Purpose
Consolidation accounting under US Generally Accepted Accounting Principles (GAAP) is a critical aspect of financial reporting for companies with subsidiaries in their group structure. The purpose is to present the financial position and results of operations of a group of companies as if they were a single entity. This practice gives stakeholders a comprehensive view of the group’s financial health and performance.
For financial reporting purpose, Consolidated Financial Statements (CFSs) are considered to be more informative and purposeful than separate financial statements – based on the foundational principle that CFS are usually needed for a fair presentation when one company controls another.
The decision to consolidate is a second step in the process, which follows the first step to determine when an entity should consolidate another entity, which can be a complex assessment. Control/ Consolidation assessment is very important to investors because when one entity consolidates another, it reports the other entity’s assets, liabilities, revenues, and expenses together with its own as if they are a single economic unit. Consequently, the consolidation decision can significantly impact the consolidating entity’s results of operations, cash flows, reported leverage, and other metrics.
How should a Going-Concern Parent Company consolidate a Subsidiary’s Liquidation-Based Statements?
In preparing financial statements, once an accounting principle is adopted, it shall be used consistently in accounting for similar events and transactions. [Para 250-10-45-11: Other Presentation Matters]
SUMMARY OF TOPIC
1. Consolidation accounting framework
2. Scope exceptions
3. Consolidation models- Voting Interest Entity (‘VOE’) vs Variable Interest Entity (‘VIE’) models
4. Navigating the Variable Interest Model
Step 1: Determination of the variability the entity was designed to create and distribute
Step 2: Identification of variable interest
. Determination of Primary beneficiary
The fact that at-risk equity holders, as a group, do not have controlling financial interest does not indicate that the reporting entity having variable interest shall consolidate the legal entity. A reporting entity with a variable interest in a VIE shall assess whether it is the primary beneficiary of the VIE, i.e., it has a controlling financial interest in the legal entity
. Assessment of primary beneficiary in related party group
A reporting entity that individually has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance (power) and the obligation to absorb losses or the right to receive benefits of the VIE that potentially could be significant to the VIE (benefits) consolidates the VIE. However, in other cases, the assessment of the primary beneficiary does not stop at the reporting entity level. It further progresses to the identification of the primary beneficiary, if any, in a related party group. This assessment depends upon the primary condition, i.e., Whether there exists a single decision-maker or power is shared.
Existence of a single decision-maker i.e. Concentration of power within one entity
The procedure undertaken by the reporting entity includes the steps in the PDF.
5. Navigating the Voting Interest Model
Comparison with IFRS
ASC 810, Consolidation under U.S. Generally Accepted Accounting Principles (GAAP), and IFRS 10, Consolidated Financial Statements under International Financial Reporting Standards (IFRS), both the standards provide guidance on Consolidation accounting. Both accounting frameworks use Controlling Financial Interest as the basis for approaches to consolidation. However, while IFRS applies a single, control-based model, the U.S. GAAP entities determine consolidation using a two-model approach (the VIE or the voting interest entity model).
