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FASB
FASB Issues ED on Consolidations,
Q&A on Segments
Paul Munter
A
s has been reported elsewhere in the Journal of Corporate Accounting &
Finance, the Financial Accounting Standards Board (FASB) has been
moving forward on several important projects. These initiatives include the
issuance of exposure drafts on stock compensation and interest method
computations, as well as progress on the business combinations project. In
addition to these initiatives, the FASB has issued an exposure draft based on its
consolidations project and the FASB staff has prepared additional guidance on
segment reporting. This column presents an overview of these two initiatives.
CONSOLIDATIONS
Paul Munter, Ph.D., CPA, is
KPMG Peat Marwick Professor of
Accounting at the University of
Miami. He is editor-in-chief of The
Journal of Corporate Accounting
& Finance.
On February 23, 1999, the FASB issued a revised exposure draft entitled
Consolidated Financial Statements: Purpose and Policy. This current exposure
draft is a revision of the previous exposure draft which had been issued October
16, 1995. The revised exposure draft would establish standards for when entities
should be consolidated. While it is a revision of the previous exposure draft, its
proposed requirement is that a controlling entity (parent) consolidate all entities
that it controls (subsidiaries) unless control is temporary at the time the entity
becomes a subsidiary and the conclusions underlying that requirement are
consistent with the proposed consolidation policy and views expressed by the
FASB in its 1995 exposure draft. The revisions included in this exposure draft are
intended to clarify the definition of control of an entity and to expand the
implementation guidance.
This exposure draft would establish standards that specify when entities
should be included in consolidated financial statements and would apply to
business enterprises and not-for-profit organizations that control other entities
regardless of the legal form of the controlling and controlled entities. The
proposed Statement would not apply to financial statements of pension plans
and investment companies, that in accordance with generally accepted accounting
principles (GAAP) carry substantially all of their assets, including investments in
CCC 1044-8136/99/1004127-02
© 1999 John Wiley & Sons, Inc.
127
Paul Munter
controlled entities, at fair value with all changes in value reported in a statement
of net income or financial performance.
As noted earlier, this proposal would require that a controlling entity
(parent) consolidate all entities that it controls (subsidiaries) unless control is
temporary at the time the entity becomes a subsidiary. Control of an entity is
defined as a nonshared decision-making ability of an entity to direct the policies
and management that guide the ongoing activities of another entity so as to
increase its benefits and limit its losses from that other entity’s activities.
While the exposure draft would require consolidation based on control, it
would carry forward the existing prohibition against consolidation of a new
subsidiary if a parent’s control is temporary at the date that control is obtained.
Control of a newly acquired subsidiary would be considered temporary if at the
date of acquisition the parent either has committed to a plan to relinquish
control of that subsidiary or is obligated to do so and it is likely that loss of control
will occur within one year. However, control also would be considered temporary
if, at the date of acquisition, circumstances beyond management’s control are
likely to require more than one year to complete the ultimate disposition.
If adopted as a final standard, paragraphs 1, 2, 3, and 5 of Accounting
Research Bulletin (ARB) No. 51, Consolidated Financial Statements, as previously
amended by FAS No. 94, Consolidation of All Majority-Owned Subsidiaries,
would be superseded. Additionally, ARB No. 51 would be amended to extend its
provisions to not-for-profit organizations.
The FASB is currently proposing an effective date for financial statements for
annual periods beginning after December 15, 1999, and all interim periods in the
year of adoption—and that the standard would be adopted by retroactive restatement
of comparative financial statements for earlier periods. However, retroactive
restatement would not be required for those entities for which (1) control was
relinquished or (2) management has committed to a plan to relinquish control or
is obligated to do so and that relinquishment is likely to occur within one year of
the fiscal year-end in which this proposed Statement is first applied.
Q&A ON SEGMENTS
Financial Accounting Standard (FAS) No. 131, Disclosures about Segments of
an Enterprise and Related Information, was issued in June 1997 and was effective
for annual financial statements issued for fiscal years beginning after December
15, 1997. FAS No. 131 uses a management approach for determining what
information should be disclosed. The management approach is based on the way
that management organizes the segments within the entity for making operating
decisions and assessing performance. It is intended to assist users in being able
to see an entity “through the eyes of management.” While this management
approach drives much of the information that should be disclosed, certain
information about an entity’s operating segments is required by FAS No. 131.
Specifically, disclosure about an entity’s products and services, geographic areas,
and major customers is required, regardless of the way the entity is organized.
Not surprisingly, as companies have attempted to implement the provisions
of FAS No. 131, the FASB staff has received many inquiries. In response to those
inquiries, the FASB staff recently released a Question and Answer Guide (Q&A)
on applying FAS No. 131. The Q&A contains 18 questions with the FASB staff’s
response and is available on the FASB’s Web site at: http://www.rutgers.edu/
Accounting/raw/fasb/new/index.html. ♦
128
The Journal of Corporate Accounting and Finance/Summer 1999
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