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Consolidating reporting : development, issues, and solution

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Consolidating reporting : development, issues, and solution
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Battraw, Chris
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Consolidating Reporting: Development, Issues, and Solution by Chris Battraw
An undergraduate thesis submitted in partial completion of the Metropolitan State University of Denver Honors Program
May 2016
Dr. John Hathorn
Dr. Andrew Holt Dr. Megan Hughes-Zarzo
Honors Program Director
Primary Advisor
Second Reader


Consolidated Reporting: Development, Issues, & Solution
Date Completed Completed By
5/13/2016 Chris M Battraw
Inspired by many, sum,, but aren't we all? So which kinds off Inspirations ought we to seek? Faeebook me you/1 answer,


Abstract
Consolidated financial reporting is a requirement for publicly traded companies who acquire control over another company. Control over another company usually occurs when the acquirer obtains more than fifty percent of another companys voting-stock. The parent company must then combine all financial statement elements of the subsidiary into the parents financial statements. However, a problem occurs because not every company has the same accounting systems and account definitions/terms, so the parent must find a way to combine the accounts and elements. The most optimal way is to have the subsidiary implement the same accounting system as the parent. However, doing so could be a burden on the subsidiary because of cost and complexity issues; the subsidiary would have to purchase, install, and test the new accounting system, and this may cause losses resulting from improper accounting system installation and/or maintaining an old system as a backup in case the new accounting system fails. Parent companies of small sizes should require their subsidiaries to implement a process by which the subsidiaries reclassify their financial statement accounts to a list of accounts that the parent company can use in preparing consolidated financial statements. Although having the subsidiary adopt the same accounting system as the parent would be more optimal, only large companies and their stakeholders will benefit from doing so. Implementing the same accounting system as its parent company can be too complex and expensive on small companies with no merit to do so. This thesis project will focus into the development of consolidated financial reporting and the purposes of it. The paper will also consider the ethical considerations and perspectives for the stakeholders of financial reporting, which will merit a look into the American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct. It will then briefly explain the various issues with reporting consolidated financial statements and present a solution


to the main issue in question. And since much of the information relating to business combinations is private and will likely differ among companies/industries, many assumptions will be made when applying authoritative accounting literature. Companies of small sizes should implement the proposed solution-process, while larger companies may actually benefit from the opposing solution. The opposing solution is that implementing the same accounting system will be more optimal and preferred; when subsidiaries implement the same accounting system as the parent, it will result in easily obtained consolidation figures and less human-error, as well as an easier way to audit such companies.


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Chris Battraw Advisor Dr. John Hathorn HON 4950-1 27 Mar. 2016
Consolidated Reporting: Development, Issues, & Solutions 1. A Look into Consolidated Reporting
Assume a recent graduate, Mary, lands her dream job right out of college and begins working immediately. Mary is so excited and finds that she has some extra cash every month, so she decides to invest it somewhere. Her local bank refers her to a broker who recommends investing in large companies because it is unlikely theyll fail as business. So she decides to purchase shares in a retail company every month using her residual earnings. By the end of her first year, in December, her stock has grown by a significant amount, and future prospects of the companys profitability look high. However, after the companys financial statements are published, her broker calls her and informs her that the companys stock price has fallen significantlyIf Mary were to sell the shares, she would not even recover the total amount she had invested. Shes now faced with the decision to either sell the stock and recover some of the lost money, or keep it with the hopes that the stock price will rise and risk it losing even more value.
Decisions like the above example happen all the time. During the housing bust of 2007-2009, home owners and investors in home-based index funds saw a significant drop in home values and lost much of their wealth. So what can someone look at, or anticipate, when deciding to buy, sell, or keep stock or investments? They key point made in the opening example was that the retail company had published their financial statementsand thats when the phone call from


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the broker came. Once a companys financial statements are published, so many things happen, and the stock price of the company changes to what investors think reflects all available information. William H. Beaver, in Financial Reporting: An Accounting Revolution, found that Graham and Dodd attempted to formalize the process of analyzing financial statement data to find mispriced securities with the understanding that mispriced securities are due to hidden information within financial statements (132). This led to the understanding, by Fama and others, that a securities market is efficient if prices fully reflect the information available (quoted in Beaver, 134). And while its probably unlikely that every investor will know every piece of information about a company, thus making the securities-market completely efficient, markets seem to generally reflect this notion. A companys financial statements, or more specifically, its 10-K form, reveal new information about the company. It must detail the profit/loss for the year, any new assets purchased/sold or liabilities assumed/resolved that year, and any change in ownership, as well as a wealth of other information relating to the companys current and future operations. Also important is the acquisition and/or merger of another company. The acquisition of another company is vital information because the acquisition of another company results in the parent being able to influence the subsidiarys actions and collecting the owning-percentage share of the subsidiarys income/losses. The Accounting Standards Codification (ASC) explains that the purpose of consolidated financial statements is to prepare the financial information of the parents and subsidiaries as if they were a single economic entity.
If a company is acquired, the parent company must report consolidated financial statements, which is basically the financial statements of the parent company plus the financial statements of the subsidiary. But it is more complicated than that. One major issue is that the financial statement accounts used in one company are usually termed differently, and therefore


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means something different, than the financial statement accounts of another company. In order to combine these accounts to produce consolidated financial statements, the parent and/or the subsidiary will have to reclassify their accounts to have the same terms/definitions so that the accounts can, in fact, be combined. The best way to do so would be to have the subsidiary use the same accounting system as the parent, using the same account names/terms as the parent, so that when reporting day comes, the majority of the consolidation process will be complete. However, it may be way too costly, and in many cases complex, for subsidiaries to purchase, install, and maintain the same accounting system as the parent. Small parent companies should require their subsidiaries to implement a process by which the subsidiaries reclassify their financial statement accounts to a list of accounts that the parent company can use in preparing consolidated financial statements. While requiring subsidiaries to implement the same accounting system as the parent may be more optimal, that can be too complex and expensive.
The importance of financial statements, while relevant to all stakeholders, can be pin pointed directly to stakeholders such as investors, creditors, and lenders; financial statements are made for them. But the reason to prepare financial statements for stakeholders is to show them the company has been efficiently and effectively using the investors and lenders capital to produce more profit and grow the wealth of their stock investment. The FASBs Statements of Financial Accounting Concepts (SFAC) sets out the Conceptual Framework for financial reporting and gives guidance in SFAC No 8 in terms of who financial reporting is meant and why. It sets out the objective, among other things, which is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity (Para. OB2). And financial reports are to help investors, lenders, and other creditors estimate the value of the reporting entity


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(0B7). These investors, lenders and other creditors are considered the primary users of financial information and are whom the statements are directed for (Para. OB5), but the statements are not primarily directed for other members of the public or even for regulators (OB 10). The best reason from the Concept Statement is that these investors, lenders, and other creditors need information to assess the returns they expect from investing in the company and the prospects for the company's future liquidity (OB3). It later explains the official reasons as investors, creditors, and other lenders having a more critical and immediate need, the focus of the FASB and IASB requires them to do so, and the information needs of these users are likely to meet the needs of users in jurisdictions with a corporate governance model in the context of all types of stakeholders (BC1.16). Even the International Accounting Standards Board's (IASB), in their Conceptual Framework for Financial Reporting, agrees with the FASB's objective, word-for-word, for financial reporting: "to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity (OB2). Furthermore, without providing financial information that is useful to investors, the general public would lose out on goods/services that are provided by companies who receive the necessary capital to expand/innovate. SFAC No. 8 further addresses these fundamental qualitative characteristics of relevance and faithful representation that make financial information useful (QC5). Since it is important that a company produce a healthy financial picture and grow the wealth of its investors, without the use of illegal means or reporting error, it is imperative that a company do so in a meaningful way, as well as to find ways to improve its operations and/or innovate.
2. History & Development of Consolidated Reporting


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When a company is formed and becomes publicly traded, which means the company issues stock to the public, the company must report a set of financial statements. The four major financial statements are the income statement, balance sheet, statement of equity, and cash flow statement. The income statement shows the revenues and expenses the company incurred throughout the year, netting them to equal net incomewhich is basically a net profit. The balance sheet shows the dollar value of assets the company owns, as well as the dollar value of liabilities owed and equity assumed by investors. The statement of equity reveals the detailed changes in the companys equity accounts, which are shown on the balance sheet as the net change. And the cash flow Statement shows the amount of cash the company received and paid throughout the year.
What if a publicly traded company decides to acquire another company? In these situations, even if the acquired company still operates as a separate legal entity, financial accounting standard setters have argued that if a parent company has control over another company, then the parent company actually controls every asset, revenue, and expense of the subsidiary. The FASBs Statement of Financial Accounting Concepts (SFAC) No. 6 confirms this understanding in its Appendix B heading, Characteristics of Assets, Liabilities, and Equity or Net Assets and of Changes in Them: Control by a Particular Entity:
Every asset is an asset of some entity; moreover, no asset can simultaneously be an asset of more than one entity, although a particular physical thing or other agent that provides future economic benefit may provide separate benefits to two or more entities at the same time (paragraph 185). To have an asset, an entity must control future economic benefit to the extent that it can benefit from the asset and generally can deny or regulate access to that benefit by others, for example, by permitting access only at a price. Thus, an asset of


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an entity is the future economic benefit that the entity can control and thus can, within limits set by the nature of the benefit or the entitys right to it, use as it pleases (Para. 183-184).
And since the acquisition of more than 50 percent of a companys voting stock would allow the parent to vote onand therefore directthe companys actions, the parent would have to prepare consolidated financial statements.
Way back in 1957, there were two methods allowed for accounting for business combinations: the purchase method and the pooling of interest method. Abraham M. Stanger, in an article from St. John's Law Review, describes what these methods are, their differences, and key points about the pooling of interest method. Stanger notes that business combinations arise when a corporation acquires the assets of another corporation:
on a going concern basis, either directly, as in a merger, consolidation or purchase of substantially all of the assets, or indirectly, by way of acquisition of at least 51 percent voting control of the shares of the acquired corporation (865).
The purchase accounting method, in simple terms, is required when the acquiring company is merely purchasing the other companys net assets with cashnet assets is the difference between a companys total assets and total liabilities. If the amount paid is higher than the fair value of the acquired companys net assets, then the difference is recorded as goodwill; if the purchase price is lower than the fair value of the acquired companys net assets, the difference is recorded as negative goodwill. If instead of acquiring the companys net assets with cash, it acquires the companys stock with cash, then the relationship becomes parent to subsidiary, and the subsidiarys assets are written up to fair value. If the acquirer instead acquires the other companys stock with stock, then the cost of the transaction is measured by either the fair value


