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.

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.

See EM 4.4 for additional information on investee reporting on a lag.

Example FSP 18-4 illustrates the initial consolidation of a subsidiary that reports its operations on a lag relative to its parent.

EXAMPLE FSP 18-4
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.

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.

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.

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.

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, and apply the approach consistently across all periods presented.