Question

1. Explain what conditions will be required to prepare consolidated financial statements for a company that owns less than 100% of the voting common stock of another company?

2. Identify 3 events or conditions that should be included in The Articles of Partnership.

3.The SEC administers many laws and regulations governing the information made in files reports.

a) What is the difference in issues covered by Regulation S-X and Regulation S-K?
b) How do the issues covered by these regulations differ from the AAERs and SABs?

Answer 1

Ans 1:

Consolidated financial statements are the financial statements prepared by a company (the parent) which has investments in more than 50% of the common stock of other companies (called subsidiaries). Consolidated financial statements are prepared by combining the parent’s financial statements with the subsidiary’s. Conditions required to prepare consolidated financial statements for a company that owns less than 100% of the voting common stock of another company :

- A parent shall prepare consolidated financial statements using uniform accounting policies for like transactions and other events in similar circumstances.

- Consolidation of an investee shall begin from the date the investor obtains control of the investee and cease when the investor loses control of the investee.

- As soon as the 50% ownership is acquired, the investor is required to prepare consolidated financial statements. It is because at 50% or more ownership, the investor controls the business and financing decisions of the investee effectively making the investee (now called subsidiary) just its own extension. In accordance with the substance over form principle of accounting, the parent and the subsidiary must be presented as a single economic entity.

-Under the equity method of accounting, your company's investments in other businesses are reported on financial statements with more detail than is required for the stocks you hold that don't give you the ability to exert significant influence. Initially, your equity investment is reported on the balance sheet at cost. Each dividend payment you receive reduces the reported value of the investment, whereas it increases for your share of the net income reported by the company. To illustrate, suppose your company acquires a 30-percent ownership interest in a business for $100,000 cash. If you receive a $10,000 dividend payment during a year the business reports net income of $50,000, the amount reported on the balance sheet decreases to $90,000 for the dividend payment, but increases by $15,000 for your 30-percent share of its reported net income.

-The general rule requires consolidation of financial statements when one company's ownership interest in a business provides it with a majority of the voting power -- meaning it controls more than 50 percent of the voting shares. But even if your company's equity or voting interest is 50 percent or less, consolidation may still be required. In the absence of owning a majority of the equity, extensive contractual agreements or other business arrangements between two enterprises may be sufficient to establish the requisite control that warrants consolidating financial statements.

Ans 2:

Articles of partnership is a contract that forms an agreement among business partners to pool labor and capital and share in profit, loss, and liability. Such a document acts as a rule book for limited partnerships by outlining all the conditions under which parties enter into a partnership. Articles of partnership may also be referred to as a partnership agreement. Several items related to the formation of a partnership are covered in a typical articles of partnership. They include:

• The names of the parties in the partnership
• The partnership's principal place of business
• The purpose of the partnership's business
• The terms of the partnership
• When the partnership will begin and, if not infinite, when and how it will end
• Each partner's capital contribution
• Each partner's percentage of interest in the partnership
• How the partnership's profits will be distributed (equally is the default, but there may be special conditions)
• How the partnership will be managed
• How salaries (if any) will be distributed
• How and under what conditions partnership rights can be transferred or sold

Ans 3 (a) :

Regulation S-X extends the meaning of the term “financial statements” to include all notes to the statements and all related schedules. Regulation S-X is closely related to Regulation S-K, which lays out reporting requirements for various SEC filings and registrations used by public companies. Regulation S-X profoundly affects internal and external accounts and auditors, and directors and officers and numerous officials, employees and contractors of publicly reporting companies, and because of the need for accurate reporting of monies and other data, any operation of a company may be affected to require ultimate compliance with Regulation S-X and the Sarbanes-Oxley Act.

Regulation S-X and the Financial Reporting Releases (Staff Accounting Bulletins) set forth the form and content of and requirements for financial statements required to be filed as a part of (a) registration statements under the Securities Act of 1933 and (b) registration statements under section 12, annual or other reports under sections 13 and 15(d) and proxy and information statements under section 14 of the Securities Exchange Act of 1934; except as otherwise specifically provided in the forms. Regulation S-K is a prescribed regulation under the US Securities Act of 1933 that lays out reporting requirements for various SEC filings used by public companies.

Regulation S-X is seen less frequently but is equally valid for (c) registration statements, annual reports and shareholder reports filed under the Public Utility Holding Company Act of 1935 and likewise for (d) the Investment Company Act of 1940.

Regulation S-K applies to:

• registration statements under the Securities Act to the extent provided in the forms to be used for registration under that Act;
• registration statements under section 12 of the Securities Exchange Act of 1934, also known as sub part C of part 249 of this chapter (17 CFR Part 229);
• annual or other reports under sections 13 and 15(d);
• going-private transaction statements under section 13;
• tender offer statements under sections 13 and 14;
• annual reports to security holders and proxy and information statements under section 14; and
• any other documents required to be filed under the Exchange Act, to the extent provided in the forms and rules under that Act.

Ans 3 (b) :

Accounting and Auditing Enforcement Release (AAER) means Administrative proceedings or litigation releases that entail an accounting or auditing-related violation of the securities laws. The Securities and Exchange Commission (SEC) provides a list of certain enforcement actions related to financial reporting concerning administrative proceedings and civil lawsuits. These Accounting and Auditing Enforcement Releases (AAERs) are reviewed by Audit Analytics and key data points are extracted. Since 1999, the SEC has issued over 2,700 Accounting and Auditing Enforcement Releases (AAERs) involving over 800 entities and more than 2,500 individuals. About two-thirds of these releases were published in the years prior to 2010. The overall average number of AAERs issued per year (since 1999) is just over 140 releases, but in the past 10 years, the average number of AAERs issued per year is just over 100.

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