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of the acquirer's stock issued or the fair value of the acquired companys property, whichever is more evident (Stanger, 865-866). One of the differences of the purchase method with the now used acquisition method is that negative goodwill is accounted for as an allocated-reduction of the acquired long-term/fixed assets fair values, and the long-term/fixed assets fair values are used as the allocation-basis (Doupnik et-al, 60). Before moving on, long-term assets, also known as fixed assets, are considered any asset the company owns and expects to hold onto for a year or longer; it does not include any current assets such as cash, inventory, or supplies that the company expects to use up within less than a year. Now, to illustrate an example of accounting for goodwill in an acquisition under the purchase method, assume a company is going to acquire another company who has the following book and fair value amounts:
Assets
Liabilities
Equity
Equipment
Building
Total Assets
Book FV
200 250
100
300
150
400
Notes
Total
Liabilities
Book FV 100 100
100 100
Total
Equity
Book FV 200 200
200 200
Net assets are the remaining assets after subtracting out liabilities, so this companys net assets, at book value, is 300 100 = 200, which is also the equity book value. However, this companys net assets, at fair value (FV), are 400 100 = 300. Now, if the acquirer purchased this companys net assets for 350, then goodwill will have to be recorded in the books as a new line item in the acquirers assets in the amount of 50 (350 300). However, if the acquirer paid 260, then this transaction becomes a bargain purchase and 40 (260 300) would need to be allocated as a reduction of the long-term assets fair values. The bargain purchase gain of 40 must be allocated


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using the long-term/fixed assets fair values as the basis, so the portion of the 40 to allocate to the building is 15 ((150/400)*40), with the remaining (also calculated as ((250/400)*40)) to allocate to equipment. Therefore, the new fair values of the equipment and building that the acquirer is allowed to log as their cost of acquisition is 135 and 225, respectively.
Accounting Research Bulletin (ARB) 48, issued in 1957, outlined the criteria needed for the pooling of interest method. To use the method, a business combination must result in the acquirer acquiring voting-stock of the acquired company, the former owners of the acquired company continuing on as "holders of ownership interests in the combined entity," the former owners' intent to retain such shares, the continuance of management, and "retention of the business of the constituents to the combination for a reasonable period of time thereafter." In addition, the pooling of interest method results in combining the historical retained earnings (which is basically accumulated net income from every year) with that of the newly formed parent company, and allows for the parents income statements to be restated for previous years as if it was always combined with the subsidiary (Stanger, 865-866). So, it can be seen that, during this period of time, the pooling of interest method had some benefits to it because if a potential parent company is operating poorly and wants to increase its earnings, all it has to do is acquire a healthy company that has performed well in prior years in order to artificially inflate the parent companys earnings. And, since goodwill is not recognized, there is less an incentive to bargain for such a transaction (Stanger, 866-871).
2.1 Changes to ARB 48
Superseding ARB 48, according to the FASB, is the Accounting Principles Board (APB) 16, which stated its acceptance of the use of the pooling of interest method but added criteria for the pooling of interest method to be allowed. It also says that any business combination meeting


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the criteria must use the pooling of interest method (Para. 8), so there is no more option between this and the purchase accounting method. The purchase accounting method basically remains the same, with the earnings of the subsidiary being included in the acquiring companys earnings only after the acquisition, and the pooling of interest method is now meant for the uniting of ownership interest by two or more companies who are exchanging stock for stock, so the transaction is not considered an acquisition (FASB, APB 16, Para. 11-12). APB 16 also made a set of 12 criteria for using the pooling of interest method (FASB, APB 16, Para. 46-48), which made the use of the method more restrictive on companies. However, the FASB reasoned that the pooling of interest method was causing some problems. The 12 criteria for this method "did not distinguish economically dissimilar transactions." There were similar business combination transactions that were being accounted for much differently because of the two methods. As a result, it was difficult to compare the financial statements of similar companies and many stakeholders began demanding better information relating to the recognition of intangible assets. In addition, the management of such companies argued that the differences between the two methods were affecting competition in markets for mergers and acquisitions. So, in 2001, the FASBs Statement of Financial Accounting Standard (SFAS) 141 disallowed the pooling of interest method and required only the purchase accounting method (FASB, SUMMARY, n.p). It was later revised, in 2007, into SFAS 141(r), which replaced the purchase accounting method with the acquisition method (FASB, Statement of Financial Accounting Standards, i).
2.2 Current Literature for Consolidation Reporting Now that SFAS 141 (r) is codified into the FASBs ASC 805, it can be used as the current authoritative literature for business combinations. First off, many terms are defined in SFAS


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141(r), but there are a few terms most worthy of identifying for the newly formed acquisition method:
A business combination is a transaction or other event in which an acquirer obtains control of one or more businesses.... Control has the meaning of controlling financial interest in paragraph 2 of Accounting Research Bulletin No. 51, Consolidated Financial Statements, as amended (FASB, Statement of Financial Accounting Standards, 2).
And that paragraph states the "usual condition for a controlling financial interest is ownership of a majority voting interest," which is defined as owning more than 50 percent of the shares in a company, which is a condition pointing towards consolidation (FASB, ARB 51, Para. 2).
There are four conditions required for the use of the acquisition method. One must, first, identify the acquirer, second, determine the acquisition date, third, recognize and measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquired company, and fourth, recognize and measure goodwill or a gain from a bargain purchase (FASB, Statement of Financial Accounting Standards, 3-4). As Doupnik et-al mentions, one difference between the purchase method and the acquisition method is that negative goodwill is accounted for as a gain in the acquisition method (52). Using the example used for the purchased method, which had net assets of 300 at fair value, a purchase of this companys net assets with 260 cash would result in a bargain purchase gain of 40. This gain was used as an allocated reduction of the long-term/fixed assets using the purchase method. But now this gain will be treated as a bargain purchase gain to be recognized in the income statement, and the long-term/fixed assets retain their fair-value figures.
The following is a detailed example of consolidating a parents (P) accounts with a subsidiarys (S) when P acquires a 60% of Ss 200 common shares. The first graph is before


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consolidating the accounts: It shows the regular account figures, at fair value, for each company. However, it assumes and includes the investment in S account, which resulted after P paid $600 for Ss shares with cash: S previously had $10 in cash (notice that, according to the accounting equation, a companys assets must equal its liabilities plus equity. Adding total liability plus total equity yields the total assets figure and, conversely, total assets minus total liabilities equals total equityAssets = Liabilities + Equity).
Ps investment in, or price paid to, S was $5 per share. 60% of the 200 shares is 120, and 120 multiplied by $5 is $600. $600 is the investment in S, then. Now then, the above balance sheet figures are the current figures reported in Ps and Ss individual financial statements for reporting purposes. However, since P is required to prepare consolidated financial statements, the figures of each company should be combined after eliminating the $600 investment account.


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The first working step (WS1) would be to eliminate the $600 with a corresponding elimination to 60% of Ss total equity, as shown in the next graph. 60% of Ss $100 retained earnings is $60, and 60% of Ss $700 common shares is $420. Notice that, per the math logic of the accounting equation, the reduction of $600 in Ps assets is greater than the total reduction of $480 ($60 retained earnings + $420 common shares) in Ss equity. What happens to one side of the accounting equation must happen to the other; so, this resulting difference between 600 and 480, 120, is logged in an account called goodwill as an increase to Ps assets in the consolidated financial statements (notice that -600 + 120 = the 480 reduction in assets that corresponds to the 480 reduction in equity).
The second working step (WS2) involves getting rid of any non-controlling interest (NCI). Since P only acquired 60% of Ss common shares, 40% is still owned by others, which is known as an


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NCI. This means that, even though P will be combining 100% of the asset and liability accounts of S, P only has a 60% claim to such accounts. To make up for this, then, the parents equity account must be reduced by the amount the NCI owns in the company with a corresponding increase to an NCI account, also listed under equity, showing the NCI amount that P does not have a claim in. It may seem obvious that the remaining 40% of Ss total equity is the amount that the NCI has a claim to, but this optional method is only allowed under the International Financial Reporting Standards (IFRS) 3, paragraph 19, which states that the acquirer shall measure non-controlling interest at either fair value (a) or the present ownership instruments' proportionate share in the recognized amounts of the acquirees identifiable net assets (b). Under US GAAPs ASC 805-20-30-1, "the acquirer shall measure the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at their acquisition-date fair values" only. The fair value of the common shares is the $5 price paid for each common share. Therefore, the remaining shares of S, 80 (200*.40), multiplied by $5 is $400. The following graph shows this elimination under WS2:


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In the above graph, $400 is added to equity as an NCI but the corresponding reduction of equity can only be $320 ($40 of Retained Earnings and $280 of Common Shares). Therefore, the remaining increase difference of $80 (400-320) needs to also increase the goodwill account under assets. Now, the accounts are ready to be combined into single consolidation figures. The next graph shows the consolidation (totaling): P must report the last column.
2.3 Why Consolidation Reporting Matters


