FRF for SMEs--Accounting for Subsidiaries

Under this framework, an entity can elect an accounting policy to either consolidate all its subsidiaries or account for them using the equity method.  All disclosures required in this framework for the method selected should be presented in Note A and elsewhere in the footnotes to the financial statements.  Material differences in the basis of accounting used by the parent and a subsidiary will prevent the consolidation or equity methods.

Consolidated Financial Statements

Consolidated statements recognize that a parent entity and its subsidiaries represent a complete business or economic unit.  As with all reporting frameworks, the needs of users of financial statements become primary in determining frameworks and accounting policies within those frameworks.  The user’s need for consolidated or unconsolidated statements, therefore, should drive management’s election to use the consolidation or equity methods.

When the consolidation method is used, the following items should be considered:

  • Note A would describe the basis for preparation of the financial statements; each financial statement would include “consolidated” in its title.
  • Interests in an entity that is not a subsidiary would be presented as an investment with disclosures under this framework.
  • Consolidation of a subsidiary begins when a parent acquires control and is not consolidated retroactively for financial statement presentations.
  • When an entity ceases to be a subsidiary it is no longer consolidated.  Amounts in previous consolidated financial statements are not retroactively restated.
  • Management should disclose the names and descriptions of all subsidiaries, the parent’s ownership interest in each and the income received during the reporting period.
  • Combined financial statements may be useful for brother/sister type entities or entities under combined management. Combined statements would be prepared using principles similar to consolidations.

Non-Consolidated Statements Disclosures

The basis of accounting, i.e., the equity method, for the entity’s subsidiaries should be disclosed.  Disclosures should include the names and description of all subsidiaries, the carrying amounts recorded in the financial statements and the entity’s ownership percentage.

Next week’s blog will include more information for preparing consolidated financial statements under the FRF for SMEs.  Watch for my webcast series this fall on the new special purpose reporting framework.

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by Larry Perry, CPA, CPA Firm Support Services, LLC - Larry has over 40 years experience as a CPA practitioner, author of accounting and auditing manuals, author and presenter of live staff training seminars and author of webcast and self-study CPE programs.  He is co-founder of CPA Firm Support Services, LLC (www.cpafirmsupport.com), an organization providing resources, training and consulting to smaller CPA firms.  Larry writes a weekly blog on AccountingWEB.com focusing on small audits, reviews and compilations.  He is currently developing documentation manuals and handbooks for small audits, reviews and compilations and related electronic practice aids.

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