Rules for consolidating subsidiaries
In the business environment, this type of arrangement does not exist, and regulatory guidelines require that affiliated companies consolidate their assets and financial statements.A financial statement is an accounting data summary providing valuable data about a firm’s solvency, liquidity and profitability.In fact, financial statements that were once presented on a combined basis, were often switched to consolidated presentation.However, this appears to be a misinterpretation, as the new accounting rules on VIEs did not abolish or change in anyway the use of combined financial presentation.At the end of the day, both presentation methods report the aggregate results of operations and financial position of two or more entities.
Although it may make sense for newlyweds to share assets once they exchange vows, a couple signing a pre-nup agrees on who gets what in case of a divorce.
Company XYZ is the most important shareholder in company B and carries significant clout in the firm’s decision-making processes.
At the end of the year, company XYZ’s accountants calculate the firm’s equity in its subsidiaries.
In short, the new standard requires that these types of entities be consolidated into the financial statements of the entity that benefits the most from their operating income and who holds the risk to absorb any operating losses and liabilities (i.e. It sounds easy enough, but as practitioners can attest, the standards are extensive and a bit confusing, which continues to result in ‘diversity in practice'.
For instance, with the advent of FIN 46, many in public and private accounting practice interpreted the new literature as precluding the use of combined financial statement presentation.