The stated purpose of consolidated financial statements remains unchanged and "is to present, primarily for the benefit of the shareholders and creditors of the parent, the results of operations and the financial position of a parent and all its subsidiaries as if the group were a single economic entity."
The general consolidation policy also remains unchanged from ARB 51 (as amended by SFAS No. 94). Consolidated financial statements are usually more meaningful than separate statements and, therefore, are necessary when one company has a controlling financial interest in other companies. Ownership of a majority voting interest is the usual condition for a controlling financial interest. Thus, consolidation is normally indicated when one company owns more than 50 percent of the outstanding voting shares of another company. As previously required by SFAS No. 94, all majority-owned subsidiaries must be consolidated. However, a subsidiary is not consolidated if the majority owner is unable to exercise control. (Note that, although control may be obtained under the provisions of the EDs by means other than ownership, the ED focuses on control through majority ownership.)
For the most part, consolidation procedures remain as specified in ARB 51. However, some important changes and clarifications are included in the ED:
a. When control of a subsidiary is obtained during a fiscal period, only the subsidiary's revenues, expenses, gains, and losses that occur after control is obtained should be included in the consolidated financial statements (eliminating other alternatives permitted by ARB 51).
b. Any shares of the parent held by a subsidiary must be eliminated in consolidation.
c. All intercompany profit or loss must be eliminated regardless of the existence of a noncontrolling interest, and this elimination must be allocated between the controlling and noncontrolling interest, if any (where ARB 51 allowed allocation rather than requiring it).
d. The ED clarifies that consolidated financial statements are required as the general-purpose financial statements of companies having one or more subsidiaries, and that parent-only financial statements are not a valid substitute.
ARB 51 permits the noncontrolling interest in a subsidiary's assets to be reported in the consolidated financial statements as a liability, equity, or between the two categories (as is currently common in practice). The ED requires the noncontrolling interest to be reported in equity separately from the parent's stockholders' equity. A suggested possible caption is "noncontrolling interest in subsidiaries."
Net income or loss and each component of other comprehensive income must be attributed to the controlling and noncontrolling interests based on their relative ownership interests. If a contractual arrangement specifies some other attribution arrangement, then those elements of comprehensive income would be attributed in that manner.
If losses attributable to the controlling and noncontrolling interests in a consolidated subsidiary exceed their interests in the subsidiary, additional losses will continue to be attributed to those interests, even if the noncontrolling interest's share of those losses exceeds the equity attributable to the noncontrolling interest.
Once a parent has obtained control of a subsidiary, changes in ownership interests in that subsidiary that do not affect control are accounted for as equity transactions, and, therefore, no gain or loss is recognized in the consolidated income statement. When such a change in ownership occurs, the carrying amount of the noncontrolling interest is adjusted to reflect its new ownership level, and any difference between the adjustment and the fair value of the consideration paid or received is recognized in equity. The change has no effect on consolidated net income or on the numerator in the calculation of consolidated earnings per share.
If there is a change in the relative ownership interests of the controlling and noncontrolling interests in a subsidiary for which goodwill has been recognized at the date of acquisition, the goodwill must be reattributed to the controlling and noncontrolling interests based on the relative carrying amounts of the goodwill previously allocated to them. The original allocation of goodwill may not necessarily have been in the ownership ratio when allocated at acquisition in accordance with SFAS No. 141R.
If control of a subsidiary is lost by any means (e.g., sale, contractual agreement), a gain or loss is recognized in consolidated net income as the difference between the following two items (para. 27):
a. The aggregate of (1) the fair value of the proceeds, if any, from the transaction that resulted in the loss of control and (2) the fair value of any retained investment in the former subsidiary at the date control is lost
b. The parent's interest in the former subsidiary's net assets at the date control is lost
If the subsidiary is partially owned at the time the parent loses control, the noncontrolling interest's share of the carrying amount of the subsidiary's net assets is derecognized against the carrying amount of the noncontrolling interest. No gain or loss is recognized with respect to the noncontrolling interest.
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