Question

In your initial post, describe and compare the process when a subsidiary is consolidated under IFRS versus U.S. GAAP. Also, explain how goodwill is determined under each practice.

Answer 1

The process when a subsidiary is consolidated is different under U.S. GAAP and under IFRS. In case of IFRS parent entities prepare consolidated financial statements that include all subsidiaries. Exemption is applied to a parent that is itself wholly owned or if the owners of the minority interests have been informed about and do not object to the parent not presenting consolidated financial statements. Exemption is also applied in case the parent’s securities are not publicly traded nor is it in the process of issuing securities in public securities markets. Lastly exemption is applied when the immediate or ultimate parent publishes consolidated financial statements that comply with IFRS. In case of U.S. GAAP there is no exemption for general purpose financial statements.

Now the underlying process is different as well. IFRS focuses on the concept of control in determining whether a parent/subsidiary relationship exists. Control is the parent’s ability to govern the financial and operating policies of a subsidiary to obtain benefits. On the other hand US GAAP makes use of a bipolar consolidation model in which all consolidation decisions are evaluated first under the variable interest entity (VIE) model. The second model then looks at voting interest. Under this model, control can be direct or indirect and may exist with less than 50% ownership. There are differences with regards to uniform accounting policies as well. In case of IFRS consolidated financial statements are prepared using uniform accounting policies for like transactions and events in similar circumstances for all of the entities in a group. In case of US GAAP consolidated financial statements are prepared using uniform accounting policies for all of the entities in a group except when a subsidiary has specialized industry accounting principles.

Goodwill, as per IFRS, is measured as the difference between the aggregate of (i) the value of the consideration transferred (generally at fair value), (ii) the amount of any non-controlling interest (NCI, see below), and (iii) in a business combination achieved in stages, the acquisition-date fair value of the acquirer's previously-held equity interest in the acquiree. It is the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. In case of US GAAP goodwill is the excess of the cost of an acquisition price over the fair value of acquired net assets. It is recorded when the carrying amount of goodwill is more than its implied fair value.