ACC 401-2

ACC 401-2 - ADVANCED ACCOUNTING STUDY GUIDE-JETER/CHANEY...

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ADVANCED ACCOUNTING STUDY GUIDE-JETER/CHANEY 4 TH ED. CHAPTER THREE – CONSOLIDATED FINANCIAL STATEMENTS I. DEFINITIONS OF SUBSIDIARY AND CONTROL A. Subsidiary : Situation wherein a parent company (and/or parent’s other subsidiaries) owns a controlling interest in the voting shares of another company, usually more than 50% of the voting shares. B. Control : The ability of an entity to direct the policies and management that guide the ongoing activities of another entity so as to increase its benefits and limit its losses from that other entity’s activities. For purposes of consolidated financial statements, control involves decision-making ability that is not shared with others. It stresses the need to prepare consolidated financial statements whenever control exists, even in the absence of a majority ownership. C. Parent: When a stock acquisition occurs, the acquiring company is generally referred to as the parent . D. Noncontrolling (minority) interest: Shareholders holding the remaining stock in a subsidiary outside of that held by the parent company. E. Affiliated companies: The related companies having a joint relationship. Each of the affiliated companies continues its separate legal existence. II. REQUIREMENTS FOR THE INCLUSION OF SUBSIDIARIES IN THE CONSOLIDATED FINANCIAL STATEMENTS A. Given the purpose that consolidated statements is to present for a single accounting entity the net resources and operating results of a group of companies under common control, also considering the problems related to off-balance- sheet financing, the FASB has taken the position that essentially all controlled corporations should be consolidated. B. Under some circumstances, majority-owned subsidiaries should be excluded from the consolidated statements. Those circumstances include: 1. Control does not rest with the majority owner – e.g. as when the firm is in bankruptcy.
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2. A foreign company is domiciled in a country with foreign exchange restrictions, controls, or governmentally imposed uncertainties that cast significant doubt on the parent’s ability to control the subsidiary. 3. Majority owned investments that are not consolidated for one of the above reasons are normally reported as investments using the cost method (with fair value adjustments, if needed) because the subsidiaries are not controlled nor significantly influenced by the parent company. III. REASONS FOR SUBSIDIARY COMPANIES A. Stock acquisition is relatively simple in some cases. Mechanisms such as open market purchases and cash tender offers help avoid the often long & difficult negotiations of stock for stock exchange in complete takeovers. B. Control of subsidiary’s operations can be accomplished with smaller investment – not all of the subsidiary’s stock must be acquired, but only a sufficient portion to achieve control. C.
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This note was uploaded on 10/20/2010 for the course ACC 401 taught by Professor Lentz during the Fall '09 term at Strayer.

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ACC 401-2 - ADVANCED ACCOUNTING STUDY GUIDE-JETER/CHANEY...

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