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18.7 Change in entities in the consolidated group
Publication date: 30 Sep 2023
us Financial statement presentation guide
S-X 3A-03 requires public reporting entities to disclose material changes in the subsidiaries it includes or excludes in its consolidated or combined financial statements when compared to the prior fiscal year.
Reporting entities should follow the disclosure requirements in ASC 805 (see FSP 17) and ASC 810 for newly-consolidated entities, as applicable.
If a subsidiary of an SEC registrant is not consolidated, the reporting entity should disclose the reason for excluding the subsidiary from its consolidated financial statements and the basis of accounting for its investment in the subsidiary.
A change in a reporting entity’s interest in an investee may impact the manner in which it accounts for that interest. For example, a reporting entity may account for its interest in an investee following the equity method of accounting and subsequently acquire additional shares, thereby resulting in consolidation. The following sections addresses the presentation and disclosure requirements to consider in such instances.
18.7.1 Change from fair value or equity method to consolidation
Initial consolidation of an investee previously reported using fair value or the equity method should be accounted for prospectively as of the date the entity obtained a controlling financial interest. Although prior years’ financial statements of the subsidiary would not be consolidated with those of its parent because there was no controlling financial interest at those dates, public business entities should provide pro forma information required by ASC 805-10-50-2. See FSP 17.4.12.1 for more details.
If a change in ownership interest occurs after the balance sheet date, it is a nonrecognized subsequent event which may require disclosure. See FSP 28.6.3.9 for further discussion.
18.7.2 Deconsolidation
A reporting entity will deconsolidate a subsidiary (or derecognize a group of assets that meet the definition of a business as defined in ASC 805) upon the loss of control, consistent with the guidance in ASC 810-10-40-3A. Upon deconsolidation, the reporting entity would no longer present the subsidiary’s assets, liabilities, and results of operations in its consolidated financial statements. The reporting entity should also consider the applicability of the presentation and disclosure requirements for discontinued operations as further discussed in FSP 27.
In the period a subsidiary is deconsolidated (or a group of assets that meet the definition of a business is derecognized), the reporting entity should include the following disclosures in its footnotes or, where appropriate, on the face of its income statement, as required by ASC 810-10-50-1B:
- The amount of any gain (loss) recognized
- The portion of any gain (loss) recognized that relates to the remeasurement of any retained interest in the deconsolidated subsidiary (or derecognized business) to fair value
- The income statement line item in which the gain (loss) is included (unless separately presented on the face of the income statement)
- A description of the valuation techniques utilized to measure the fair value of any direct or indirect retained interest in the deconsolidated subsidiary (derecognized business). Other disclosures may also apply (e.g., those required by ASC 820 regarding the fair value measurement’s level within the fair value hierarchy)
- Information regarding the inputs used to measure the fair value of the retained interest
- The nature of any continuing involvement with the former subsidiary (business) upon deconsolidation (derecognition)
- Whether the transaction resulting in deconsolidation (derecognition) involved a related party (see FSP 26.5.8)
- Whether the former subsidiary (business) will be a related party after deconsolidation (derecognition) (see FSP 26.5.8)
It may be more effective to include such disclosures in the notes to the consolidated financial statements rather than on the face of the reporting entity’s income statement. A reporting entity should present the information in a single note or by cross-referencing other footnotes.
If a reporting entity loses control of a subsidiary that is not a business and substantially all of the assets of the subsidiary are non-financial assets, the reporting entity should follow the derecognition guidance in ASC 610-20 (see PPE 6.2). For presentation and disclosure requirements of gains and losses recognized upon the derecognition of a long-lived asset, refer to FSP 8.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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