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7 Cards in this Set
- Front
- Back
- 3rd side (hint)
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Consolidated Financial Statements
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Ignore important legal relationships and emphasize economic substance over form.
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Consolidated F/S's are an economic truth but a legal fiction.
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When To & When Not To Consolidate
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1. Consolidate ALL majority-owned subsidiaries (over 50% of voting interest is owned by parent) to have one management and one economic entity.
2. DO NOT consolidate when control is not with owners. |
3. Companies that have different year ends can be consolidated. If the year ends differ by 3 months or less, parent can use sub's regular F/S's of a different period.
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IFRS vs. U.S. GAAP- Consolidating
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-Under U.S. GAAP, significant transactions during the gap period require disclosure.
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-Under IFRS, the subsidiary F/S's must be adjusted for significant transactions during the gap period.
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Consolidation
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A combination of the F/S's of two or more entities into a single set of F/S's representing a single economic unit.
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Cost Method
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(Fair Value/AFS Method) investor accounts for the investment as this if they do not have the ability to exercise significant influence over the investee.
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Do not consolidate = no significant influence (typically < 20%)
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Equity Method
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Account for this way if the investor can exercise significant influence over the investee and holds 50% or less of the voting stock.
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Do not consolidate = significant influence but 50% or less ownership (typically 20%-50%)
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Consolidate
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Investor should prepare consolidated F/S's with its invests when the investor has control (more than 50%) of the sub. Internally, investor may use either the cost or equity method to account for its investments.
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Control (greater than 50% ownership)
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