Question

You are a manger in the accounting department of Greene company. Greeneis a rapidly expanding manufacturing company, and is considering some additional acquisitions.The company would like to diversify, and is trying to decide between the two different scenarios outlined in Part 1 and Part 3. To help him make his decision, the Chief Financial Officer would like specific information on how the potential acquisitions would affect financial reporting.

Part 1 - Greene is considering diversifying by purchasing an insurance company and a lumber company. The CFO would like to know how the accounts of these two substantially different subsidiaries would be reported in the consolidated financial statements. Research the Accounting Standards Codification to see what guidance is provided, and prepare a 2 pagememo to the CFOwith your findings. Include in your memo at least two examples of situations in which it may be inappropriate to combine similar-appearing accounts of two subsidiaries.

Answer 1

Consolidation is based on control, the power to govern the operating, and, financial policies of an entity so as to obtain benefits from its activities. There is no exemption in case the business is of a different nature from that of the holding company. In this case, there will not be any exemption for the insurance or the timber company.

• This is in case the organization has more than 50 percent of the voting rights.
• Control of the Board of Directors
• The format used is the same as used by the parent company for its financial statements
• It encompasses both domestic, and, foreign subsidiaries.
• Subsidiaries may not be included when control is short-term, and, there are restrictions on the organization transferring funds to the parent
• One-on-one consolidation, grouping together the like items
• Goodwill, or, Capital Reserve is used in the statement based on whether the cost of investment is greater or less than the holding company's share in equity
• Present minority interest in net assets separately
• Include intragroup transactions, balances, and, the resulting unrealized profits

Following disclosures should be made in the statements

• List of subsidiaries
• The proportion of ownership interest
• Subsidiaries having different reporting dates
• Applying accounting policies of consolidated financial statements

Certain companies can be conglomerates who diversify and make investments in various fields such that reduce risk, this also diversifies shareholder's portfolio and keeps earnings secured. Therefore companies can have various subsidiaries in different sectors and businesses. Now when a parent company has various subsidiaries this entails consolidation of reports, which involves combining the accounts of all the subsidiaries and reporting an overall performace of all the subsidiaries.

Now in the question stated if Greene purchases a insurance company and a lumber company and in the annual report presents a financial statement that shows profits, this maybe true or subject to various limitations.

For example if the insurance company is making huge profits while the lumber company is making losses, the large profits of the insurance company will offset the losses made by the lumber company, therefore consolidated financial statement will still report profits. This causes a problem in the long run because if the lumber company is constantly making losses then shareholder value will reduce. Therefore it becomes inappropriate to combine the similar accounts of these two companies.

Therefore consolidated financial statements should ensure that it provides clarity on the financial statements that are presented and should specifically say if a certain subsidiary is running under losses. Financial statements must always provide a true and fair view. Stakeholders must be made aware of the actual state of affairs of the company.