the use of the equity method and the issuance of separate financial statements of the
nonconsolidated subsidiaries is more meaningful.
Those opposed to the consolidation of businesses in nonhomogeneous lines of
business may be confusing and also may obscure important information. Companies
in financial businesses have different assets, liabilities, revenues, expenses, and fi-
nancial ratios than those in manufacturing and commercial business. The users of fi-
nancial statements could have a better understanding of the financial conditions of
the group if the parent’s financial statements consolidate only the subsidiaries with
similar financial and accounting characteristics and present separate financial state-
ments for entities with significantly different financial and accounting characteristics.
Proponents of the full consolidation of all controlled subsidiaries believe that full
consolidation presents more meaningful financial information. They agree that users
of financial statements are interested in the performance of individual business units,
but they believe that the appropriate response is to issue consolidated statements that
include all controlled subsidiaries along with either segment information or separate
financial statements for the various business units.
In the United States, the Financial Accounting Standards Board (FASB) has rec-
ognized that information on the different segments of a business is important to the
user. Accordingly, the Board issued FASB Statement No. 131, “Disclosures About
Segments of an Enterprise and Related Information.” This Statement requires the
disclosure of information about the operating segments of a company as supplemen-
tal information in the consolidated financial statements. Some level of segment re-
porting is required in most of the industrial countries.
(e) Subissues in Accounting for Subsidiaries. A number of subissues exist concern-
ing how to implement full consolidation. Some of these subissues will be discussed
in this section.
(i) Conceptual Approach to Consolidation. The first issue is the selection of a con-
ceptual approach to consolidation. The question is essentially one of entity definition.
Should the focus of consolidation reporting be on the parent, the total business entity,
or on some other construct?
PARENT THEORY OF CONSOLIDATION. Currently, the generally accepted consolidation
practices have followed the parent theory of consolidated statements. This approach
considers the consolidated statements to be no more than an extension of the parent
company financial statements. The consolidated statements are not intended to be of
a significant benefit to the minority interest. The cost principle is followed in that
only the parent’s share of the assets acquired and the liabilities assumed is reported
in the fair value evidenced by the parent’s cost. The minority interest continues to be
carried at book value, since no transaction occurred, and hence no cost incurred for
this portion. Minority interest is treated basically as creditors.
Major characteristics of the parent theory can be summarized as follows:
- Fair values are assigned only to the portion of the assets and liabilities acquired
by the parent. The minority interest share of the assets and liabilities is contin-
ued to be carried at their book value. - Goodwill reported on the consolidated statements relates only to the parent’s in-
terest.
18 • 12 CONSOLIDATED FINANCIAL STATEMENTS AND BUSINESS COMBINATIONS