- Possesses a large minority voting interest that produces a majority of the votes
typically cast in the election of a corporation’s governing board with other vot-
ing interests being generally dispersed - Possesses the unilateral ability to obtain a majority voting interest in a corpora-
tion’s governing board, such as the ownership of options, including those em-
bedded in convertible securities, which if exercised produce such a majority vot-
ing interest - Is the general partner in a limited partnership in which no other group of limited
partners can remove the general partner or dissolve the limited partnership
The ED also proposes to adopt the economic approach to preparing consolidated
financial statements, in particular the treatment of minority interests as part of con-
solidated shareholders’ equity.
(ii) Canada. The primary guidance in Canada is Section 1590 of the CICA Hand-
book. Section 1590 defines a subsidiary as “an enterprise controlled by another en-
terprise (the parent) that has the rights and ability to obtain future economic benefits
from the resources of the enterprise and is exposed to related risks.” Control of the
enterpriseis defined as:
The continuing power to determine its strategic operating, investing and financing poli-
cies without the co-operation of others... An enterprise is presumed to control another
when it owns, directly or indirectly, an equity interest that carries the right to elect the
majority of the members of the other enterprise’s board of directors, and is presumed
not to control the other enterprise without such ownership.Control does not exist if an enterprise is acquired “with the clearly demonstrated
intention that it be disposed of in the foreseeable future.” In addition, control does
not exist, even when one enterprise has majority voting rights in a second enterprise,
if a statute or agreement imposes “severe” long-term restrictions” on the ability of the
second enterprise to distribute earnings to the first enterprise or undertake other trans-
actions with the first enterprise. “For example, the imposition of severe foreign ex-
change or currency export restrictions over a foreign subsidiary may indicate that
control has been lost.”
A parent is required to fully consolidate all subsidiaries. Certain disclosures are re-
quired if an enterprise concludes that it does not control another enterprise despite
ownership of majority voting rights or concludes that it does control another enter-
prise despite not owning majority-voting rights.
(iii) European Union. Guidance on the preparation of consolidated financial state-
ments in the European Union is found in the Seventh Directive. These requirements
are legally enforceable for all EU member countries once they have been introduced
into each country’s national laws. As of 1992 all of the member countries have
adopted the Directive. The Directive generally requires parents to prepare financial
statements that account for investments in subsidiaries by the full consolidation
method. The Directive provides a framework for the preparation of these statements
with numerous options in two areas: which parent undertakings are required to pres-
ent consolidated financial statements and what constitutes a parent–subsidiary rela-
tionship.
18 • 8 CONSOLIDATED FINANCIAL STATEMENTS AND BUSINESS COMBINATIONS