Question

As controller of the Parent Company who is ready to prepare financial statements, you have the following information:

1. You, the Parent Company, have 141 subsidiaries or investees.
2. 80 of these subsidiaries are located in the United States and are 100% owned and controlled by you (the Parent.)
3. 20 of these companies are located in the United States but you only own 30% of the company.
4. 40 of these subsidiaries are 100% owned and are located in the European Union, which uses IFRS as the accounting framework. 38 of these 40 subsidiaries use the Euro to denominate their financial statements; 2 of the 40 subsidiaries do not use the Euro; one uses the Polish Złoty PLN and the other uses the Danish krone to denominate financial statements.
5. One 100% owned subsidiary is in Switzerland which allows IFRS or U.S. GAAP to be used as the accounting framework. Financial statements are denominated in the Swiss Franc.

REQUIRED: What are the steps you would use (the Parent Company) to prepare consolidated financial statements for the parent company, the 121 100% owned subsidiaries, and the 20 companies in which you are heavily invested. [Consider IFRS, foreign currency; NCI, and anything else you think is pertinent.]

Answer 1

In this case, there are many foreign subsidiaries of the parent company, therefore, in order to prepare consolidated financial statements, first of all it is necessary to translate the financial statements of the foreign subsidiary into the reporting currency of the parent. Two types of methods are there for currency translation i.e. current rate and temporal method. Current rate method is used for translating self-sustaining operations whereas temporal method is used for translating integrated operations. Items of balance sheet items are translated using the closing rate of the functional currency whereas the items of income statement are translated using the exchange rate on the date of actual transaction or the average rate, if not available.

Combine the items of assets, liabilities, income, expenses, equity of the parent with those of the subsidiaries.

Eliminate the carrying value of the parent's investment in each subsidiary and parent's share in the equity of each subsidiary.

Also, compute the value of non-controlling interest in case the parent does not hold 100% of the voting share capital of the subsidiary and the allocation of consolidated net income between the parent and the non-controlling interest is done on the basis of their interest holding. On the other hand, the consolidated balance sheet comprises of the amount of the non-controlling interest i.e. amount attributable to minority shareholders or outside investors. Consolidated retained earnings need to be calculated by excluding the subsidiary's retained earnings which are attributable to minority interest.

Completely eliminate any intra-group assets, liabilities, equity, expenses, incomes, cash flows arising from transactions between the entities of the group.