11.1 Presentation
ASC 810-10
45-25 A reporting entity shall present each of the following separately on the face of the statement of financial position:
- Assets of a consolidated variable interest entity (VIE) that can be used only to settle obligations of the consolidated VIE
- Liabilities of a consolidated VIE for which creditors (or beneficial interest holders) do not have recourse to the general credit of the primary beneficiary.
While ASC 810 contains certain presentation requirements for
VIEs and noncontrolling interests,
entities should generally apply other GAAP on the presentation of assets and
liabilities. Presentation requirements specific to VIEs are discussed below. In
addition, see Deloitte’s Roadmap Noncontrolling Interests.
11.1.1 Separate VIE Presentation Requirements
Under the variable interest model, a reporting
entity is required to present certain qualifying assets and
liabilities of a VIE separately on the face of the balance sheet. This
information must be presented on a gross basis for each major class of assets
and liabilities. That is, a VIE’s liabilities cannot be offset against its
assets, unless permitted by other GAAP, and a VIE’s assets should not be
combined as a single asset line item and its liabilities should not be combined
as a single liability line item, unless this is permitted by other GAAP.
Paragraph A81 in the Basis for Conclusions of Statement 167 notes that the Board rejected a linked presentation approach that would have allowed liabilities of a VIE to be reflected as a deduction from the related assets of the VIE. Therefore, a presentation of the assets and liabilities separately but on one side of the statement of financial position would also not be appropriate. In addition, the “Board considered, but rejected, a single line-item display of those assets and liabilities” that meet the separate presentation criteria. Accordingly, the assets of the VIE (which may include, for example, cash, receivables, investments, or fixed assets) should not be combined on the face of the statement of financial position as a single line item unless they are the same category of asset (the same principle applies to liabilities of the VIE).
The VIE model does not provide additional guidance on how assets and liabilities
that meet the separate presentation criteria should be presented in the
statement of financial position. A reporting entity has presentation
alternatives as long as the assets and liabilities that meet the separate
presentation criteria appear separately on the face of the statement of
financial position. For example, among other acceptable alternatives, a
reporting entity may be able to present assets and liabilities:
-
As one line item and then parenthetically state the amount of positions (i.e., assets and liabilities) that are in a VIE and that meet the separate presentation criteria.
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As one line item on the face of the balance sheet and then include a table following the consolidated balance sheet to present the assets and liabilities of the consolidated VIEs that have been included in the preceding balance sheet.
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In two separate line items (e.g., one line item for receivables that are in a VIE and meet the separate presentation criteria and another line item for all other receivables). However, in a manner consistent with its comment letters, the SEC staff has challenged this presentation in certain instances and required one of the other two alternatives above in accordance with SEC Regulation S-X, Rule 5-02. Therefore, SEC registrants should be aware that such presentation may be challenged; however, we understand that this challenge has not consistently been applied.
In addition, although all assets and liabilities of consolidated VIEs that meet
the separate presentation criteria must be separately presented on the balance
sheet, this presentation requirement does not necessarily apply to every VIE.
Presenting separate line items on a reporting entity’s balance sheet for each
VIE may be impractical for certain companies that consolidate numerous VIEs that
meet the criteria under ASC 810-10-45-25. We believe that a reporting entity may
consider the aggregation principles for disclosure in ASC 810-10-50-9 (see
Section 11.2.5.1) when applying the separate
presentation requirements.
Finally, we believe that in applying the aggregation principles, the reporting
entity should document and disclose its accounting policy on how it considers
aggregation for similar legal entities.
Further, a reporting entity is permitted, but not required, to separately
present noncontrolling interests in consolidated VIEs in the equity section.
However, such an election is an accounting policy choice that must be applied to
all consolidated VIEs.
ASC 810-10-45-25 does not require that the changes in the assets and liabilities be separately reflected in the statement of cash flows or in the statement of operations unless this is required by other GAAP. However, a reporting entity is permitted to reflect this information separately, and such an election is an accounting policy choice that must be applied to all consolidated VIEs. In addition, the separate presentation criteria for assets are not the same as those for liabilities. Therefore, it is possible that only the assets or only the liabilities would have to be separately presented for certain entities.