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There is not only legal but ethical reasoning behind reporting consolidated financial statements. First, the Securities Act of 1933 required that, generally, all securitiesstock, shares, and other forms of ownership in companiestraded in the U.S. be registered. So, the Securities and Exchange Commission (SEC) was created by the Securities Exchange Act of 1934 to register, regulate, and oversee such companies who register and required that all companies who own more than 10 million in assets and had more than 500 owners register with the SEC (SEC., The Laws). Digging further, understanding the ethical reasoning behind such acts will become very important, since people rely on financial statements to make economic decisions that affect not just their economy but the worlds.
Cornell University Law School describes the 1929 great depression as being the result of too much speculation in company securities. Many people were purchasing securities by companies who promised much profit in return but without giving much information about the company. As thousands of investors bought up stock in companies, they later all sold the stock in a panic, resulting in the great depression (n.d.). This makes sense, and is one reason for depressions. A boom in the market place can occur where many businesses are raising funds by issuing stock in their company in order to expand and continue providing goods and services that the public demands. But if too many investors are purchasing stock in companies without knowing all the relevant information about the company, then the investors are making uninformed decisions. There was little incentive to invest on the use of investors money, so this was one example of financial markets that did not reveal the necessary information for investors to make informed, rational resource-allocation decisions, and it costs not only the investors money but the general publics welfare. The companies that had to make cut backs had to lay off workers, close down shops, and possibly default on their liabilitiesdebt owed. The great


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depression, as well as other economic downturns, highlights the magnitude and importance of financial reporting; without reporting audited financial statements, how can companies continue? Investors may not trust companies that give little information, and a successfully running economy depends, to some degree, on the trust investors have in markets. For this reason, it is crucial that publicly traded companies report audited financial statements with enough information to maintain the trust of investors.
Thankfully, the FASB is designated as the organization that establishes standards and rules of financial reporting in the U.S. (FASB, FACTS), known as Generally Accepted Accounting Principles (GAAP). U.S. GAAP requires publicly traded companies to report information about a companys income/loss for the year, the ending-years balances in asset, liability, and equity accounts, the cash flow changes for the year, and the net change in equity for the year. U.S. GAAP also requires a set of notes to the financial statements, which describe the various accounting policies, methods, and various other issues that relate to the financial statements. All this information is meant to give current and potential investors, creditors, and lenders the information they need to make their resource-allocation decisions. And in effect, this also assists the general public.
But there are still reporting problems and issues today in areas that U.S. GAAP either does not cover or does not cover well. For example, Scott Taub, in his article '"Busting some myths about IFRS and GAAP,'" on the IFRS Foundation and IASB website, mentioned that U.S. GAAP is largely silent on fixed asset capitalization and depreciation. After doing a quick search in the Codifications, it seems that U.S. GAAP truly is silent on capitalization of property, plant, and equipmentwhich are tangible long-term, or fixed, assets (ASC 360-10-35). In terms of depreciation methods, it only briefly talks about what depreciation is (ASC 360-10-35-4) and


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what it should be based on (ASC 360-10-35-3) but does not give proper rules or applications related to any type of method. It merely mentions the declining balance and sum-of-the-years'-digits method as two methods that may be used (ASC 360-10-35-7). Since there are many areas U.S. GAAP is either silent on or does not provide much guidance on, the American Institute of Certified Public Accountants (AICPA) came out with the AICPA Code of Professional Conduct, which is a document meant to give guidance to people in public and private practice, as well as to others. The principles of the code are, and state, the following:
Responsibilities principle: In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities.
The public interest principle: Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate a commitment to professionalism.
Integrity principle: To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity.
Objectivity and independence principle: A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services.
Due care principle: A member should observe the professions technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the members ability.


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Scope and nature of services principle: A member in public practice should observe the Principles of the Code of Professional Conduct in determining the scope and nature of services to be provided (Para. 0.300.010 0.300.070).
A close look at these principles would determine these principles to be virtues of character, a topic originating from Aristotle. The AICPAs code, therefore, has identified that maintaining such character traits are vital to the accounting professional. And this does make sense, since there are many areas of accounting that require judgement, so in making a decision, one must consider the alternatives and pick the best one. But the best one is a subjective phrase, so it must be considered in light of some ethical values, and the best ethical value in the AICPAs code is the public interest principle. This principle also relates much to biblical principles such as the widely known golden rule, where, to some Christians, means to treat others as oneself and to assist others when needed. So, it seems the modern-day, ethical principles for CPAs can be tied to literature that stems back to, and beyond, in the case of Aristotle, the time of the biblical birth of Christ. And these ethical principles offer guidance concerning the wellbeing of others.
The last point to make for the importance of financial reporting is for whom financial reporting is meant. Earlier, it was described that financial reporting is for the potential and current investors of companies, but they are not the only ones who have a stake in a company. Kohls Corporation, for example, provides general merchandise for the public. Auto manufacturers provide vehicles to the general public, and banks provide the services of holding onto peoples purchasing power. The general public is a stakeholder of most, if not all, companies in the worldbecause economies in other countries affect each other. If Ford, Kohls, JCPenney, or any other business were not operating today, where would people get their furniture, food, shelter, or other basic living needs and luxury items? If a company fails, the


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public suffers from it. Financial reporting ensures that companies continue to operate; when financial statements are published and audited, investors will continue to hold onto their shares or decide to purchase someallowing the companies to have capital to run their businesses and the public will be employed by the company, be able to purchase the goods and services demanded from the company, and invest in the shares of the company.
Mary, in the opening example, faced a common question: why is the stock price declining? While minor declines and rises are normal aspects of the business cycle and markets in general, a significant decline in a companys stock is usually due to negative information about the company being revealed. If a relatively new company, Company A, decides to acquire another company, Company B, then Company B must give its financial statement information to Company A for Company As consolidated financial statements. And if company B decides to implement the same accounting system as company A to do so, then this new information would be a huge expense in Company Bs incomes statement, which could possibly cause the stock price to decrease. A cheaper process for reporting consolidated financial statements, therefore, would be needed to reduce such a burden.
3. Consolidation Issues
Consolidation issues in the U.S. become a problem when a public U.S. company acquires a foreign company or vice-versa. A U.S. public company registered with the SEC must report consolidated financial statements when the company acquires more than fifty percent of an entitys stock (ASC 810-10-05). Consider a hypothetical U.S. publicly traded companycalled Retai Inc.registered with the SEC that acquires a fifty-one percent interest in a London-based companycalled Londo, Inc. Retai is ayou guessed itretail company that provides fashion and clothing merchandise, while Londo is a similar but smaller retail company, also providing


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fashion and clothing merchandise. Retai was subject to U.S. GAAP and Londo, being part of the U.K., which is a European Union (EU) member, is subject to IFRS but as adopted by the EU. Also assume Retai uses SAP software for its accounting systems and Londos accounting software is QuickBooks.
Now that Retai has acquired a controlling interest in Londo, Retai must report to the SEC a consolidated set of financial statements which include Retais accounts and Londos accounts combined. However, a complicated set of issues come with that. The accounting systems used in each company is different, the currencies used to report financial statements in each company is different, which brings up foreign currency exchange risk, and there could also be transactions made between the parent and subsidiary that need to be cancelled-out and not considered when preparing a consolidated set of financial statements. Having the subsidiary install the same accounting system as the parent could be optimal but, because of the cost and complexities of doing so, each entity should keep their existing system and consider a different process to combine the financial statement figures.
3.1 Differing Accounting Systems
With a different accounting system used by each company, the parent will need to request financial statement information from the subsidiary. The subsidiary could do so, but without the parent knowing much about the subsidiarys account terms and definitionsthe methods used to account for various itemsit would be very hard for the parent to just combine the figures. For instance, U.S. GAAP allows for the Last-In First-Out (LIFO) inventory method to be used (ASC 330-10-30-9), but for a company under IFRS, LIFO is not allowed. Therefore, the inventory account on a U.S. company would likely be valued differently than the inventory account of a company preparing their statements under IFRS, so a U.S. company would need to


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recalculate/reconcile the foreign companys inventory account to a LIFO figure. In our hypothetical situation, Retai should send Londo a list of Retais account names and related terms/definitions/methods used in each account so that Londo can convert Londos list of accounts to the parents. Londo knows more about how Londos accounts are valued and can reconcile its accounts much easier than Retai. Retai would have to be open to answer any questions Londo may have during the process. So, there are three main steps that the parent company would need to lay out as a policy to Londo. The first step is for the parent to define a list of company-wide account names with its related terms/definitions/methods. The second step would require much support/input/work from the subsidiarys controllers and other employees in charge of handling Londos accounts. And the third step would be to have an open communication channel between the parent and subsidiary.
3.2 Cost & Complexities of Accounting Systems By allowing each company to keep its existing accounting systems and merely reconcile the two companys financial statements together, this would save the subsidiary a significant amount of time, cost, and complications that may result from changing its accounting systems. SAP produces a wide variety of enterprise application software for companies of all sizes (McKinsey) and is one of the largest accounting system providers. While their cost estimates are not public information, one can only speculate as to how costly it is. Someone from OCHIBA Business Solutions seems to know the costs related to "SAP Business One The Cost Effective Solution," meant for private, small to medium entities (SMEs). Their webpage list the total costs of the software for only 10 user systems fully implemented at about 34,400 pounds a year (n.d.). For only 10 people, that can become very costly depending on how many users are needed. In addition, some small companies may not need all the unique features that larger software


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providers, like SAP, provide; there could be unused and unneeded features that subsidiaries would have to pay for. SAP's website, for instance, shows that they offer many other features/services than QuickBookss website shows, and SAP even separates their services by line of business, by industry, by platform and technology, or by product. In terms of QuickBooks, their cost figures readily available on their website. But their highest package, at $39.95 per month, allows for access for up to five people (QuickBooks), which amounts only to almost $1,000 per year for 10 users. Comparing this to SAPs cost shows an enormous difference, not to mention pounds are usually worth more than U.S. dollars when converted. SAPs cost, in this case, is over 3400% the cost of QuickBooks before even converting the SAP pounds figure into U.S. dollars.
Another factor to consider would be how complex the installation and use of SAP at Londo would be, and the cost related to it. Londo would have to train or hire new employees that are familiar with SAP. And this new, SAP expert would have to spend his/her time installing and training existing employees to use it. But the SAP expert would have to first talk to and understand each employees job duties and access rights. And theres also the chance that, after the new system is implemented, it fails to operate the intended way. Sudhir Lodh and Michael Gaffikin wrote an article in the European Accounting Review about the, theoretically informed, implementation process of an SAP accounting system. The general implications of the authors ideas are that implementation of an SAP accounting system is a continuous process. Many of the problems with implementation of the SAP system, particularly with a major steel producer in Australia who was the main focus of in the article, are that the "original timetable for the SAP evaluation did not proceed as anticipated;" the implementation team ended up questioning SAP's ability to meet specific, future requirements, since it took so long for the system to meet its


