Accountants' Handbook Volume One: Financial Accounting and General Topics, Eleventh Edition

Chapter 13. CONSOLIDATION, TRANSLATION, AND THE EQUITY METHOD

Steven Rubin, CPA

Deloitte & Touche LLP

OVERVIEW

Consolidation, translation, and the equity method are related sets of accounting practices used mainly in the preparation of consolidated financial statements.

(a) CONSOLIDATION.

Consolidated financial statements present the financial position, results of operations, and cash flows of a consolidated group of companies essentially as if the group were a single enterprise with one or more branches or divisions. With limited exceptions, a consolidated group of companies includes a parent company and all subsidiaries in which the parent company has a direct or indirect controlling financial interest. Because the reporting entity for consolidated financial statements transcends the legal boundaries of single companies, consolidated financial statements have special features, which require consideration in preparing and interpreting them.

(i) Control.

Consolidation is required when one company, the parent, owns—directly or indirectly—more than 50 percent of the outstanding voting shares of another company, unless control is likely to be temporary or does not rest with the parent. For instance, a majority-owned subsidiary is not consolidated if it (1) is in legal reorganization or bankruptcy or (2) operates under foreign exchange restrictions, controls, or other governmentally imposed uncertainties so severe that they cast doubt on the parent's ability to control the subsidiary. Majority-owned ...