11.1.1.1 Separate Presentation Requirements — Intercompany Eliminations
In complying with ASC 810-10-45-25, a reporting entity should first apply ASC
810-10-45-1, which states that “[i]n the preparation of consolidated
financial statements, intra-entity balances and transactions shall be
eliminated. This includes intra-entity open account balances, security
holdings, sales and purchases, interest, dividends, and so forth.” After the
appropriate eliminations and consolidation of account balances, the
reporting entity should apply the presentation requirements of ASC
810-10-45-25 to the consolidated balance sheets of the reporting entity.
When identifying the assets and liabilities to be presented in accordance
with that guidance, the reporting entity should consider only those assets
and liabilities that continue to be presented and included in the
consolidated balance sheets of a reporting entity after the principles of
consolidated financial statements have been applied. A reporting entity
should not gross up the assets and liabilities of a consolidated VIE to
apply ASC 810-10-45-25.
Example 11-1
Entity A contributes $40 in cash in exchange for a $10 equity investment and $30
loan to Entity B, a VIE. Entity B contributes $40 in
cash for an investment in Entity C, also a VIE. Once
capitalized, C borrows $160 from a third-party bank
and uses the $40 contributed by B and the $160
borrowed from the bank to purchase $200 of
investment-grade debt securities from third parties.
The $160 borrowed from the bank is recourse only to
these securities (i.e., the bank does not have
recourse to the assets of A or B [B is the parent of
C, and A is the parent of B]). The $200 of
investment-grade debt securities may only be used to
service the borrowing from the bank and, upon
liquidation of C, to distribute the net assets of C
to B. In addition, B and C are both VIEs, B is the
primary beneficiary of C, and A is the primary
beneficiary of B.
Entity A must first apply ASC 810-10-45-1 and eliminate its investment in and loan to B and then eliminate B’s investment asset in VIE C. As a result of these eliminations, no assets or liabilities of consolidated VIE B exist in the consolidated statement of financial position; therefore, no separate balance sheet presentation for these items is required under ASC 810-10-45-25. Entity A would separately identify the $200 of investment-grade debt securities and $160 of bank borrowings in its consolidated financial statements, since these items meet the conditions in ASC 810-10-45-25. The diagram below illustrates this scenario.
11.1.1.2 Separate Presentation Requirements — Optional Presentation
A reporting entity may elect to separately present assets and liabilities of VIEs even if they do not meet the requirements for separate presentation in ASC 810-10-45-25. However, if a reporting entity elects to separately present assets and liabilities of a consolidated VIE that do not meet the separate presentation requirements, the face of the financial statements should clearly indicate which assets and liabilities meet the separate presentation criteria and which do not. In addition, the reporting entity should ensure that its presentation is compliant with the requirements discussed above in Section 11.1.1. Electing such a presentation is an accounting policy choice that must be applied to all consolidated VIEs.
11.1.2 Presentation of Beneficial Interest in a CFE on the Consolidated Balance Sheet
The beneficial interests in a CFE should be classified as liabilities on the balance sheet of the consolidated entity. On the basis of informal discussions with the SEC staff, we understand that the staff would object to the classification of such beneficial interests within noncontrolling equity interest on the consolidated entity’s balance sheet.
The beneficial interests in a CFE are often issued in the legal form of debt, in which case they must be classified as a liability. In certain situations, the residual interests in a CFE may be issued in the form of a share. However, the SEC staff believes that when an asset-backed financing subsidiary that is not considered a business was created simply to issue beneficial interests in financial assets, those beneficial interests should be classified as liabilities in the consolidated financial statements of the parent entity. The SEC staff discussed this issue at the 2009 AICPA Conference on Current SEC and PCAOB Developments. An SEC staff member, Professional Accounting Fellow Brian Fields, stated the following:
To say it again in another way, when a subsidiary is created simply to issue beneficial interests backed by financial assets rather than to engage in substantive business activities, we’ve concluded that sales of interests in the subsidiary should be viewed as transfers of interests in the financial assets themselves. The objective of an asset-backed financing is to provide the beneficial interest holders with rights to a portion of financial asset cash flows and the guiding literature is contained in Codification Topic 860 on transfers of financial assets. That literature requires a transfer to be reflected either as a sale or collateralized borrowing, depending on its specific characteristics — presentation as an equity interest in the reporting entity is not a possible outcome. [Emphasis added and footnote omitted]
11.1.3 Parent and Subsidiary With Different Fiscal-Year-End Dates
ASC 810-10
45-12 It ordinarily is feasible for the subsidiary to prepare, for consolidation purposes, financial statements for a period that corresponds with or closely approaches the fiscal period of the parent. However, if the difference is not more than about three months, it usually is acceptable to use, for consolidation purposes, the subsidiary’s financial statements for its fiscal period; if this is done, recognition should be given by disclosure or otherwise to the effect of intervening events that materially affect the financial position or results of operations.
