4.16 Conforming Accounting Policies
Financial statements are more transparent and relevant if the policies used to account for similar assets,
liabilities, operations, and transactions are the same. Therefore, the acquirer and acquiree should
conform their accounting policies in the consolidated financial statements if there is no justification for
differences between them.
In some cases, an acquirer may choose to conform the accounting principles of
the acquiree to its own. Because acquisition accounting results in a new basis of
accounting for the acquiree, the acquirer’s accounting principles may be applied
without regard to the acquiree’s previous accounting principles and there is no need
to assess the preferability of the acquirer’s principles. If an acquirer chooses to
change one or more of its accounting policies to conform to the acquiree’s policies,
such a change would represent a voluntary change in accounting principle under ASC
250-10 and would be permitted only if the acquirer could justify the preferability
of the acquiree’s accounting principle.
Only in limited circumstances is it acceptable for a parent and one or more of
its subsidiaries to apply different accounting policies in the parent’s consolidated
financial statements. For example, entities may have different accounting policies
for inventory or they may use one method (e.g., LIFO) to measure certain categories
of inventories and another method (e.g., FIFO or average cost) to measure others. In
addition, policies that are transaction-specific could result in the use of
different accounting policies for similar items in the consolidated financial
statements. For example, the fair value option under ASC 825-10 can generally be
elected on an instrument-by-instrument basis.
Entities may sometimes be required to apply different accounting policies to
comply with industry-specific guidance. ASC 810-10-25-15 states that “[f]or the
purposes of consolidating a subsidiary subject to guidance in an industry-specific
Topic, an entity shall retain the industry-specific guidance applied by that
subsidiary.” This guidance is not intended to result in the use of multiple
accounting policies but rather to retain the industry-specific guidance applied by
the subsidiary in the consolidated financial statements even if the parent itself or
any of its other subsidiaries are not subject to that guidance.
Moreover, the facts and circumstances may support a conclusion that a
subsidiary’s accounting policies should be different from that of its parent in the
subsidiary’s stand-alone financial statements. For example, a subsidiary may be
acquired in a business combination in which pushdown accounting is not applied. The
subsidiary would continue to apply the policies it used before the acquisition in
its stand-alone financial statements, which might be different from the parent’s
accounting policies. If the subsidiary wanted to adopt the parent’s policies in its
stand-alone financial statements, such a change would represent a voluntary change
in accounting principle under ASC 250-10 and would be permitted only if the
subsidiary could justify the preferability of the parent’s accounting principle.
In addition, in its separate financial statements, a subsidiary may adopt a new
standard in a period other than the period in which the parent adopts it or may use
a different transition method for its adoption. In such cases, even though the
subsidiary may use different accounting policies in its stand-alone financial
statements, the subsidiary’s policies must be conformed to those of the parent in
the parent’s consolidated financial statements.