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previous needs; many previously scheduled sessions had to be canceled in order to concentrate on other requirements of the system; the methods used within SAP are difficult to assess, and each session they were exposed to brought up many more issues; implementing a prototype model is the only way a firm can decide the suitability of SAP; and a series of training sessions must be conducted with employees to use the system/prototype. Another issue of concern within SAP's package capability was issues with terminology and definitions, as well as screen layouts and the difficulty for the average person to use SAP. People will need hands on experience with the system (86-87). So, its clear that implementation of an SAP system is very complex. The only reason the above company implemented an SAP system was because they needed a better way to manage their cost management systems, and after working with a consulting firm, decided to implement the SAP system (85-86). In Retais and Londos situation, there is no suitable reason for Londo to adopt SAP, other than reporting consolidated figures for the parent companys shareholders. However, thats a subjective claim, as there may be instances where the complexities involved in adopting the same accounting system may be worth it.
4. Opposing Solution: Adopt The Same Accounting System The major opposing view point to implementing the proposed three-step consolidation process is to have the subsidiaries implement the same accounting system as the parent. If Retai were to have Londo implement the same accounting system as Retai, then the proposed three-step process would be very simplified but have its pros and cons. With the same accounting system in-place, many of the accounts used between the parent and subsidiary would be the same, depending on the circumstances of each company. For instance, a cash account is probably determined based on the same transactionscollecting cash. But there may be some instances where there is an account that one company uses but the other doesnt. For instance, if Londo


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accounts for office textbooks in an account called misc. office, but Retai accounts for office textbooks in an account called supplies, then this would be an example of differing account terms. Retai and Londo could end up deciding to lump the accounts together into a supplies or a similarly named account and use that for financial reporting. Or, Retai could easily combine, and have ready, the various supplies accounts into its financial statements when needed for reporting day. With the same accounting system in place, so many things could be, or are inherently, done to benefit the companies.
4.1 Benefits of Having The Same Accounting System
One benefit for a subsidiary to have the same accounting system as its parent company is that the parent company will gain better information due to less human error. Without the same accounting system, the subsidiary and parent would have to implement some manual processes, such as the proposed 3-step process, using a series of excel and/or other data processing spreadsheets, input from accounting personnel at the subsidiary, and input from the accounting personnel at the parent company. Judgement is required from each personnel and typos and calculation errors can occur from a person entering data into spreadsheets. And since the use of the same accounting system results in less human judgement and typo error, it would be much easier for auditors to audit such companies. For SAP, for instance, audit software such as SAP Assurance and Compliance Software, powered by SAP HANA (SAP), and Smart Link for SAP Audit Software (Arbutus) are available to both quicken the audit process and reduce the possibility of human error. The audited companies would save on time-based costs/fees related to both external and internal auditors, if GAS is used to audit such companies.
Another benefit for a subsidiary to have the same accounting system as its parent company is that it gives more assurance to the shareholders and other stakeholders of the


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consolidated company as to the fairly presented financial statements due to less human error. The stakeholders of a company usually desire the company to perform well, and this includes reporting fairly presented financial statements. With the same accounting system in place, shareholders, as well as other stakeholders, will have greater assurance as to the accuracy of and non-materially misstated financial statements. No doubt this is what the Financial Reporting Council (FRC) had in mind when approving Financial Reporting Standard (FRS) 102, The Financial Reporting Standard applicable in the UK and Republic of Ireland, which is, as its name implies, meant for companies in the UK and Republic of Ireland. The standard says that uniform accounting policies are to be used when preparing consolidated financial statements for like transactions and similar events, although adjustments can be made for uniformity if it is to the contrary (FRS 102.9.17). While the FRC's reasoning for the universal accounting policy rule is missing in this standard, I can infer from the goal of financial reporting, and from the FRC's consolidation procedures in FRS 102.9.13, that universal accounting policies gives greater assurance to stakeholders that parent companies are preparing reliable financial statements.
4.2 Disadvantages of Having The Same Accounting System One of the main disadvantages of having a subsidiary adopt the same accounting system as its parent company is the costs and complexities. As mentioned before, many costs and complexities arise when having a subsidiary implement the same accounting system as its parent. Some research by Aidi Ahami and Simon Kent, in a publication called The Utilisation of Generalized Audit Software (GAS) by External Auditors, verifies this notion but for certain types of entities. The authors found that, after conducting an online survey among external auditors, about 73 percent of respondents noted that the utilisation of generalized audit software (GAS) is nonexistent for auditing small clients. Some respondents knew the advantages of using


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GAS but were hindered by "high implementation costs; learning curve and adoption processes; and the lack of ease of use." Of those that did use GAS used interactive data extraction and analysis (IDEA), another audit software tool but used only for financial statement auditing (89). So, it seems that at least for small companies the use of audit software is too costly and complicated. For much larger companies, however, the benefits could possibly outweigh these costs and complexities.
5. Concluding Thoughts
The goal of consolidated financial statements is to prepare a set of financial statements assuming one company, in substance, has economic control over its various activities, regardless of the legal control tied to such activities. The goal is to report this consolidated set of financial statements to the companys group of shareholders, lenders, and other creditors. Uniformity of accounting standards across the globe is likely always going to be a problem, but companies need to adopt standards/policies that align with their particular situation. In the case of accounting systems used by parent companies and their subsidiaries, should they all use the same accounting system?
It seems that the adoption of the same accounting system would be burdensome on all types of entities, especially large ones, since a larger company would have a lot more to account for. But remembering the goal of financial reporting shows that investors, lenders, and other creditors need to be shown reliable, accurate, and fairly presented financial statements. The adoption of the same accounting system among parent companies and their subsidiaries will certainly assist this goal but should companies of small sizes be burdened with such a requirement if there are not that many stakeholders? Small companies should not have to be burdened with such a requirement. If a company becomes large enough, there will be more


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stakeholders at risknot just the investors, lenders, other creditors, customers, and regulatory bodies but the company itself. Ahmis and Kents findings reveal that many external auditors do not even use GAS on small clients because of the immateriality involved. Therefore, small companies should implement a manual process whereby the financial information of the subsidiaries and of the parent is combined into one, but large companies should have their subsidiaries adopt the same accounting system as the parent. Materiality, then, becomes the basis for a company to adopt the same accounting system.


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Works Cited
Ahmi, Aidi & Simon Kent. "The Utilisation of Generalized Audit Software (GAS) by External Auditors." Emerald Insight. Managerial Auditing Journal, Vol. 28 Iss: 2, pp. 88-113. 2013. Web. 26 Mar. 2016.
AICPA. "Code of Professional Conduct." American Institute of Certified Public Accountants. 14 Dec. 2014. Web. 28 Oct. 2015.
Arbutus. "SAP Audit Software." Arbutus. Arbutus Software Inc. N.d. Web. 26 Mar. 2016.
Beaver, William H. Financial Reporting: An Accounting Revolution. 2nd edition. Prentice-Hall. Print.
Cornell University Law School. "Securities Law History." Cornell Law School. Cornell University. N.d. Web. 28 Oct. 2015.
Doupnik, Timothy S., Thomas F. Schaefer, & Joe B. Hoyle. Advanced Accounting. 10th edition .McGraw-Hill. Print. 2011.
FASB. Accounting Standards Codification: 330-10-30-9. American Accounting Association, FASB. N.d. Web. 13 Feb. 2016.
FASB. Accounting Standards Codification: 805-20-30-1. American Accounting Association, FASB. N.d. Web. 20 Apr. 2016.
FASB. Accounting Standards Codification: 810-10-10-1. American Accounting Association, FASB. N.d. Web. 5 Mar. 2016.
FASB. Accounting Standards Codification: 810-10-05. American Accounting Association, FASB. N.d. Web. 13 Feb. 2016.
FASB. "APB 16: Business Combinations." Financial Accounting Standards Board. Aug. 1970.
Web. 25 Oct. 2015.


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FASB. "ARB 51: Consolidated Financial Statements." Financial Accounting Standards Board. Aug. 1959. Web. 25 Oct. 2015.
FASB. "Facts About Fasb." Financial Accounting Standards Board. N.d. Web. 28 Oct. 2015.
FASB. "Statement of Financial Accounting Concepts No. 6." Financial Accounting Standards Board. Dec. 1985. Web. 25 Oct. 2015.
FASB. Statement of Financial Accounting Concepts No. 8. Financial Accounting Standards Board. Sep. 2010. Web. 5 Mar. 2016.
FASB. "Statement of Financial Accounting Standards No. 141 (revised 2007): Business
Combinations." Financial Accounting Standards Board. Dec. 2007. Web. 25 Oct. 2015.
FASB. "Summary of Statement No. 141" Financial Accounting Standards Board. Jun. 2001. Web. 25 Oct. 2015.
Financial Reporting Council. "FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland." Financial Reporting Council. The Financial Reporting Council Limited. Sep. 2015. Web. 26 Mar. 2016.
IASB. Conceptual Framework for Financial Reporting. IFRS Foundation. Sep. 2010. Web. 5 Mar. 2016.
IFRS. "International Financial Reporting Standard 3: Business Combinations." IFRS. IFRS Foundation. Jan. 2008. Web. 20 Apr. 2016.
Lodh, Sudhir C., and Michael J.R. Gaffikin. "Implementation of An Integrated Accounting And Cost Management System Using The SAP System: A Field Study." European Accounting Review 12.1 (2003): 85-121. Business Source Premier. Web. 24 Mar. 2016.
McKinsey. "SAP Analysis Update: SAP U.S. at a Glance: Helping the World Run Better and Improving People's Lives." SAP. 22 Jan. 2016. Web. 13 Feb. 2016.