45-13 A parent or an investor should report a change to (or the elimination of) a previously existing difference between the parent’s reporting period and the reporting period of a consolidated entity or between the reporting period of an investor and the reporting period of an equity method investee in the parent’s or investor’s consolidated financial statements as a change in accounting principle in accordance with the provisions of Topic 250. While that Topic generally requires voluntary changes in accounting principles to be reported retrospectively, retrospective application is not required if it is impracticable to apply the effects of the change pursuant to paragraphs 250-10-45-9 through 45-10. The change or elimination of a lag period represents a change in accounting principle as defined in Topic 250. The scope of this paragraph applies to all entities that change (or eliminate) a previously existing difference between the reporting periods of a parent and a consolidated entity or an investor and an equity method investee. That change may include a change in or the elimination of the previously existing difference (lag period) due to the parent’s or investor’s ability to obtain financial results from a reporting period that is more consistent with, or the same as, that of the parent or investor. This paragraph does not apply in situations in which a parent entity or an investor changes its fiscal year-end.
If, on the basis of the primary
beneficiary requirements discussed in Chapter 7, it is determined that a
variable interest holder is the
primary beneficiary of a VIE, the VIE will be considered a new subsidiary of the
company and should be consolidated in accordance with the guidance in Chapter 10. In some
situations, a VIE’s fiscal-year-end date will not be the same as the parent
company’s.
A reporting entity should consider all facts and circumstances when assessing the appropriateness of reporting a subsidiary’s financial results on a time lag. It is ordinarily feasible to align a subsidiary’s reporting period with the parent’s; however, the guidance acknowledges that as long as the fiscal-year-end dates of the parent and subsidiary are not more than three months apart, it generally would be acceptable to use the subsidiary’s financial statements for its fiscal period.
While ASC 810-10 does not specify when different fiscal-year-end dates would be
appropriate, a parent should nevertheless be able to support its conclusion. For
example, the parent may be able to support a different fiscal-year-end date for
a subsidiary that operates in a seasonal industry in which most industry
participants use a specific fiscal year. The advantages of a subsidiary’s
reporting date being comparable to other dates in the industry may outweigh the
disadvantages of a subsidiary’s fiscal-year-end date being different from the
parent’s. In addition, the parent may be able to support a similar conclusion
for a subsidiary that cannot produce timely and reliable financial results even
though it has the same closing date as the parent. For example, a calendar-year
parent may have its subsidiary use a November 30 year-end simply to ensure that
the subsidiary’s financial information is fully compiled, reliable, and
available to include in the parent’s (i.e., consolidated) annual financial
statements.
If the parent and the subsidiary have different fiscal-year-end dates, the parent should consider using the best available data from the subsidiary when preparing its consolidated financial statements. The most recent information is generally preferred. Therefore, for consolidation it may be better for the parent to use the subsidiary’s financial information as of its interim date that coincides with the parent’s balance sheet date. However, sometimes year-end financial information is better than interim financial information (e.g., when the subsidiary’s system for producing interim financial information is not sufficiently reliable). If the parent concludes that the subsidiary’s year-end financial information is preferable, the financial information for the subsidiary’s 12 months should be combined with that of the parent as though they had the same year-end.
The parent should evaluate material events occurring during any reporting time
lag (i.e., the period between the subsidiary’s year-end reporting date and the
parent’s balance sheet date) to determine whether the effects of such events
should be disclosed or recorded in the parent’s financial statements under ASC
810-10-45-12, which states that “recognition should be given by disclosure or
otherwise to the effect of intervening events that materially affect the
[parent’s] financial position or results of operations.”
