Consolidated versus consolidating financial statements
To illustrate how consolidated presentation can be misleading to users of the financial information, let’s assume that the operating company, real estate, and equipment entities reported the following financial position and results of operations: Notice that under the consolidated presentation there is a separate line item for non-controlling equity as well as non-controlling income.These amounts represent the total equity of the real estate entity and the equipment entity as well as any third-party rentals (i.e.When a company has ownership in one or more companies, an accountant may have to either consolidate their financial statements or combine them.Consolidation occurs when a parent company owns more than 50 percent of a subsidiary.In these situations, accounting standards are clear that a combined financial statement presentation is likely more meaningful and therefore preferred over a consolidated presentation (ASC 810-55-1b).Nonetheless, we still see practitioners evaluating the real estate and equipment entities as VIEs and consolidating them into the operating company.Back in 2001, we witnessed the Enron accounting scandal, which led to one of America’s largest corporate bankruptcies and the demise of the prestigious accounting firm Arthur Andersen.A key ingredient in Enron’s accounting plot involved the use of special purpose entities (SPEs).
Intercompany transactions are those occurring between the parent and the subsidiary or the companies in the group.
non-controlling interest) when in fact all interest is under common control.
Certainly there might be situations where a VIE would exist under a common controlled group, but under this often seen real world example it is clear that the VIE literature is not applicable and instead combined presentation is appropriate.
Accountants must eliminate these accounts because, if they remain on the books, they may be accounted for twice, one time on the parent's book and again on the subsidiary's books.
In both a consolidated financial statement and a combined financial statement, the accountant must create a non-controlling interest account.