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OCHIBA Business Solutions. SAP Business One The Cost Effective Solution. OCHIBA Business Solutions. N.d. Web. 24 Mar. 2016.
SAP. "SAP Assurance and Compliance Software." SAP. SAP SE. N.d. Web. 26 Mar. 2016.
SEC. "The Laws That Govern the Securities Industry." U.S. Securities and Exchange Commission. 1 Oct. 2013. Web. 28 Oct. 2015.
Stanger, Abraham M. "Accounting for Business Combinations: Choice or Dilemma." St. John's Law Review. Issue 5 Volume 44. Spring 1970, Special Edition. Article 62. Dec. 2012. Web. 25 Oct. 2015.
Taub, Scott. Busting Some Myths About IFRS and GAAP. IFRS. 7 Aug. 2014. Web. 6 Mar. 2016.


Full Text

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Consolidating Reporting: Development, Issues, and Solution by Chris Battraw An undergraduate thesis submitted in partial completion of the M etropolitan State University of D enver Honors Program May 2016 Dr. John Hathorn Dr. Andrew Holt Dr. Megan Hughes Zarzo Primary Advisor Second Reader Honors Program Director

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Consolidated Reporting: Development, Issues, & Solution Date Completed 5/13/2016 Completed By Chris M Battraw I nspired by many sure So which kinds of inspirations ought we to seek? Facebook me your answer.

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Abstract Consolidated financial reporting is a requirement for publicly traded companies who acquire control over another company. C ontrol over another company usually occurs when the voting stock. The parent company must then combine all financial statement elements financial statements However, a problem occurs because not every company has the same accounting systems and account definitions/terms, so the parent must find a way to combine the accounts and elements The most optimal way is to have the subsidiary implement the same account ing system as the parent. However, doing so could be a burden on the subsidiary because of cost and complexity issues; the subsidiary would have to purchase, install, and test the new accounting system, and this may cause losses resulting from improper acc ounting system installation and/or maintaining an old system as a backup in case the new accounting system fails. Parent companies of small sizes should require their subsidiaries to implement a process by which the subsidiaries reclassify their financial statement accounts to a list of accounts that the parent company can use in preparing con solidated financial statements Although having the subsidiary adopt the same accounting system as the parent would be more optimal, only large companies and their stakeholders will benefit from doing so Implementing the same accounting system as its parent company can be to o complex and expensive on small companies with no merit to do so This thesis project will focus into the development of consolidate d financial reporting and the purposes of it. The paper will also consider the ethical considerations and perspectives for the stakeholders of financial reporting, which will merit a look into the American Institute of AICPA ) Code of Professional Conduct. I t will then briefly explain the various issues with reporting consolidated financial statements and present a solution

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to the main issue in question. And since much of the information relating to bu siness combinations is pri vate and will likely differ among companies/industries, many assumptions will be made when applying authoritative accounting literature. C ompanies of small sizes should implement the proposed solution process while larger companies may actually benefit fr om the opposing solution The opposing solution is that implementing the same accounting system will be more optimal and preferred; when subsidiaries implement the same accounting system as the parent, it will result in easily obtained consolidation figure s and less human error, as well as an easier way to audit such companies.

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Battraw 1 Chris Battraw Advisor Dr. John Hathorn HON 4950 1 27 Mar 2016 Consolidated Reporting: Development, Issues, & S olution s 1. A Look into Consolidated Reporting Assume a recent graduate Mary, lands her dream job right out of college and begins working immediately Mary is so excited and finds that she has some extra cash every month, so she decides to invest it somewhere. Her local bank refers her to a broker who recom mends investing in large companies because it is as business So she decides to purchase shares in a retail company every month using her residual earnings. By the end of her first year in December, her stock has grown by a significant amount and future prospects of the However, after financial statements are fallen significantly If Mary were to sell the shares, she would not even recover the total amount she had lost money, or keep it with the hopes that the stock price will rise and risk it losing even more value. Decisions like the above example happen all the time. Du ring the housing bust of 2007 2009, home owners and inve stors in home based index funds saw a significant drop in home values and lost much of their wealth So what can someone look at, o r anticipate, when deciding to buy, sell, or keep stock or investments? They key point made in the opening example was that the retail company had published their financial statements

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Battraw 2 nancial statements are published, so many things happen and the stock price of the company changes to what investors think reflect s all available information that Graham and Dod d information within financial statements (132). This led to the understanding, by Fa ma and others, that a securities market is efficient if prices fully reflect the information available (quoted in Beaver, 134). information about a company, thus making the secur ities market completely efficient, markets seem to generally reflect this notion. statements, or more specifically, its 10 K form, reveal new information about the company. It must detail the profit/loss for the year, any new assets purchased/sold or liabilities assumed/resolved that year, and any change in operations. Also important is the acquisition and/or merger o f another company. The acquisition of another company is vital information because the acquisition of another company results in ing the owning percentage share of the inco me/losses. The Accounting Standards Codification (ASC) explains that the purpose of consolidated financial statements is to prepare the financial information of the parents and subsidiaries as if they were a single economic entity. If a company is acquire d, the parent company must report consolidated financial statements, which is basically the financial statements of the parent company plus the financial statements of the subsidiary. But it is more complicated than that. One major issue is that the financ ial statement accounts used in one company are usually termed differently, and therefore

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Battraw 3 means something different, than the financial statement accounts of another company. In order to combine these accounts to produce consolidated financial statements, t he parent and/or the subsidiary will have to reclassify their accounts to have the same terms/definitions so that the accounts can, in fact, be combined. The best way to do so would be to have the subsidiary use the same accounting system as the parent, us ing the same account names/terms as the parent, s o that when reporting day comes, the majority of the consoli dation process will be complete However, it may be way too costly, and in many cases complex, for subsidiaries to purchase, install, and maintain the same accounting system as the parent. Small parent companies should require their subsidiaries to implement a process by which the subsidiaries reclassify their financial statement accounts to a list of accounts that the parent company can use in prepa ring consolidated financial statements. While requiring subsidiaries to implement the same accounting system as the parent may be more optimal, that can be too complex and expensive. The importance of financial statements, while relevant to all stakeholder s, can be pin pointed directly to stakeholders such as investors, creditors, and lenders ; financial statements are made for them. But the reason to prepare financial statements for stakeholders is to show them the company has been efficiently and effectively using to produce more profit and grow the w ealth of their stock investment Financial Accounting Concepts (SFAC) sets out the Conceptual Framewor k for financial reporting and gives guidance in SFAC No 8 in terms of who financial reporting is meant and why It sets out the objective rovide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions And f inancial reports are to help investors, lenders, and other creditors estimate the value of the reporting entity

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Battraw 4 (OB7). Thes e investors, lenders and other creditors are considered the primary users of financial information and are whom the statements are directed for (Para. OB5) but the statements are not primarily directed for other members of the public or even for regulator s (OB10). The best reason from the Concept Statement is that these investors, lenders, and other creditors need information to assess the returns they expect from investing in the company and the prospects for the company's future liquidity (OB3). It later explains the official reasons as investors, creditors, and other lenders having a more critical and immediate need, the focus of the FASB and IASB requires them to do so and the information needs of these users are likely to meet the needs of us ers in jurisdictions with a corporate governance model in the context of all types of stakeholders (BC1.16) Even the International Accounting Standards Board's (IASB) in their Conceptual Framework for Financial Reporting, agrees with the FASB's objective word for word, for financial reporting : "to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about pro Furth ermore, without providing financial information that is useful to investors, the general public would lose out on goods/services that are provided by companies who receive the necessary capital to expand/innovate. SFAC No. 8 further addresses these fundame ntal qualitative characteristics of relevance and faithful representation that make financial information useful (QC5). Since it is important that a company produce a healthy financial picture and grow the wealth of its investors, without the use of illega l means or reporting error, it is imperative that a company do so in a meaningful way, as well as to find ways to improve its operations and/or innovate. 2. History & Develop m ent of Consolidated Reporting

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Battraw 5 When a company is formed and becomes publicly traded, which means the company issues stock to the public, the company must report a set of financial statements. The four major financial statements are the income statement, balance sheet, statement of equity, and cash flow stateme nt. The income s tatement shows the revenues and expenses the company incurred throughout t he year, netting them to equal net i ncome which is basically a net profit. The balance s heet shows the dollar value of assets the company owns, as well as the dollar value of liabilities owed and equity assumed by investors. The statement of e quity reveals the detailed which are shown on the balance sheet as the net change. And the cash flow Statement shows the amount of cash t he company received and paid throughout the year. What if a publicly traded company decides to acquire another company? In these situations, even if the acquired company still operates as a separate legal entity financial accounting standard setters have argued that if a parent company has control over another company, then the parent company actually controls every asset, revenue, and expense of the subsidiary. The FASB Statement of Financial Accounting Concepts ( SFAC ) No. 6 confirms this understanding in its Appendix B heading, Characteristics of Assets, Liabilities, and Equity or Net Assets and of Changes in Them: Control by a Particular Entity: Every asset is an asset of some entity; moreover, no asset can simultaneously be an asset of more than one entity, although a particular physical thing or other agent that provides future economic benefit may provide separate benefits to two or more entities at the same time (paragraph 185). To have an asset, an entity must control future economic benefit to th e extent that it can benefit from the asset and generally can deny or regulate access to that benefit by others, for example, by permitting access only at a price. Thus, an asset of

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Battraw 6 an entity is the future economic benefit that the entity can control and t hus can, within (Para. 183 184). parent to vote on and therefore direct th the parent would have to prepare consolidated financial statements. Way back in 1957 there were two meth ods allowed for accounting for business combinations: the purchase method and the pooling of interest m ethod. Abraham M. Stanger, in an article from St. John's Law Review describes what these methods are, their differe nces, and key points about the pooling of interest m ethod. Stanger notes that business combinations arise when a corporation acquires the assets of another corporation: on a going concern basis, either directly, as in a merger, consolidation or purchase of substantially all of the assets, or indirectly, by way of acquisition of at least 51 percent voting control of the shar es of the acquire d corporation (865). The p urcha se a ccounting method, in simple terms, is required when the acquiring company is merely purchasing the other company net assets with cash net assets is the difference If the amount paid is higher than the fair value of the acquire d company then the difference is recorded as goodwill ; if the recorded as nega tive goodwill. net assets with cash, it stock with cash, then the relationship becomes parent to subsidiary, and fair value If the acquirer instead acqu ires the other then the cost of the transaction is measured by either the fair value