A reporting entity may elect a policy of either disclosing all material intervening events, or both disclosing and recognizing them. Either policy is acceptable and should be consistently applied to all material intervening events that meet the recognition requirements of GAAP. When a reporting entity chooses to recognize material intervening events, either in accordance with its elected policy or because the events are so significant that disclosure alone would not be sufficient (as discussed below), it should take care to reflect only the impact of such events. It would generally not be appropriate to present more than 12 months of operations for the subsidiary in the consolidated financial statements (in addition to the effects of the recognized event or another change in the parent’s accounting for the subsidiary).
If the reporting entity’s policy is only to disclose material intervening events, the reporting entity may, in certain situations, be required to record some of these events in the consolidated financial statements of the parent. Examples of those situations include when the intervening event is considered (1) a recognized subsequent event in accordance with ASC 855-10-25-1 or (2) a significant intervening event (as defined in the next paragraph). A material intervening event would be considered a recognized subsequent event if it (1) occurs after the subsidiary’s period-end but before the year-end of the parent’s consolidated financial statements and (2) would meet the criteria for recognition under ASC 855 if the subsidiary was issuing separate stand-alone financial statements under GAAP.
Significant intervening events are unusual and are defined as events that are so
significant, they must be recognized to prevent the parent’s consolidated
financial statements from being misleading (e.g., the magnitude of the effect on
the parent’s consolidated financial statements is substantial and permanent in
nature). A reporting entity should recognize such events by recording their
effects in the parent’s consolidated financial statements even if the reporting
entity’s elected policy is only to disclose material intervening events.
Disclosures alone of these events would not provide financial statement users
with sufficient information regarding the extent of the effect on the parent’s
consolidated operations. One example of a situation in which a reporting entity
may be required to record the effects in the consolidated statements is when the
business assets of a subsidiary, representing 50 percent of the consolidated
revenue, assets, or net income, are destroyed by a natural disaster. In
recognizing a significant intervening event, a reporting entity must use
judgment and should consider consulting with professional accounting advisers.
This guidance applies to material (or significant) intervening events that would affect the subsidiary’s financial results rather than transactions or events of the parent. For instance, if a parent sold the subsidiary during the reporting lag, the sale is a transaction of the parent. Therefore, in such circumstances, the disposal of the subsidiary should be recognized in the period in which the disposition occurs, regardless of whether a reporting lag exists. It would be inappropriate to defer recognition of the transaction at the consolidated-parent-company level because the transaction falls into a different interim or annual period for the subsidiary.
11.1.3.1 Parent and Subsidiary With Different Fiscal-Year-End Dates — Initial Quarter After Acquisition
In the initial quarter after a parent acquires a subsidiary whose
fiscal-year-end is different from its own, the parent can use different
methods, two of which are illustrated in the example below, to apply the
guidance in ASC 810-10-45-12. A reporting entity must use judgment in
determining which method is appropriate and should consider consulting with
professional accounting advisers.
Example 11-2
On June 1, a calendar-year-end parent entity acquires a subsidiary with a fiscal
year ending July 31. The parent intends to record
the subsidiary’s earnings on a one-quarter lag. The
parent’s most recent quarter-end was June 30, and
the subsidiary’s most recent quarter-end was April
30.
Method 1
The parent would not record any subsidiary earnings in its results for the
quarter ended June 30 because the parent had no
rights to the subsidiary’s results for the quarter
ended April 30. In the quarter ended September 30,
the parent records the subsidiary’s results for the
quarter ended July 31.
Method 2
The parent would record the subsidiary’s earnings in the quarter ended June 30
on the basis of the subsidiary’s results for the
period from acquisition to June 30. In the quarter
ended September 30, the parent would record the
subsidiary’s earnings on the basis of the results
for the quarter ended July 31. However, the
subsidiary’s results for the period from acquisition
to June 30 would be reversed from retained earnings
(with an offset to investment in subsidiary) to
properly state the parent’s effects of earnings on
its equity.
Assume that a subsidiary with a September 30 year-end was acquired on April 1,
and the parent reports on a calendar-year-end basis.
