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The preparation of consolidated financial statements is based on the assumption that a reporting entity and its consolidated subsidiaries operate as a single economic entity. The presentation of a consolidated group may require certain adjustments for transactions occurring between the reporting entity and its subsidiaries. As a general rule, the amounts reported in consolidated financial statements should reflect the economic effects of only those transactions between the consolidated reporting entity and third parties.

18.6.1 Eliminating intra-entity transactions in consolidation

Consistent with the single economic entity premise, when preparing consolidated financial statements, a consolidated reporting entity should eliminate all intra-entity balances and transactions with its consolidated subsidiaries, including:
  • Accounts payable/receivable
  • Sales and purchases
  • Interest
  • Dividends
  • Intra-entity lease arrangements
  • Intra-entity profit or loss on assets remaining within the consolidated group
As a result of the foreign exchange transaction guidance in ASC 830, foreign exchange gains (losses) on intra-entity transactions, if present, may not eliminate in consolidation. Reporting entities are encouraged to consider disclosure in such situations.
See CG 8.2 for additional information on intra-entity transactions in consolidation. Capital transactions - reporting entity and its subsidiaries

A reporting entity may enter into transactions with a consolidated subsidiary that impact the subsidiary’s capital structure. Such transactions include the subsidiary’s payment of stock dividends to the reporting entity or a recapitalization of the subsidiary. Although these transactions may affect the subsidiary’s stand-alone financial reporting, they should not affect the reporting entity’s consolidated retained earnings balance or accumulated other comprehensive income, as such amounts would eliminate in consolidation.
For purposes of presenting consolidated financial statements, the reporting entity should reflect its retained earnings balance, which includes its proportionate share of the retained earnings of the subsidiary accumulated after the date the reporting entity obtains a controlling financial interest in the subsidiary (e.g., the acquisition date), less any distributions made to the reporting entity’s stockholders. Similarly, in the consolidated financial statements, the reporting entity should reflect its accumulated other comprehensive income balance, which includes its proportionate share of the accumulated other comprehensive income of the subsidiary accumulated after the date the reporting entity obtains a controlling financial interest in the subsidiary.
Similarly, a reporting entity and a consolidated subsidiary may enter into intra-company lending arrangements for commercial and/or tax purposes. Upon initial consolidation of the subsidiary, the reporting entity should eliminate the intercompany receivable/payable balances in consolidation and related interest income or expense.

18.6.2 Fiscal periods of a reporting entity and its subsidiary

The financial information in a set of consolidated financial statements is generally presumed to have been prepared as of the same date. As discussed in ASC 810-10-45-12, if a subsidiary’s financial statements are not available in a timely manner, a reporting entity may consolidate a subsidiary’s financial statements as of a date that differs from the reporting entity.

ASC 810-10-45-12

It ordinarily is feasible for the subsidiary to prepare, for consolidation purposes, financial statements for a period that corresponds with or closely approaches the fiscal period of the parent. However, if the difference is not more than about three months, it usually is acceptable to use, for consolidation purposes, the subsidiary's financial statements for its fiscal period; if this is done, recognition should be given by disclosure or otherwise to the effect of intervening events that materially affect the financial position or results of operations.

If the consolidated financial statements include the financial information of a subsidiary as of a date that differs from the reporting entity, the consolidated reporting entity should recognize, by disclosure or adjustment, the effects of events at the subsidiary level that have occurred during the intervening lag period and are material to the consolidated balance sheets or income statements. Each case requires an evaluation of the facts and circumstances to determine whether such events should be addressed through disclosure, or whether an adjustment to the consolidated financial statements is appropriate. In practice, recognition of most intervening events, other than intercompany transactions requiring elimination in consolidation, is typically by disclosure only.
When a consolidated subsidiary reports the results of its operations on a lag relative to its parent, the presentation of the subsidiary’s operations may appear unusual. These presentation issues may be more pronounced in the year a reporting entity acquires a subsidiary whose results of operations will be reported on a lag. We encourage disclosure when the financial statements of a recently-acquired subsidiary are presented on a lag, so users of the financial statements understand the impact of a newly-acquired subsidiary on the consolidated financial statements.
Example FSP 18-4 illustrates the initial consolidation of a subsidiary that reports its operations on a lag relative to its parent.
Initial consolidation of a subsidiary that reports its operations on a lag relative to its parent
FSP Corp acquires Sub Co on February 1, 20X8. Although FSP Corp and Sub Co both have fiscal years that end on December 31, FSP Corp will not be able to obtain quarterly financial results for Sub Co in time to report its results as part of its publicly-filed consolidated financial statements for the interim period ended March 31, 20X8. FSP Corp expects a similar delay in obtaining Sub Co’s results in all future periods.
Therefore, FSP Corp adopts an accounting policy whereby the operations of Sub Co are consolidated on a one quarter (i.e., three month) lag and Sub Co’s operating results for the period from February 1, 20X8 (date of acquisition) through March 31, 20X8 are omitted from FSP Corp’s consolidated statement of operations for the quarter ended March 31, 20X8. These results will be included in FSP Corp’s consolidated statement of operations for the quarter ended June 30, 20X8.
Should FSP Corp disclose the impact of its consolidation policy for Sub Co in its first quarter consolidated financial statements? If so, what specific information should be disclosed?
Yes. FSP Corp should disclose its policy of reporting Sub Co’s results on a one quarter lag. It should also disclose the fact that Sub Co’s February and March 20X8 results of operations are excluded from FSP Corp’s consolidated results of operations. Additionally, FSP Corp should disclose the fact that the Sub Co balance sheet information included in FSP Corp’s consolidated balance sheet as of March 31, 20X8 is as of the acquisition date and, if applicable, whether such amounts are preliminary and subject to potential measurement period adjustments.
FSP Corp should also disclose or adjust its consolidated operating results for any intervening events at Sub Co (between the acquisition date and March 31, 20X8) that materially impact FSP Corp’s consolidated financial position or results of operations. These same policy and related disclosures would also be included in FSP Corp’s annual financial statements.