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Battraw 7 of the acquirer's stock issued or the fair value of the prop erty, whichever is more evident ( Stanger 865 866). One of the d ifferences of the purchase method with the now used acquisition method is that negative goodwill is accounted for as an all ocated reduction of the acquired long term /fixed and the long term /fixed used as the allocation basis (Doupnik et al, 60). Before moving on, long term assets, also known as fixed assets, are considered any asset the company owns and expects to hold onto for a year or longer; it does not include any curr ent assets such as cash, inventory, or supplies that the company expects to use up within less than a year. Now, to illustrate an example of accounting for goodwill in an acquisition under the purchase method assume a company is going to acquire another c ompany who has the following book and fair value amounts: Assets = Liabilities + Equity Book FV Book FV Book FV Equipment 200 250 Notes 100 100 C/S 200 200 Building 100 150 Total Asset s 300 400 Total Liabilities 100 100 Total Equity 200 200 at book value, is 300 100 = 200, which is also net assets, at fair value (FV), are 400 100 = 300. Now, if the acquirer purchased this net assets for 350, then goodwill will have to be recorded in the books as a new line item in the ssets in the amount of 50 (350 300). However, if the acquirer paid 260, then this transaction becomes a bargain purchase and 40 (260 300) would need to be allocated as a reduction of the long The bargain purchase gain of 40 mu st be allocated

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Battraw 8 using the long as the basis so the portion of the 40 to allocate to the building is 15 ((150/400)*40), with the remaining (also calculated as ((250/400)*40)) to allocate to equipment. Therefore, the new fair values of the equipment and building that the acquirer is allowed to log as their cost of acquisition is 135 and 225, respectively. Accounting Research Bulletin ( ARB ) 48 issued in 1957, outlined the crit eria needed for the pooling of i nterest method. To use the method, a business combination must result in the acquirer acquiring voting stock of the acquired company, the former owners of the acquired company continuing on as "holders of ownership interests in the combined entity," the former owners' intent to retain such shares, the continuance of management, and "retention of the business of the constituents to the combination for a reasonable period of time thereafter." In addition, the pooling of interes t method results in combining th e historical retained earnings (which is basically accumulated net income from every year) with that of the newly formed as if i t was always combined with the subsidiary ( Stanger 865 866). So, it can be seen that, during this period of time, the pooling of interest method had some benefits to it because if a potential parent company is operating poorly and wants to increase its earnings, all it has to do is acquire a healthy company that has performed well in prior years in order to artificially inflate the parent co And, since goodwill is not recognized, there is less an incentive to bargain for such a transaction ( Stanger 866 871). 2.1 Changes to ARB 48 Superseding ARB 48 according to the FASB, is the Accounting Principles Board ( APB ) 16, which stated its acceptance of the use of the pooling of interest method but added c riteria f or the pooling of interest m ethod to be allowed. It also says that any business combination meeting

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Battraw 9 the criteria must use the pooling of interest method (Para. 8), so there is no more option between this and the purchase accounting method. The purchase accounting method basically remains the only after the a cquisition, and the pooling of interest method is now meant for the uniting of ownership interest by two or more companies who are exchanging stock for stock, so the transaction i s not considered an acquisition (FASB, APB 16, Para. 11 12). APB 16 also made a set of 12 criteria for using the pooling of interest method (FASB, APB 16, Para. 46 48 ) which made the use of the method more restrictive on companies. However, the FASB reasoned that the pooling of interest method was causing some problems. The 12 criteria for this method "did not distinguish economically dissimilar transactions." There were similar business combination transactions that were being accounted for much differently because of the two methods. As a result, it was difficult to compare the financial statements of similar companies and many stakeholders began demanding better information relating to the recognition of intangible assets. In addition, the management of such companies argued that the di fferences between the two methods were affecting competition in markets for mergers and acquisitions. So, in 2001, the SFAS ) 141 d isallowed the pooling of interest m ethod and required only the purchase acc ounting method ( FASB, SUMMARY, n.p) It was later revised in 2007, into SFAS 141(r ) which replaced the purchase accounting method with the acquisition method (FASB, Statement of Financial Accounting Standards i). 2.2 Current Literature for Consolidation Reporting Now that SFAS 141(r) is ASC 805, it can be used as the current authoritative literature for business combinations. First off, many terms are defined in SFAS

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Battraw 10 141(r) but there are a few terms most worthy of identifying for the newly formed acquisition method : A business combination is a transaction or other event in which an acquirer obtains control of one or more businesses Control has the meaning of controlling financial interest in paragraph 2 of Account ing Research Bulletin No. 51 Consolidated Financial Statements, as amended (FASB, Statement of Financial Accounting Standards 2). And that paragraph states the "usual condition for a controlling financial interest is ownership of a majority voting intere st," which is defined as owning more than 50 percent of the shares in a company, which is a condition pointing towards consolidation (FASB, ARB 51 Para. 2) There are four conditions required for the use of the acquisition method One must, first, identify the acquirer, second, det ermine the acquisition date, third, recognize and measure the identifiable assets acquired, the liabilities assumed, and any non controlling interest in the acquired company, and fourth recognize and measure goodwill or a gain from a bargain purchase (FASB, Statement of Financial Accounting Standards 3 4 ). As Doupnik et al mentions, one difference between the purchase method and the acquisition method is that negative goodwill is accounted for as a gain in the acquisition method (52). Using the example used for the purchased method, which had net assets of 300 at fair value, a purchase of this n a bargain purchase gain of 40. This gain was used as an allocated reduction of t he long term/fixed assets using the purchase method But now this gain will be treated as a bargain purchase gain to be recognized in the income statement, and the long term/fixed assets retain their fair value figures. The following is a detailed exampl when P acquires a 60% 200 common shares The first graph is b efore

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Battraw 11 consolidating the accounts : It shows the regular account figures, at fair value, for each company However, it assumes and includes the investment in S account, which resulted a fter P paid : S previously had $10 in cash (notice that, according to the g total liability plus total equity yields the total assets figure and, conversely, total assets minus total liabilities equals total equity Assets = Liabilities + Equity). Balance Sheet Accounts at Fair Value Current Assets Cash $ 20 $ 610 Inventory $ 30 $ 20 Long Term Assets Net, Equipment $ 200 $ 100 Buildings $ 150 $ 100 Investment in S $ 600 Total Assets $ 10 00 $8 30 Current Liabilities Accounts Payable $ 200 $ 30 Total Liabilities $ 200 $ 30 Equity Retained Earnings $ 550 $ 100 Common Shares $ 2 50 $ 7 00 Total Equity (Net assets) $ 80 0 $8 00 was $5 per share. 60% of the 200 shares is 120, and 120 multiplied by $5 is $600. $600 is the investment in S, then. Now then, the above balance sheet individual financial statements for reporting purpose s. However, since P is required to prepare consolidated financial statements, the figures of each compa ny should be combined after eliminating the $600 investment account.

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Battraw 12 The first working step (WS1) would be to eliminate the $600 with a corresponding eli mination to total equity $ 100 retained earnings is $ 60, $700 common shares is $ 420. Notice that per the math logic of the accounting equation, the reduction of $ 600 is greater than the total reduction of $ 480 ( $ 60 retained earnings + $ 420 common shares) accounting equation must happen to the other; so, t his resulting difference between 600 and 480, 120 is logged in an account call ed goodwill assets in the consolidated financial statements (notice that 600 + 120 = the 480 reduction in assets that corresponds to the 480 reduction in equity) Balance Sheet Accounts at Fair Value WS1 Current Assets Cash $20 $610 Inventory $30 $20 Long Term Assets Net, Equipment $200 $100 Buildings $150 $100 Investment in S $ 600 ($600) Goodwill $ 120 Total Assets $10 00 $8 30 Current Liabilities Accounts Payable $200 $30 Total Liabilities $200 $ 30 Equity Retained Earnings $550 $100 $ (60) Common Shares $250 $700 $ (420) Total Equity (Net assets) $80 0 $8 00 The second working step (WS2) involves getting rid of any non controlling interest (NCI) Since d by others, which is known as an

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Battraw 13 NCI This means that, even though P will be combining 100% of the asset and li ability accounts of S, P only has a 60% claim to such accounts To make up for this, then, the parent s equity account must be reduced by the amount the NCI owns in the company with a corresponding increase to a n NCI account also listed under equity, showing the NCI amount that P does not have a claim in It may seem obvious that the remaining 40 total equity is the amount that the NCI has a claim to but this optional method is only allowed under the International Financi al Reporting Standards (IFRS) 3 paragraph 19, which states that the acquirer shall measure non controlling interest at either fair value (a) or the present ownership instruments' proportionate share in the recognized identifiable net assets (b). Under 805 20 30 1, "the acquirer shall measure the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the ir acquisition date fair values only. The fair value of the comm on shares is the $5 price paid for each common share. Therefore, the remaining shares of S, 80 (200*.40), multiplied by $5 is $400. The following graph shows this elimination under WS2 : Balance Sheet Accounts at Fair Value WS1 W S2 Current Assets Cash $20 $610 Inventory $30 $20 Long Term Assets Net, Equipment $200 $100 Buildings $150 $100 Investment in S $ 600 ($600) Goodwill $ 120 $80 Total Assets $10 00 $8 30 Current Liabilities Accounts Payable $200 $30 Total Liabilities $200 $ 30