The parent would record the amount of subsidiary
income for the quarters ending June 30 and September
30 (on the basis of the subsidiary’s quarter ending
June 30). However, for the period ended September
30, the subsidiary’s results for the period from
acquisition to June 30 should be reversed from
retained earnings (with an offset to investment in
subsidiary) to properly state the effects of the
parent’s earnings on its equity.
Under Method 2, it is assumed that the subsidiary can close its accounts and record accurately for the initial period and that the amounts used would present fairly the results of operations even though the subsidiary’s financial data subsequently will be reported on a lag.
11.1.3.2 Classification of a Subsidiary’s Loan Payable When the Fiscal-Year-End Dates of the Parent and Subsidiary Differ
A subsidiary’s fiscal year may end before the parent’s, and the subsidiary may have debt that is classified as long-term since it matures more than 12 months after the subsidiary’s fiscal year-end. However, in certain circumstances, the debt matures less than 12 months after the parent’s fiscal year-end. Because the loan payable matures less than 12 months after the parent’s year-end, the parent should classify the loan payable as a current liability in its consolidated balance sheet. Classification as current or noncurrent is governed by the parent’s fiscal year-end. As noted in ASC 470-10-S99-4, this interpretation is consistent with comments made at meetings to discuss EITF 88-15, at which the SEC observer indicated that the SEC staff would expect registrants to present such debt as current.
11.1.3.3 Elimination of a Reporting Lag Between Parent and Subsidiary
As noted in ASC 810-10-45-13, the change to or elimination of a previously
existing reporting lag between a parent and a consolidated entity is a
change in accounting principle under ASC 250.
ASC 250 permits a reporting entity to change an accounting principle if the
reporting entity demonstrates that the newly adopted accounting principle is
not only acceptable but also preferable. Although a reporting lag of up to
93 days may be acceptable, it is preferable for the fiscal period of a
consolidated subsidiary’s or an equity method investment’s financial
statements to correspond to that of its parent or investor.
A reporting entity should evaluate whether a change in accounting principle is preferable on the basis of existing authoritative literature, changes in the structure and economics of principal transactions, industry practice, business judgment, and business planning, among other sources. However, industry practice itself may not always justify the preferability of an alternative principle. Ultimately, the determination is based on the facts and circumstances related to changing or eliminating a previously existing reporting lag, and the burden of justifying a change ultimately rests with the reporting entity making the change. Reduction or elimination of a lag would generally be preferable because the change would typically:
- Provide more timely and relevant financial information to users of the consolidated financial statements.
- Reflect the results of the parent’s and the subsidiary’s results of operations during the same 12-month period.
- Reflect comparable seasonal data throughout all of the parent entity’s operating divisions.
If a reporting entity is able to justify the preferability of a change in or elimination of a previously existing reporting lag, the reporting entity must report the change by retrospectively applying it in accordance with ASC 250-10-45-5, which states:
An entity shall report a change in accounting principle through retrospective application of the new accounting principle to all prior periods, unless it is impracticable to do so. Retrospective application requires all of the following:
- The cumulative effect of the change to the new accounting principle on periods prior to those presented shall be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented.
- An offsetting adjustment, if any, shall be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period.
- Financial statements for each individual prior period presented shall be adjusted to reflect the period-specific effects of applying the new accounting principle.
A reporting entity may be able to demonstrate that determining the cumulative effect of such change on any prior period is impracticable. If so, the change is applied as if it were made prospectively as of the earliest date practicable. However, the impracticability threshold is high, and an entity, in determining whether it has crossed this threshold, would have to assess whether it has satisfied the requirements in ASC 250-10-45-9, which states:
It shall be deemed impracticable to apply the effects of a change in accounting principle retrospectively only if any of the following conditions exist:
- After making every reasonable effort to do so, the entity is unable to apply the requirement.
- Retrospective application requires assumptions about management’s intent in a prior period that cannot be independently substantiated.
- Retrospective application requires significant estimates of amounts, and it is impossible to distinguish objectively information about those estimates that both:
- Provides evidence of circumstances that existed on the date(s) at which those amounts would be recognized, measured, or disclosed under retrospective application.
