CHAPTER SEVEN
Key Financial Accounting Areas
THIS CHAPTER DISCUSSES the accounting requirements for major financial areas including consolidation, investing in stocks and bonds, leases, pensions, postretirement benefits excluding pensions, tax allocation, and foreign currency translation and transactions.
CONSOLIDATION
Consolidation occurs when the parent owns more than 50 percent of the voting common stock of the subsidiary. Its primary purpose is to present as one economic unit the financial position and operating results of a parent and subsidiaries. Consolidation shows the group as a single company (with one or more branches or divisions) rather than separate companies. It is an example of theoretical substance over legal form. The companies constituting the consolidated group keep their individual legal identity. Adjustments and eliminations are only for financial statement reporting. Disclosure should be made of the company’s consolidation policy in footnotes or by explanatory headings.
A consolidation is negated, even if the parent owns more than 50 percent of voting common stock, in the following situations:
- Parent is not in actual control of subsidiary (e.g., subsidiary is in receivership, subsidiary is in a politically unstable foreign country).
- Parent has sold or contracted to sell subsidiary shortly after year-end. The subsidiary is a temporary investment.
- Minority interest is substantive relative to the parent’s interest; thus, individual financial statements are ...
