Question

At a recent staff meeting, the VP of Finance appeared confused. The controller has assured him that the parent company and each of the subsidiary companies had properly accounted for all transactions during the year. After several other questions, the VP finally asked, "If it has been recorded properly, then why must you spend so much time and make so many changes to the amounts reported by the individual companies when you prepare the consolidated financial statements each month? You should be able to just add the reported balances together."

Provide an answer to the VP of Finance, using a memo format. Support your response by including FASB references. Compare and contrast the FASB (GAAP) methodology with that on IASB (IFRS).

Answer 1

The controller spends time and makes changes to the amounts reported by individual companies when preparing consolidated financial statements to ensure accurate representation of the entire entity. FASB and IASB have different approaches to consolidation, with IFRS allowing for more flexibility in accounting treatment.

Step-by-step explanation:

The reason why the controller spends a lot of time and makes changes to the amounts reported by individual companies when preparing consolidated financial statements is because the parent company and its subsidiaries may have different accounting policies and practices.

These differences need to be reconciled and adjusted to ensure that the financial statements accurately reflect the consolidated financial position and performance of the entire entity.

According to the Financial Accounting Standards Board (FASB), the consolidation process involves eliminating intercompany transactions and balances to avoid double-counting and ensuring that the financial statements are presented as if the parent and its subsidiaries are a single entity.

This requires careful analysis and adjustments to align the accounting practices of the different entities.

In contrast, the International Accounting Standards Board (IASB) approach, under International Financial Reporting Standards (IFRS), also focuses on producing consolidated financial statements of the parent and its subsidiaries.

However, IFRS allows more flexibility in the accounting treatment of certain transactions, which may result in differences in the consolidation process compared to FASB (GAAP).