A change in the reporting date of a subsidiary is an accounting change which can be made only if the change results in preferable accounting in accordance with ASC 250. It would be difficult to justify the preferability of a change in the reporting period of a subsidiary that has the result of creating (or increasing) a lag period.
A reporting entity should follow the disclosure requirements in ASC 250-10-50 for changes in an accounting principle when a reporting entity changes or eliminates a difference in subsidiary reporting periods. That is, the reporting entity would retrospectively adjust the financial statements for all prior periods presented and disclosure should be made in the footnotes.
ASC 250-10-45-9 provides an exception in cases where retrospective adjustment is not practicable. If a reporting entity meets the conditions to qualify for the impracticability exception, it would not be required to retrospectively apply the effects of the change in the lag period.
When a reporting entity creates, changes, or eliminates a difference in an existing subsidiary’s reporting period, it would be inappropriate to include a subsidiary’s results for a period that is greater than the reporting entity’s reporting period (e.g., subsidiary’s reported results cannot be more than 3 months in a reporting entity’s quarterly reporting). Reporting and disclosing changes in an accounting principle are addressed in FSP 30.

18.6.3 Specialized industry accounting principles in consolidation

Reporting entities may encounter recognition and measurement complexities when consolidating subsidiaries that follow specialized industry accounting principles. For example, a private equity fund that is consolidated by its general partner may report its investments at fair value in its stand-alone fund financial statements in accordance with the specialized industry accounting principles in ASC 946, Financial Services - Investment Company.
Under ASC 810-10-25-15, reporting entities should retain specialized industry accounting in consolidation and related accounting policy disclosures, if material, assuming the specialized accounting practice is appropriate at the subsidiary level.

18.6.4 Presentation of nonhomogeneous subsidiaries

As noted in FSP 18.3, a reporting entity generally consolidates another entity in which it holds a controlling financial interest. In some situations, the reporting entity and a consolidated subsidiary may have very different or “nonhomogeneous” operations (e.g., the reporting entity is a manufacturer and the subsidiary is in the insurance industry).
The consolidation guidance does not address how the assets, liabilities, and results of operations attributable to a nonhomogeneous subsidiary should be presented and disclosed in the consolidated financial statements of its parent. It is our understanding that the FASB did not prescribe presentation guidance with respect to nonhomogeneous subsidiaries to provide reporting entities flexibility based on their unique situation.
In our view, a reporting entity should consider the following factors when determining the best presentation alternative for users of its financial statements.
  • Regulation S-X rules and financial statement user needs
Both are biased toward expanded line item disclosure and disaggregation of information.
  • The materiality of the nonhomogeneous subsidiary
For example, the more material a subsidiary with an unclassified balance sheet is to the consolidated financial statements, the more likely that it is appropriate to present a consolidated unclassified balance sheet.
  • Diversity of the reporting entity and nonhomogeneous subsidiary’s operations
The more diverse a nonhomogeneous subsidiary’s operations are from the remainder of the reporting entity, the more appropriate expanded line item disclosure may be.
  • Future plans with regard to the subsidiary
A reporting entity’s strategic plan for the subsidiary may affect whether the subsidiary’s financial information should be presented on an aggregated or disaggregated basis. For example, it may be appropriate to disaggregate a nonhomogeneous subsidiary that is expected to expand. Disaggregated information may provide transparency that allows financial statement users to understand the nonhomogeneous subsidiary’s contribution to the reporting entity’s overall operations and performance.
In some cases, reporting entities may choose to provide consolidating financial data. This presentation alternative separates all income statement and balance sheet elements of the nonhomogeneous subsidiary from the remainder of the reporting entity in columnar format. Such amounts are then totaled to derive consolidated amounts.
There are several possible approaches for presentation of nonhomogeneous operations. The reporting entity should choose a reasonable approach that it believes will be most meaningful to its financial statement users, being mindful of the prohibition in S-K Item 10(e) against including non-GAAP financial measures in the financial statements.

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