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Battraw 14 Equity Retained Earnings $550 $100 $ (60) $ (40) Common Shares $250 $700 $ (420) $ (280) NCI $ 400 Total Equity (Net assets) $80 0 $8 00 In the above graph, $400 is added to equity as an NCI but the corresponding reduction of equity can only be $320 ($40 of Retained Earn ings and $280 of Common Shares). Therefore, the remaining increase difference of $80 (400 320) needs to also increase the goodwill account under assets. Now, the accounts are ready to be combined into single consolidation figures. The next graph shows the consolidation (totaling) : P must report the last column. Balance Sheet Accounts Accounts at Fair Value WS1 WS2 Consolidated Accounts Current Assets Cash $20 $610 $630 Inventory $30 $20 $50 Long Term Assets Net, Equipment $200 $100 $300 Buildings $150 $100 $250 Investment in S $600 ($600) Goodwill $ 120 $80 $200 Total Assets $10 00 $8 30 $ 1,430 Current Liabilities Accounts Payable $200 $30 $230 Total Liabilities $200 $ 30 $230 Equity Retained Earnings $550 $100 $ (60) $ (40) $550 Common Shares $250 $700 $ (420) $ (280) $250 NCI $ 400 $400 Total Equity (Net assets) $80 0 $8 00 $ 1,430 2.3 Why Consolidation Reporting Matters

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Battraw 15 There is not only legal but ethical reasoning behind reporting consolidated financial statements. First, the Securities Act of 1933 required that, generally, all securities stock, shares, and other forms of ownership in companies traded in the U.S be registered. So, the Securities and Exchange Commission ( SEC ) was created by the Securities Exchange Act of 1934 to register, regulate, and oversee such companies who register and required that all companies who own more than 10 million in assets and h ad more than 500 owners register with the SEC (SEC., The Laws ). Digging further, understanding the ethical reasoning behind such acts will become very important, since people rely on financial statements to make economic decisions that affect Cornell University Law School describes the 1929 great depression as being the result of too much specula tion in company securities. Many people were purchasing securities by companies who promised much profit in return but without giving much information about the company. As thousands of investors bought up stock in companies, they later all sold the stock in a panic, resulting in the great depression (n.d.). This makes sense, and is one reason for depressions. A boom in the market place can occur where many business es are raising funds by issuing stock in their company in order to expand and continue provid ing goods and services that the public demands But if too many investors are purchasing stock in companies without knowing all the relevant information about the company, then the investors are making uninformed decisions There was little incentive to in vest on the use of was one example of financial markets that did not reveal the necessary information for investors to make informed, rational resource money but the gener that had to make cut backs had to lay off workers, close down shops, and possibly default on their liabilities debt owed. The great

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Battraw 16 depression, as well as other economic downturns, highlights the magnitude and importance of financial reporting; without reporting audited financial statements, how can companies continue? Investors may not trust companies that give little information, and a successfully running econom y depends to some degree, on the trust investors have in m arkets F or this reason it is crucial that publicly traded companies repo rt audited financial statements with enough information to maintain the trust of investors. Thankfully the FASB is designated as the organization that establishes standards and rules of financial reporting in the U.S. (FASB, FACTS), known as Generally Accepted Accounting Principles (GAAP). U.S. GAAP requires publicly traded companies to report information about a compa liability, and equity accounts, the cash flow changes for the year, and the net change in equity for the year. U.S. GAAP also requires a set of notes to the financial statements, which des cribe the various accounting policies, methods, and various other issues that relate to the financial statements. All this information is meant to give current and potential investors, creditors, and lenders the information they need to make their resource allocation decisions. And i n effect, this also assists the general public. But there are still reporting problems and issues today in areas that U.S. GAAP either does not cover or does not cover well. For example, Scott Taub, in his article "'Busting som e myths about IFRS and GAAP,'" on the IFRS Foundation and IASB website, mentioned that U.S. GAAP is largely silent on fixed asset capitalization and depreciation. After doing a quick search in the Codifications, it seems that U.S. GAAP truly is silent on c apitalization of property, plant, and equipment which are tangible long term, or fixed, assets (ASC 360 10 35) In terms of depreciation methods, it only briefly talks about what depreciation is (ASC 360 10 35 4) and

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Battraw 17 what it should be based on (ASC 360 10 35 3 ) but does not give proper rules or applications related to any type of method. It merely mentions the declining balance and sum of the years' digits method as two methods that may be used (ASC 360 10 35 7) Since there are many areas U.S. GAAP is either silent on or does not provide much guidance on the American Institute of Certified Public Accountants (AICPA) came out with the AICPA Code of Professional Conduct, which is a document meant to give guidance to people in public and private practice, as well as to others. The principles of the code are, and state, the following: Responsibilities principle: In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities The public interest principle: Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate a commitment to professionalism Integrity principle: To maintain and broaden public confid ence, members should perform all professional responsibilities with the highest sense of integrity Objecti vity and independence principle: A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services Due c are principle: standards, strive continually to improve competence and the quality of services, and

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Battraw 18 Scope a nd nature of services principle: A member in public practice should observe the Principles of the Code of Professional Conduct in determining the scope and nature of services to be provided ( Para. 0.300.010 0.300.070 ). A close look at these principles would deter mine these principles to be virtues of character, a maintaining such character traits are vital to the accounting professional. And this does make sense, since there are many a reas of accounting that require judgement, so in making a decision, one must must be considered in light of some ethi cal values, and the best ethical va code is the public interest principle This principle also relates much to biblical principles such as to some Christians means to treat others as oneself and to assist others when needed. So, it s eems the modern day, ethical principles for CPAs can be tied to literature t hat stems back to, and beyond in the case of Aristotle, the time of the biblical birth of Christ. And these ethical principles offer guidance concerning the wellbeing of others The last point to make for the importance of financial reporting is for whom financial reportin g is meant Earlier, it was described that financial reporting is for the potential and current investors of companies, but they are not the only ones who have a stake in a company. provides general merchandise for the public. Auto manufacturers provide vehicles to the general public, and banks provide the services of holding stakeholder of most, if not all, companies in the world because economies in other countries affect each other. JCPenney, or any other business were not operating today, where would people get their furniture, food, shelter, or other basic living needs and luxury items? If a company fails, the

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Battraw 19 public suffers from it. Financial reporting ensures that companies continue to operate; when financial statements are published and audited, investors will continue to hold onto their shares or decide to purchase some allowing the companies to have capital to run their businesses and the public will be employed by the company, be able to purchase the goods and serv ices demanded from the company, and invest in the shares of the company. Mary, in the opening example, faced a common question: why is the stock price declining? While minor declines and rises are normal aspects of the business cycle and markets in general ab out the company being revealed. If a relatively new company, C ompany A, decid es to acquire another company, Company B, then C ompany B must give its financial stat ement information to C ompany A And if compa ny B decides to implement the same accounting system as company A to do so then this new information would be a huge expense in incomes statement which c ould possibly cause the stock price to decrease. A cheaper process for reporting consolid ated financial statements, therefore, would be needed to reduce such a burden. 3. Consolidation Issues Consolidation issues in the U.S. become a problem when a public U.S. company acquires a foreign company or vice versa. A U.S. public company registered wit h the SEC must report consolidated financial statements when the company acquires more than fifty percent of an ( ASC 810 10 05 ). Consider a hypothetical U.S. publicly traded company called Retai Inc. registered with the SEC that acquires a fifty one percent interest in a London based company called Londo, Inc. Retai is a you guessed it retail company that provides fashion and clothing merchandise while Londo is a similar but smaller retail company also providing

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Battraw 20 fashion and clothing merch andise Retai was subject to U.S. GAAP and Londo, being part of the U.K., which is a European Union (EU) member, is subject to IFRS but as adopted by the EU. Also assume Retai uses SAP software for its accounting systems accounting software is QuickBooks. Now that Retai has acquired a controlling interest in Londo, Retai must report to the SEC accounts combined. However, a complicated set of issues come with t hat. The accounting systems used in each company is different, the currencies used to report financial statements in each company is different, which brings up foreign currency exchange risk, and there could also be transactions made between the parent and subsidiary that need to be cancelled out and not considered when preparing a consolidated set of financial statements. Having the subsidiary install the same accounting system as the parent could be op timal but, because of the cost and complexities of doing so, each entity should keep their existing system and consider a different process to combine the financial statement figures 3.1 Differing Accounting Systems With a different accounting system used by each company, the parent will n eed to request financial statement information from the subsidiary. The subsidiary could do so, but without the parent the methods used to account for various items it would be very hard for the parent to just combine the figures. For instance, U.S. GAAP allows for the Last In First Out (LIFO) inventory method to be used (ASC 330 10 30 9) but for a company under IFRS, L IFO is not allowed. Therefore, the inventory account on a U.S. company wo uld likely be valued differently than the inventory account of a company preparing their statements under IFRS, so a U.S. company would need to

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Battraw 21 In our hypothetical situation, R etai should send Londo terms/definitions/methods used in each account so that Londo can convert list of accounts are valued and can reconcile i ts accounts much easier than Retai. Retai would have to be open to answer any questions Londo may have during the process So, there are three main steps that the parent company would need to lay out as a policy to Londo. The first step is for the parent t o define a list of company wide account names with its related terms/definitions/ methods. The second step would require much support/input /work from controllers and other employees in accounts. And the third step would be to have a n open communication channel between the parent and subsidiary 3.2 Cost & Complexities of Accounting Systems By allowing each company to keep its existing accounting systems and merely reconcile the two c amount of time, cost, and complications that may result from changing its accounting systems. SAP produces a wide variety of enterprise application software for companies of all sizes ( McKinsey ) and is one of the largest accounting system providers. While their cost estimates are not public information, one can only speculate as to how costly it is. Someone from OCHIBA Business Solutions seems to know the costs related to SAP Business One The Cost Effective Solution," meant for private, small to medium entities (SMEs). Their webpage list the total costs of the software for only 10 user systems fully implemented at about 34,400 pounds a year ( n.d. ). For only 10 people, tha t can become very costly depending on how many users are needed. In addition, some small companies may not need all the unique features that larger software

