Consolidation (Finance)

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Consolidation (or consolidation ) in finance is the conversion of short-term debt into long- term debt or the combination of the annual financial statements of the group companies into one consolidated financial statement .

General

Consolidation with a view to converting short-term debt into long-term debt can occur in the case of individuals , companies , states or their subdivisions such as states or municipalities . In budgetary leading corporations will of fiscal consolidation spoken. Debtors can consolidate their simple debts or debts evidenced in bonds . Objectives can generally be an equalization of the repayment burdens in order to relieve liquidity, to secure a lower long-term fixed interest rate , to improve the balance sheet ( capital structure ) or to balance the budget . Consolidation can be taken as a regular measure to achieve these goals. But it can also be used as part of a renovation phase.

execution

Either the conversion of short-term debts into long-term debt was planned from the outset when a loan agreement with short-term terms (1 to 2 years) was concluded, or the debtor decides retrospectively to reschedule his short-term debts with long-term ones .

The planned short-term financing is a so-called bridge financing ( English bridge loan ), which is available in two forms:

The subsequent consolidation arises mainly from the fact that a large number of short-term debt (possibly many creditors) is caused by a long-term lending by few or only one creditor replaced to be. In the latter case, the consolidation ensures solid financial planning , as the risks of follow-up financing are eliminated and the interest and repayment dates are harmonized.

The consolidation bond serves similar purposes . It is a bond that arises from the combination of several older bonds or other loans into a uniform, mostly long-term bond with often more favorable terms. This process is also called unification .

Legal issues

The consolidation of short-term debts usually takes place by way of novation , i.e. by replacing a previous debt relationship with a new one. There is no express legal regulation in Germany; however, the novation results from Section 311 (1) BGB . If the new, long-term debt is thus established, the old debt automatically expires as it is repaid by paying the new debt . Ordered loan collateral is lost when the old, short-term liabilities are repaid, so they have to be re-agreed for the long-term loan. The consolidation can constitute a credit event if it - or the conversion of short-term to long-term debt - is mentioned as a credit event in a credit agreement , bond, or credit default swap .

Group consolidation

Companies also use the term consolidation with a different content. The debt consolidation according to § 303 para. 1 HGB concerns the consolidated financial statements and has nothing to do with the change in maturity in debt. In the group , it is rather a matter of balancing out mutual receivables and liabilities within the framework of debt consolidation . The capital consolidation according to § 301 HGB concerns the offsetting of mutual capital investments in equity . Furthermore, Section 304 (1) HGB prescribes the elimination of intercompany results for intra-group deliveries and services ; corresponding costs and income of the group members are to be offset according to Section 305 (1) HGB so that they are no longer shown in the consolidated financial statements. The general offsetting prohibition of Section 246 (2) HGB does not apply to group consolidation because there is a situation of confusion . Such “ingroup balances” must also be offset in accordance with IAS 27.17.