Debt consolidation includes the law that the consolidated financial statements of a company should be as if all companies belonging to it were a group or a unit. These should be not only legally but also economically a whole and there should be no debt positions or claims against each other. Prepaid expenses and contingent liabilities are to be included in the consolidation.
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When consolidation takes place within a group, it makes sense and content to balance the companies involved. This process is called debt consolidation, try this. It is customary for payments to be made between the so-called parent and subsidiary companies – these payments should be fully offset in the consolidated financial statements. Two-sided debts of the companies arise already by the contracts, which describe the relationship exactly. The content of these offsetting liabilities can be broad. Literally, therefore, one needs an equally broad description. In all balance sheet items of the companies concerned, the nature of the claims must be optimally recorded and a settlement can be made. Only then will debt consolidation be done. Because this assumes that the involved, so the affected companies may not have mutual debts.
What does commercial Law say?
The Commercial Code provides for an exception to simplify the consolidation of debts, and accordingly the amounts play only a subordinate role. As far as the description of the assets and earnings situation, as well as the financial position, is concerned, there is no need to admit it. Here then the consolidation would be possible without offsetting. If all the companies concerned post the same amounts, the offsets are neutral in terms of profit and are an unproblematic step. Shifts can be compensated accordingly if they all comply with the deviations of the corresponding positions. In order for settlement without effect on income to take place, loss carryforwards or group reserves must be formed.
What does unity theory include?
Unity Theory captures offsets of the company’s receivables and debt positions, which are included in a parent’s due consolidated financial statements. These are the debts that are to be offset against each other. There is a need to see all the companies belonging to the group in a single entity, the so-called unitary theory. From this perspective, there are no claims and debt positions against each other. All balance sheet items that have the nature of receivables will be offset against the other Group companies included in the consolidation with the opposite item of the liability.