Consolidations: An Overview of the FASB DM
The accounting profession is taking a much-needed look at consolidation policies and procedures. Procedures for preparing consolidated financial statements evolved quietly over 50 years ago and have not changed much since. The prevailing authorities guidance, Accounting Research Bulletin no. 41, Consolidated Financial Statements, issued more than 30 years ago, described accepted practice at the time and expressed some preferences but set few hard and fast rules. Since then, considerable merger and acquisition activity has taken place. And, except for a 1987 amendment to ARB no. 51 by the Financial Accounting Standards Board, no U.S. standard-setting body has completed a conceptual consideration of consolidations. In recent years, numerous consolidation policy and procedure questions have been brought to the FASB's attention by the American Institute of CPAs, the Securities and Exchange Commission and others. In an effort to address those questions, the FASB recently published a discussion memorandum, Consolidation Policy and Procedures. The DM is part of a multi-phased FASB project on accounting for affiliations between entities. FUNDAMENTAL ISSUES IN THE DM The fundamental issues in the DM are whether and how separate financial statements of tow or more affiliated entities should be combined into a single set of consolidated statements. "Whether" focuses on the importance of control and ownership as conditions for consolidation and on defining control. "How" considers procedural matters such as the following: * Measuring a subsidiary's identifiable assets and liabilities at acquisition date. * Measuring a subsidiary's goodwill at the acquisition date. * Treating an investee that becomes a subsidiary through a series of purchases of small blocks of stock. * Handling subsequent increases and decreases in a parent's proportionate interest in a subsidiary. * Eliminating intercompany transactions. * Structuring the information for the most meaningful financial statement display. * Conforming parent and subsidiary accounting practices and fiscal periods. CONTROL VS. OWNERSHIP Historically, consolidation in the United States has almost always been limited to the financial statements of an investor and the investees in which it owns more than a 50% voting interest. In the past few years, Canada, Australia, New Zealand, the United Kingdom, Germany, France, Japan, the European Community and the International Accounting Standards Committee have adopted control as the principal consolidation criterion - broadening the reporting entity to include all controlled affiliates, even if they are less-than-majority owned. Control versus ownership is probably the most important issue in the DM. Does one entity's ability to control another's operating and financing policies justify consolidation (with ownership of a substantial voting interest serving as an indicator of control)? Or are control and level of ownership two district conditions that must be separately tested and met? Varying viewpoints have led to three concepts of consolidated financial statements - the economic unit concept, the parent company concept and the proportionate consolidation concept. Exhibit 1, at right, describes them. The examples exhibits 2 and 3, pages 59 and 60, and the more extensive examples in the DM itself, show the three concepts can result in significantly different accounting measurements. EXHIBIT 1 Three concepts of consolidated financial statements Economic unit concept * Consolidated financial statements are intended to provide information about a group of legal entities, a parent and its subsidiaries, operating as a single unit. All of their assets and not just the parent's portion, belong to the consolidated entity. * Unless the subsidiary is wholly owned, the consolidated entity;s proprietary interest is divided into a controlling interest (the parent;s stockholders) and one or more noncontrolling interests in subsidiaries. …