Consolidating joint ventures under gaap
in fact, whether to consolidate a controlled company that is less than majority owned is probably the single most difficult issue in the DM.
Determining how to consolidate involves answering questions of consolidation procedure.
* Consolidation procedures should result in a financial statement presentation as if two or more legal entities were a single company.
Some people read into that principle such consolidation procedures as eliminating 100% of the profit on intercompany transactions rather than only the parent's percentage and accounting for purchases and sales of the subsidiary's stock after the parent has acquired control as treasury stock transactions with no gain or loss. Need to Reconsider ARB 51 The FASB undertook its project on consolidation policy and procedures primarily because of perceived shortcomings of the existing standards. ARB 51 is more descriptive of consolidation practices in the 1950s than prescriptive of what practice ought to be in the 1990s. Because existing standards were written 30 years ago, they did not contemplate the complex securities and techniques used today in mergers and takeovers. Over the years, the AICPA has published a number of "issues papers" calling to the FASB'S attention practice problems in the area of consolidations.
The FASB felt that the GAAP for consolidations, issued in 1959, should be reviewed considering the inadequacy of some standards, the obsolescence of others, the problems with the standards identified by the SEC and by the American Institute of Certified Public Accountants, and the international changes in standards regarding consolidated statements.
Examples include: * How to measure a subsidiary's identifiable assets and liabilities at acquisition date. * What to do if an investee becomes a subsidiary through a series of purchases of small blocks of stock - a step acquisition.
* How to account for subsequent increases and decreases in a parent's proportionate interest in a subsidiary. * How to structure the information for the most meaningful financial- statement display.
* All of a subsidiary's assets and liabilities belong to the consolidated entity, not just the parent's portion.
* The consolidated entity's ownership equity is divided into: - Controlling interest (stockholders of the parent); and - One or more non-controlling (minority) interests in those subsidiaries less than wholly owned. Ownership is an indicator of control, but not a separate criterion.
The consolidation debate has begun, thanks to publication by the FASB of Discussion Memorandum (DM), Consolidation Policy and Procedures.