Ch.3_notes - Introduction to Consolidated Financial...

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Introduction to Consolidated Financial Statements Chapter 3 Consolidation Policy (FASB 94) : As a general rule, if an investor owns more than fifty percent of the voting stock of an investee (i.e., a parent/subsidiary relation exists), then consolidated financial statements must be prepared. Exceptions: If control is temporary (e.g., the subsidiary is in the process of being sold) Control does not rest with the majority owner (e.g., the subsidiary has filed for a chapter 11 reorganization) The traditional view of control includes both direct and indirect control. Indirect control or pyramiding occurs when a company’s common stock is owned by one or more other companies that are all under common control. Examples of indirect control of Z company by P company include the following ownership situations: (1) (2) (3) P P P X X Y W X Y Z Z Z In (1), P owns 80% of X, which owns 60% of Z. In (2), P owns 90% of X and 70% of Y: X owns 40% of Z, and Y owns 30% of Z. In (3), P owns 90% of X and 80% of Y; X owns 80% of W and 30% of Z; Y owns 15% of Z; W owns 15% of Z. In all three cases, P’s control over Z is indirect because it is gained by controlling other companies that control Z. 1
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Consolidated financial statements present the financial position and results of operations for a parent and one or more subsidiaries as if the individual entities were a single company. The Consolidated Entity is a conceptual (fictitious) entity used only for financial reporting purposes, and does not maintain its own ledger or engage in transactions. ------------------------------------------------------------------------------------------- Consolidation Procedures (through chapter 3): (1) Adjust for any errors or omissions on either the parents or subsidiary’s books.
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