- Would have been available when the financial statements for that prior period were issued.
For example, retrospective application of a change in or elimination of a reporting lag may be deemed impracticable if it is not feasible for the reporting entity to objectively determine assumptions related to estimates (e.g., fair value measurements, various impairment analyses) that would have been used as of the period-end date of the prior reporting periods without the benefit of hindsight. However, a reporting entity would need to use judgment and consider its specific facts and circumstances before making a determination about the practicability of retrospective application.
11.1.4 Other Considerations Related to Parent and Subsidiary Presentation
11.1.4.1 Combined Financial Statements
ASC 810-10
45-10 If combined financial statements are prepared for a group of related entities, such as a group of commonly controlled entities, intra-entity transactions and profits or losses shall be eliminated, and noncontrolling interests, foreign operations, different fiscal periods, or income taxes shall be treated in the same manner as in consolidated financial statements.
Consolidated financial statements must be presented when a parent holds a
controlling financial interest in its subsidiaries. However, sometimes
companies are economically linked because they are under common management
or common
control (e.g., subsidiaries of a common parent) even though
there is no controlling
financial interest between the entities under common control.
In these circumstances, it may be more appropriate to present combined
financial statements for all periods if such statements would be more
meaningful to investors than the separate financial statements of the
individual entities (e.g., in situations in which companies under common
control combine just before or contemporaneously with an initial public
offering).
The accounting policies for preparing combined financial statements should be
the same as those for preparing consolidated financial statements. For
example, in the combined financial statements, any intercompany investment
is offset against the related equity. If there is no intercompany
investment, the individual company equities are combined. Intercompany
transactions and profits and losses also should be eliminated.
11.1.4.2 Disclosure of Condensed Financial Information of Registrant
SEC Regulation S-X, Rules 5-04, 7-05, and 9-06, require registrants to disclose
the condensed financial information described in SEC Regulation S-X, Rule
12-04 (also known as Schedule 1 or parent-only financial statements), as a
separate schedule (except for bank holding companies, which must disclose it
in a financial statement footnote). The disclosures must be provided when
the restricted net assets of consolidated subsidiaries exceed 25 percent of
the registrant’s consolidated net assets as of the end of the most recently
completed fiscal year. SEC Regulation S-X, Rule 1-02(dd), defines restricted
net assets as “that amount of the registrant's proportionate share of net
assets of consolidated subsidiaries (after intercompany eliminations) which
as of the end of the most recent fiscal year may not be transferred to the
parent company by subsidiaries in the form of loans, advances or cash
dividends without the consent of a third party (i.e., lender,
regulatory agency, foreign government, etc.).”
In accordance with Regulation S-X, Rule 12-04, the condensed financial
information (1) consists of the “financial position, cash flows and results
of operations of the registrant as of the same dates and for the same
periods for which audited consolidated financial statements are required”;
(2) “need not be presented in greater detail than is required for condensed
statements” under SEC Regulation S-X, Article 10; and (3) may omit certain
detailed footnote disclosures that “would normally be included with complete
financial statements.” In addition, paragraph 2810.1 of the FRM states
that “the condensed financial information presented should include a total
for comprehensive income presented in either a single continuous statement
or in two separate but consecutive statements.” See Section 2810 of the
FRM for additional information about parent-only financial statements.
11.1.4.3 Stand-Alone Parent-Company Financial Statements
Parent-company financial statements issued on a stand-alone basis do not comply
with GAAP. ASC 810-10 states that consolidated financial statements, rather
than parent-company financial statements, are the general-purpose financial
statements. However, it may be acceptable to issue the parent-company
financial statements in accordance with Regulation S-X, Rules 5-04, 7-05,
and 9-06 (see discussion in the previous section), together with the
consolidated financial statements if each set of statements clearly
indicates that the primary (general purpose) financial statements are the
consolidated financial statements.
11.1.4.4 Presentation of a Parent Company’s Interest in a VIE When the VIE and Primary Beneficiary of the VIE Are Under Common Control
ASC 810-10
30-1 If the primary beneficiary of a variable interest entity (VIE) and the VIE are under common control, the primary beneficiary shall initially measure the assets, liabilities, and noncontrolling interests of the VIE at amounts at which they are carried in the accounts of the reporting entity that controls the VIE (or would be carried if the reporting entity issued financial statements prepared in conformity with generally accepted accounting principles [GAAP]).