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Battraw 22 providers, like SAP, provide; there could be unused and unneeded features that subsidiaries would h ave to pay for. SAP's website, for instance, shows that they offer many other features/services than QuickBooks and SAP even separates their services by line of business, by industry, by platform and technology, or by product. In terms of QuickBooks, their cost figures readily available on their website. But their highest package, at $ 39.95 per month, allows for access for up to five people (QuickBooks) which amounts only to almost $1,000 per year for 10 users Comparing shows an enormous difference, not to mention pounds are usually worth more than U.S. dollars when converted. pounds figure into U.S. dollars. Another factor to consider would be how complex the installation and use of SAP at Londo would be, and the cost related to it Londo would have to train or hire new employees that are familiar with SAP. And this new, SAP expert would have to spend his/her time installing an d training existing employees to use it. But the SAP expert would have to first talk to and the new system is implemented, it fails to operate the intended way Sudhir Lodh and Michael Gaffikin wrote an article in the European Accounting Review about the theoretically informed implementation process of an SAP accounting system. ideas are that implementation of an SAP ac counting system is a continuous process. Many of the problems with implementation of the SAP system particularly with a major steel producer in Australia who was the main focus of in the article, are that the "original timetable for the SAP evaluation did not proceed as anticipated;" the implementation team ended up qu estioning SAP's ability to meet specific future requirements, since it took so long for the system to meet its

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Battraw 23 previous needs; man y previously scheduled sessions had to be canceled in order to concentrate on other requirements of the system; the methods used within SAP are difficult to assess, and each session they were exposed to brought up many more issues; implementing a prototype model is the only way a firm can decide the suitability of SAP; and a series of training sessions must be conducted with employees to use the system/prototype. Another issue of concern within SAP's package capability was issues with terminology and defini tions, as well as screen layouts and the difficulty for the average person to use SAP. People will need hands on experience with the system (86 87). only reason the above company impl emented an SAP system was because they needed a better way to manage their cost management systems and after working with a consulting firm, decided to implement the SAP system (85 there is no suitable reason for Lon do to adopt SAP, other than reporting consolidated figures for the parent company complexities involved in adopting the same accounting system may be worth it. 4. Opposin g Solution : Adopt The Same Accounting System The major opposing view point to implementing the proposed three step consolidation process is to have the subsidiaries implement the same accounting system as the parent. If Retai were to have Londo implement the same accounting system as Retai, then the proposed three step process would be very simplified but have its pros and cons With the same accounting system in place, many of the accounts used between the parent and subsidiary would be the sam e, depending on the circumstances of each company. For instance, a cash account is probably determined based on the same transactions collecting cash. But there may be some instances r instance, if Londo

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Battraw 24 terms. Retai and Londo could end up deciding a similarly named account and use that for financial reporting. Or Retai could easily combine and have ready, reporting day. With the same accounting system in place, so many things could be, or are inherently, done to benefit the companies. 4.1 Benefits of Having The Same Accounting System One b enefit for a subsidiary to have the same accounting system as its parent company is that the parent company will gain better information due to less human error. Without the same accounting system, the subsidiary and parent would have to implement some manual process es such as the proposed 3 step process, using a series of excel and/or other data processing spreadsheets, input from accounting personnel at the subsidiary, and input from the accounting personnel at the parent company. Judgement is required from each pers onnel and typos and calculation errors can occur from a person entering data into spreadsheets And since the use of the same accounting system results in less human judgement and typo error, it would be much easier for auditors to audit such companies. Fo SAP Assurance and Compliance Software, powered by SAP HANA (SAP), and Smart Link for SAP Audit Software possibility of human error Th e audited companies would save on time based costs /fees related to both external and internal auditors, if GAS is used to audit such companies. Another benefit for a subsidiary to have the same accounting system as its parent company is that it gives more assurance to the shareholders and other stakeholders of the

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Battraw 25 consolidated company as to the fairly presented financial statements due to less human error The stakeholders of a company usually desire the company to perform well, and this includes repo rting fairly presented financial statements. With the same accounting system in place, shareholders, as well as other stakeholders, will have greater assurance as to the accuracy of and non materially misstated financial statements. No doubt this is what the Fi nancial Reporting Financial Reporting Standard applicable in the UK and Republic of Ireland which is, as its name implies, meant for companies in the UK and Republic of Ireland. The standard says that uniform accounting policies are to be used when preparing consolidated financial statements for like transactions and similar events, although adjustments can be made for uniformity if it is to the contrary (FRS 102.9.17). While the FRC's reasoning for the universal accounting policy rule is missing in this standard I can infer from the goal of financial reporting, and from the FRC's consolidation procedures in FRS 102.9.13, that universal accounting policies gives greater assurance to stakeholders that parent companies are preparing reliable financial statements. 4.2 Disadvantages of Having The Same Accounting System One of the main disadvantages of having a subsidiary adopt the same accounting system as its parent company i s the costs and complexities As mentioned before, many costs and complexities arise when having a subsidiary implement the same accounting system as its parent. The U tilisation of Genera lized Audit Software (GAS) by External Auditors types of entities. The authors found that, after conducting an online survey among external auditors, about 73 percent of respondents noted that the utili s ation of gener alized audit software (GAS) is nonexistent for auditing small clients Some respondents knew the advantages of using

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Battraw 26 GAS but were hindered by high implementation costs ; learning curve and adoption process es; and the lack of ease of use. Of those that did use GAS used interactive data extraction and analysis (IDEA), another audit software tool but used only for financial statement auditing (89). So, it seems that at least for small companies the use of audit software is too costly and co mplicated. For much larger companies, however, the benefits could possibly outweigh these costs and complexities. 5. Concluding Thoughts The goal of consolidated financial statements is to prepare a set of financial statements assuming one company, in substa nce, has economic control over its various activities, regardless of the legal control tied to such activities. The goal is to report this consolidated set of financial mity of accounting standards across the globe is likely always going to be a problem, but companies need to adopt standards/policies that align w ith their particular situation. In the case of accounting systems used by parent companies and their subsidiari es, should they all use the same accounting system? It seems that the adoption of the same accounting system would be burdensome on all types of entities, especially large ones, since a larger company would have a lot more to account for. But remembering the goal of financial reporting shows that investors, lenders, and other creditors need to be shown reliable, accurate, and fairly presented financial statements. The adoption of the same accounting system among parent companies and their subsidiaries will certainly assist this goal but should companies of small sizes be burdened with such a requirement if there are not that many stakeholders? S mall companies should not have to be burdened with such a requirement If a company becomes large enough, there will be more

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Battraw 27 stakeholders at risk not just the investors, lenders, other creditors, customers, and regulatory bodies but the company itself. not eve n use GAS on small clients because of the immateriality involved. Therefore, small companies should implement a manual process whereby the financial information of the subsidiaries and of the parent is combined into one but large companies should have the ir subsidiaries adopt the same accounting system as the parent. Materiality, then, becomes the basis for a company to adopt the same accounting system.

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Battraw 28 Works Cited Ahmi, Aidi & Simon Kent. "The U tilisation of Generalized Audit Software (GAS) by External Auditors." Emerald Insight. Managerial Auditing Journal, Vol. 28 Iss: 2 pp. 88 113. 2013. Web. 26 Mar. 2016. AICPA. "Code of Professional Conduct." American Institute of Certified Public Accountants 14 Dec. 2014. Web. 28 Oct. 2015. Arbutus. "SAP Audit Software." Arbutus. Arbutus Software Inc N.d. Web. 26 Mar. 2016. nd edition. Prentice Hall. Print. Cornell University Law School. "Securities Law History ." Cornell Law School. Cornell University N .d. Web. 28 Oct. 2015. th edition. McGraw Hill Print. 2011. FASB. Accounting Standards Codification: 330 10 30 9 American Accounting Association, FASB N.d. Web. 13 Feb. 2016. FASB. Accounting Standards Codification: 805 20 30 1. American Accounting Association, FASB N.d. Web. 20 Apr 2016. FASB. Accounting Standards Codification: 810 10 10 1. American Accounting Association, FASB N.d. Web. 5 Mar. 2016. FASB. Accounting Standards Codification: 810 10 05 American Accounting Association, FASB N.d. Web. 13 Feb. 2016. FASB. "APB 16: Business Combinations." Financial Accounting Standards Board Aug. 1970. Web. 25 Oct. 2015.

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Battraw 29 FASB. "ARB 51: Consolidated Fina ncial Statements." Financial Accounting Standards Board Aug. 1959. Web. 25 Oct. 2015. FASB. Facts About Fasb ." Financial Accounting Standards Board N .d. Web. 28 Oct. 2015. FASB. "Statement of Fina ncial Accounting Concepts No. 6 ." Financial Accounting Standards Board Dec. 1985. Web. 25 Oct. 2015. Financial Accounting Standards Board Sep. 2010. Web. 5 Mar. 2016. FASB. "Statement of Financial Accounting Standards No. 141 (revised 2007): Business Combinations." Financial Accounting Standards Board Dec. 2007. Web. 25 Oct. 2015. FASB. Summary o f Statement No. 141" Financial Accounting Standards Board Jun. 2001. Web. 25 Oct. 2015. Financial Reporting Council. "FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland." Financial Reporting Council. The Financial Reporting Council Limited Sep. 2015. Web. 26 Mar. 2016. IFRS Foundation Sep. 2010. Web. 5 Mar. 2016. IFRS. "International Financial Reporting Standard 3: Business Combinations." IFRS. IFRS Foundation Jan. 2008. Web. 20 Apr. 2016. Lodh, Sudhir C., and Michael J.R. Gaffikin. "Implementation o f An Integrated Accounting And Cost Management System Using The SAP System: A Field Study." European Accounting Review 12.1 (2003): 85 121. Business Source Premier Web. 24 Mar. 2016. McKinsey. SAP Analysis Update: SAP U.S. at a Glance: Helping the World Run Better and Improving People's Lives." SAP 22 Jan. 2016. Web. 13 Feb. 2016.

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Battraw 30 SAP Business One The Cost Effective Solution OCHIBA Business Solutions N.d. Web. 24 Mar. 2016. SAP. "SAP Assurance and Compliance Software." SAP. SAP SE N.d. Web. 26 Mar. 2016. SEC. "The Laws That Govern the Securities Industry." U.S. Securities and Exchange Commission 1 Oct. 2013. Web. 28 Oct. 2015. Stanger, Abraham M. "Accounting for Business Combinations: Choice or Dilemma." St. John's Law Review. Issue 5 Volume 44. Spring 1970, Special Edition Article 62. Dec. 2012. Web. 25 Oct. 2015. IFRS 7 Aug. 2014. Web. 6 Mar. 2016.