recorded off-balance sheet. An exception applies when the investor has guaranteed or is obliged to settle the obligations of the investee and, as at the reporting date, it is evident that the investee cannot meet its obligations. In such a case, the investor recognises both a liability and the loss calculated under the equity method in its balance sheet (Accounting Standards Board Guideline (ASBG) 11, para. 98).

The result is a more realistic picture of the consolidation group’s actual equity, helping to assess the company’s ability to continue as a going concern.

Where is this disclosed?

The calculation of adjusted unconsolidated equity must be disclosed in the statement of changes in unconsolidated equity.

Important nuances to consider

Correct classification of influence. Check whether the investment qualifies as control or significant influence (i.e. a subsidiary or associate).

• Use of the equity method. Ensure that the subsidiary’s or associate’s equity is calculated correctly and based on consistent accounting principles, including profits/losses, dividends, revaluations, etc.
• Negative equity of a subsidiary. Its value is generally zero, but ASBG 11 para. 98 outlines exceptions (see above).
• Timeliness. If the adjusted unconsolidated equity does not meet the requirements, the management board must act before the balance sheet date – later post–balance sheet adjustments require additional disclosures in the report (going concern note due to insufficient equity, post–balance sheet events note, additions to the management report).

Summary: act before the balance sheet date!

The parent of a consolidation group cannot assess compliance with the Commercial Code’s equity requirements based on consolidated data. Instead, adjusted unconsolidated equity must be used – a figure that removes the carrying amount of subsidiaries and associates and replaces it with their actual impact calculated under the equity method.

It is crucial to perform the analysis before the balance sheet date so that any equity shortfalls can be corrected in time.