In circumstances in which the primary beneficiary of a VIE and the VIE are under
common control, the reporting entity should initially measure the assets,
liabilities, and noncontrolling interests of the VIE at the amounts at which
they are carried in the financial statements of the common parent (i.e., the
common parent’s carrying amounts).
For considerations related to reporting a parent’s or affiliate’s interest in
the reporting entity’s consolidated subsidiary (i.e., reporting the parent’s
or affiliate’s interest in the VIE by the primary-beneficiary subsidiary),
see Section
3.2.1 of Deloitte’s Roadmap Noncontrolling Interests.
11.1.5 Parent and Subsidiary 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, in the absence of justification for differences between them, the accounting policies of a parent and its subsidiaries should be conformed in the parent’s consolidated financial statements.
Only in limited circumstances is it acceptable for the accounting policies of a
parent and one or more of its subsidiaries to differ 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 some 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, in some cases, 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 more than one accounting policy 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 the industry-specific guidance.
When a business is acquired, a parent may wish 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 parent could justify a conclusion that the acquiree’s accounting principle is preferable.
Moreover, the facts and circumstances may support a conclusion that a subsidiary’s accounting policies should be different from its parent’s 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 had applied before the acquisition in its stand-alone financial statements, which may differ 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 a conclusion that the parent’s accounting principle is preferable.
In addition, a subsidiary may adopt, in its separate financial statements, 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.
If an adjustment is made to conform the accounting policies of a subsidiary to those of the consolidated group, the entire adjustment should be allocated among the majority and noncontrolling interests. This view is consistent with the underlying assumption that consolidated financial statements represent the financial position and operating results of a single business unit.
11.1.6 Parent-Company Issuance of Stock Compensation to Subsidiary Employees
When a parent company issues stock compensation to a subsidiary’s employees, the
subsidiary should record the compensation expense in its separate financial
statements. ASC 718-10-15-4 requires the subsidiary to account for the
transaction as if it granted the award unless the transfer is “clearly for a
purpose other than compensation for services to the reporting entity.” In
addition, SAB Topic
1.B (see ASC 220-10-S99-3) requires a subsidiary to recognize in
its financial statements expenses incurred by the parent on behalf of the
subsidiary.
11.1.7 Allocation of Expenses From a Parent to a Subsidiary — Private Versus Public Subsidiaries
The Codification does not address the allocation of indirect costs incurred by a
parent company to a subsidiary in the subsidiary’s stand-alone financial
statements. For public companies, SAB Topic 1.B (see in ASC 220-10-S99-3)
discusses the allocation of certain direct and indirect costs in financial
statements of a subsidiary that are included in a registration statement
prepared for the issuance of shares of the subsidiary to the public. In its
response to Question 1 of SAB Topic 1.B, the SEC staff states that a registrant
(subsidiary) is required to reflect in its historical income statements all
costs of doing business, including those incurred by the parent on the
subsidiary’s behalf.
Under SAB Topic 1.B, the stand-alone financial statements of a public subsidiary must reflect that subsidiary’s costs incurred by the parent on the subsidiary’s behalf. However, there is no requirement under GAAP for a company with a private subsidiary to allocate to the subsidiary certain indirect expenses incurred by the parent on the subsidiary’s behalf. Nevertheless, the company must consider the disclosure requirements of ASC 850-10-50.
Direct expenses of both public and private subsidiaries that are incurred by the subsidiaries’ parent generally should be reflected in the subsidiaries’ financial statements. For example, if a parent provides inventory to its subsidiary at no charge or directly compensates the subsidiary’s employees, the related costs should generally be reflected in the subsidiary’s financial statements (i.e., be “pushed down” to the subsidiary). Without the push down of these expenses, the subsidiary’s financial statements would be less meaningful because they would not reflect all of the direct costs related to the revenues generated at, and reported by, the subsidiary. Reporting entities will often be required to exercise judgment in determining how to reflect direct expenses and in providing the appropriate disclosures.