Question

how the consoldation process and procedures work for Amazon in terms of financial statements?

Answer 1

Consolidation accounting is the process of combining the financial results of several subsidiary companies into the combined financial results of the parent company. This method is typically used when a parent entity owns more than 50% of the shares of another entity.

The following steps document the consolidation accounting process flow:

Record intercompany loans. If the parent company (such as Amazon Inc.) has been consolidating the cash balances of its subsidiaries into an investment account, record intercompany loans from the subsidiaries to the parent company. Also record an interest income allocation for the interest earned on consolidated investments from the parent company down to the subsidiaries.

Charge corporate overhead. When the parent company (such as Amazon Inc.) allocates its overhead costs to subsidiaries, calculate the amount of the allocation and charge it to the various subsidiaries.

Complete adjusting entries. At the subsidiary (amazon.com, amazon web services, etc.) and corporate levels, record any adjusting entries needed to properly record revenue and expense transactions in the correct period.

Investigate asset, liability, and equity account balances. Verify that the contents of all asset, liability, and equity accounts for both the subsidiaries and the corporate parent are correct, and adjust as necessary.

Review subsidiary financial statements. Print and review the financial statements for each subsidiary, and investigate any items that appear to be unusual or incorrect. Make adjustments as necessary. Eliminate intercompany transactions. If there have been any intercompany transactions, reverse them at the parent company level to eliminate their effects from the consolidated financial statements. Then they (such as Amazon Inc.) review parent financial statements. Print and review the financial statements for the parent company, and investigate any items that appear to be unusual or incorrect. Make adjustments as necessary. Lastly close subsidiary books. Depending upon the accounting software in use, it may be necessary to access the financial records of each subsidiary and flag them as closed. This prevents any additional transactions from being recorded in the accounting period being closed.

Finally, they close parent company (Amazon Inc.) books. Flag the parent company accounting period as closed, so that no additional transactions can be reported in the accounting period being closed. Later on, Amazon Inc. financial statements. Print and distribute the financial statements of the parent company.

Given the considerable number of steps, it is useful to convert them into a detailed procedure, which the accounting department should follow religiously as part of its closing process. Otherwise, a key step could be missed, which would throw off the financial statement results. Some of the tasks noted here can be automated, or at least made simpler, in order to produce financial statements more quickly. However, to some degree, the higher level of precision required to produce more accurate financial statements requires additional consolidation effort, and therefore more time.

Amazon prepares the accompanying consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting.

Principles of Consolidation used by Amazon Inc.

The consolidated financial statements include the accounts of Amazon.com, Inc., its wholly-owned subsidiaries, and those entities in which we have a variable interest and are the primary beneficiary (collectively, the “Company”). Intercompany balances and transactions have been eliminated.

It records purchases, including incremental purchases, of shares in equity-method investees at cost. Reductions in our ownership percentage of an investee, including through dilution, are generally valued at fair value, with the difference between fair value and our recorded cost reflected as a gain or loss in our equity-method investment activity. In the event we no longer have the ability to exercise significant influence over an equity-method investee, we would discontinue accounting for the investment under the equity method.