Financial Statement Presentation 1

Financial Statement Presentation

and
Disclosures Associated with Consolidations
By: Chris Lawson
Keiser University

Financial Statement Presentation 2
A companys financial statements are important to the companys managers because it
allows them to communicate with interested outside parties about its accomplishment running
the company. Financial statements are also important because they show a variety of financial
information that creditors and investors use to evaluate a companys financial performance
because they need to know where their money went and where it is now. We all know that a
companys financial statement is the heart and soul of how desirable a company looks to its
investors and creditors. Financial statements that are distributed to interested parties often appear
to report the financial position and operations of a single company. In reality these statements
often includes a number of separate organizations tied together through a business combination
(Hoyle, & Doupnik, p. 39). Businesses that has acquired subsidiaries, must consolidate each of
the financial statements into one called a consolidated financial statement. Consolidated
financial statements are very similar to individual financial statements in that they show the
operations and financial position to the owners and creditors, but they differ because the
consolidated statement shows the combined results of the parent and all its subsidiaries as if the
consolidated group were a single economic entity. There is a presumption that consolidated
financial statements are more meaningful than separate financial statements and that they are
usually necessary for a fair presentation when one of the entities in the consolidated group
directly or indirectly has a controlling financial interest in the other entities (ASC 810-10-10-1).
So now that we have an understanding of what and how important consolidated financial
statements are, I would like to discuss how the presentation, disclosures, and the effects of
variable interest entities, off balance sheet transactions, and noncontrolling interest may have to
the reader of the financials.

Financial Statement Presentation 3
The FASB moved away from the concept of decision making authority to a Risks and
Rewards view, when it promulgated FIN 46 R in December 2003. FIN 46R introduced the
variable interest consolidation standard that requires the primary beneficiary of a variable interest
entity to consolidate the VIE (Mckee, 2006). So what is a variable interest entity or VIE? A
variable interest entity can take form of a trust, partnership, joint venture, or corporation
although sometimes it has neither independent management nor employees (Schaefer &
Doupnik, p. 248). Facilitating securitization, research and development, leasing, reinsurance,
hedging, or other transactions or arrangements are why variable interest entities are often created
for one of these single specified purposes (FASB ASC 810-10-05-11). Before a VIE is included
on the consolidated financial statement it must first be determined that it is in fact a VIE in the
first place. The characteristics of a VIE must meet any of the three criteria: The equity at risk is
not sufficient, at-risk equity investors lack one or more of the characteristics of a controlling
financial interest, or other factors indicate that equity holders lack a controlling financial
interest (Dauberman, 2008). After the VIE and the primary beneficiary has been identified,
consolidation of a variable interest entity is done by using procedures that are similar to
consolidation of a traditional majority-owned subsidiary based on voting interests. The VIEs
liabilities, expenses, revenues, assets, and cash flows are consolidated into the financial
statements of the primary beneficiary, and any intra-entity balances and are eliminated.

If the ownership interests in a subsidiary are held by owners other than the parent, it is a
non-controlling interest. Non-controlling interest is the portion of equity attributable, directly or
indirectly, to a parent (FASB ASC 810-10-20). Upon acquisition, the non-controlling interest
shares proportionately in the fair values of the subsidiarys net identifiable assets as adjusted for
Financial Statement Presentation 4
excess fair value amortization (Hoyle, & Doupnik, 2013). Non-controlling interest affects the
calculations of net income and is classified as one item under net assets (Futamura, 2010). Non-
controlling interest used to be presented as an independent item between liabilities section and
capital section on the consolidated balance sheet and is not affected as it being deducted for
calculating net income on the consolidated income statement. Now, the non-controlling interest
is the equity of subsidiaries is now reported in the owners equity section of the consolidated
statement of financial position (Hoyle, & Doupnik, 2013). It should also be clearly identified,
labeled, and distinguished from the parents controlling interest subsidiaries.

Lastly, off balance sheet transactions are a form of special purpose entities (SPE) that is
widely used by major corporations. SPEs typically are defined as entities created for a limited
purpose, with a limited life and limited activities, and designed to benefit a single company.
They may take the legal form of a partnership, corporation, trust, or joint venture. SPE actual
function is to isolate financial risk and provide less-expensive financing. Just like the variable
interest entities mentioned earlier, consolidation does not change net income or net assets,
causing only offsetting changes in the components of those measures. When you think about the
term off-balance sheet transaction, the first thing that comes to mind is scandal. Companies like
Citigroup and Enron became infamous in the accounting and business world which their misuse
of SPEs caused auditors, investors, and analysts to demand more information. The allegations
that Enron and other companies used SPEs to hide losses and debt ultimately caused the SEC to
quickly issue FR-61. FR-61 did not impose new disclosure requirements but rather reminded
managers of their existing MD&A disclosure responsibilities(Chandra, Ettredge, & Stone,
Financial Statement Presentation 5
2006). Today, despite efforts in the past years by standard setters to improve reporting
transparency, the problems associated with off-balance sheet accounting still remain.

Although these three topics discussed through this paper do not make up a companys
identity they can really influence the consolidated financial statement in a major way. The
objective non-controlling interest is to improve the relevance, comparability, and transparency of
the financial information that a reporting entity provides. The volume and risk of the off-balance
sheet activities needs to be considered by the examiner in the evaluation of capital adequacy.
Although off balance sheet transactions including variable interest entities remain off the balance
sheet, capital to asset ratios are not necessarily affected regardless of the volume of business that
is conducted. Needless to say the as long as businesses follow FASB regulations and make the
proper disclosures on the financial statements, they would not suffer the same fate as did Enron.

Financial Statement Presentation 6

References
Chandra, U., Ettredge, M. L., & Stone, M. S. (2006). Enron-era disclosure of off-balance-sheet
entities. Accounting Horizons, 20(3), 231-252. Retrieved from
http://search.proquest.com/docview/208919430?accountid=35796
Dauberman, M., (2008), Making Sense of Variable Interest Entities, California CPA magazine.
Retrieved from http://www.calcpa.org/Content/25148.aspx
FASB ASC 810-10. Retrieved from https://asc.fasb.org/combinesubtopic&trid=2197479
FASB, Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB
No. 5, Retrieved from http://www.fasb.org/summary/stsum160.shtml
Futamura, M. (2010). THE INTRODUCTION OF ACCOUNTING PRINCIPLES FOR
CONSOLIDATED FINANCIAL STATEMENTS IN JAPAN: FOCUS ON MINORITY
INTEREST AND OTHER RELATED ACCOUNTING TREATMENTS. Journal of
International Business Research, 9, 1-22. Retrieved from
http://search.proquest.com/docview/875107736?accountid=35796
Hoyle, J., Schaefer, T., & Doupnik, T. (2013). Foreign Currency Transactions and Hedging
Foreign Exchange Risk. Fundamentals of Advanced Accounting. New York: McGraw-
Hill/Irwin.
McKee, T. E., Bradley, L. J., & Rouse, R. W. (2006). Accounting for special purpose entities:
The control view versus the primary beneficiary view for consolidation. Journal of Applied
Financial Statement Presentation 7
Accounting Research, 8(1), 162-207. Retrieved from
http://search.proquest.com/docview/233313542?accountid=35796