Consolidated Financial Statements and Non-Controlling Interests 1

Consolidated Financial Statements and Non-Controlling Interests 1

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."

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