4.2 Multiple Legal Entities Representing a Single Reporting Entity
Through consolidation, a parent and its subsidiary form a single reporting
entity for accounting purposes while remaining separate legal entities for
operational purposes. Sometimes, a parent and its subsidiary may not have been
formed in contemplation of each other and may not share common management. The
disparate ownership interests and management structures that exist in a parent and
its subsidiary can give rise to certain complexities when the separate financial
statements of the two entities are combined into one set of consolidated financial
statements.
4.2.1 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.
Under ASC 810-10-45-12, a parent and its subsidiary are not required to share a
fiscal-year-end date. However, the difference in fiscal-year-end dates should
not be more than approximately three months. See Section 11.1.3 of Deloitte’s Roadmap
Consolidation — Identifying a Controlling Financial
Interest for a comprehensive discussion of reporting and
disclosure considerations that arise when a parent and its subsidiary have
different fiscal-year-end dates, including (1) the effect of material
intervening events, (2) reporting in the initial quarter after the parent’s
acquisition of the subsidiary, and (3) classification of the subsidiary’s loan
payable.
SEC Considerations
On August 17, 2018, the SEC issued a final
rule amending some of the Commission’s disclosure
requirements, including certain disclosure requirements in SEC
Regulation S-X. Among the amendments in the final rule is the removal of
Rule 3A-02(b) from Regulation S-X. Before the final rule became
effective on November 5, 2018, Rule 3A-02(b) used the phrase “93 days,”
as opposed to the phrase “about three months” in ASC 810-10-45-12, and
required disclosure of (1) the closing date for the subsidiary and (2)
the factors supporting the parent’s use of different fiscal-year-end
dates.
In U.S. GAAP, the specific number of days is not provided. Entities should use judgment in determining whether a period on the margin of three months (e.g., 94 days or 89 days) is appropriate.
4.2.2 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.
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 retrospectively among the controlling 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.
See Section
11.1.5 of Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial
Interest for further discussion.