2.A subsidiary should be excluded from consolidation if
a. Control is intended to be temporary because the subsidiary is acquired and
held exclusively with a view to its subsequent disposal in the near future, or
b. The subsidiary operates under severe long-term restrictions that signifi-
cantly impair its ability to transfer funds to the parent.Subsidiaries excluded from consolidation should be accounted for in accordance
with IAS No. 25, “Accounting for Investments.” This pronouncement permits long-
term investments to be accounted for at cost, lower of cost or market, or fair value.
IAS No. 27 defines controlas “the power to govern the financial and operating
policies of an enterprise so as to obtain benefit from its activities.”
(d) Exclusion of Subsidiaries From Full Consolidation. While the predominant
method of accounting for investments in subsidiaries is full consolidation, under cer-
tain circumstances subsidiaries should be excluded from consolidation. The four
most common reasons for exclusion from consolidation are: immateriality, control
not resting with the legal owners, control being temporary, and significantly different
lines of business.
(i) Control Not Resting With Legal Owners. If a subsidiary is in bankruptcy, control
might not rest with the legal owners but with a bankruptcy trustee; in this situation,
the legal owners should not consolidate the subsidiary. Likewise, if a foreign sub-
sidiary is severely restricted in terms of its business operations or its distribution of
earnings by government restrictions or foreign currency controls, the parent should
not consolidate the subsidiary. If consolidation is inappropriate for these reasons, the
parent in all probability also does not have significant influence and therefore the
subsidiary should be accounted for by the cost method.
(ii) Control Is Temporary. This exemption would generally apply to newly acquired
subsidiaries. Most authorities believe that if a parent has consolidated a subsidiary in
the past, it should continue to do so until the subsidiary is sold or otherwise disposed
of. The subsidiary continues to be controlled until the sale and consolidation aids in
comparability with past periods. However, if a subsidiary has been purchased with
the intention of reselling, there are good arguments for the nonconsolidation of the
subsidiary. This lack of control is discussed in the FASB Exposure Draft, “Consoli-
dated Financial Statements: Purpose and Policy,” issued in February 1999. This ED
states:
A subsidiary shall be consolidated unless a parent’s control is temporary at the date that
control is obtained. Control of a newly acquired subsidiary shall be considered tempo-
rary if at the date of acquisition the parent either has committed to a plan to relinquish
control of that subsidiary or is obligated to do so and it is likely that loss of control will
occur within one year.(iii) Significantly Different (Nonhomogeneous) Lines of Business. This is still a con-
troversial topic. The trend is toward full consolidation. The United States, Canada,
the United Kingdom, and the IASC rules require consolidation regardless of the lines
of business. However, many accountants argue that the issuance of parent financial
statements that account for subsidiaries in significantly different lines of business by
18.5 ACCOUNTING FOR INVESTMENTS IN SUBSIDIARIES 18 • 11