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Definition of consolidating financial statements

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ithin a charged political atmosphere, the Financial Accounting Standards Board issued a revised exposure draft to clarify consolidation policy after its 1995 ED failed to obtain board approval.This effectively rekindles controversy fueled by critics of existing FASB guidance—particularly in-vestor advocates—who have been strident in their complaints about the poor quality of quarterly corporate earnings reports.

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In the most recent step, FASB is trying to calm concerns by defining what constitutes control of an entity which, it says, will provide CPAs with better tools with which to analyze complex corporate structures. Some CPAs and other financial professionals believe existing standards are sufficient and adding more detail will only confuse financial report users.Patricia Mc Connell, a senior managing director at Bear, Stearns & Co., thinks so."The new wording makes the exposure draft more operational, especially the wording on general partnerships," she says.So, obviously it is a very helpful information for the investors.Which is why it is mandatory for public listed companies in India to release consolidated financial statements.Standalone financial statements show the financial position of the company alone (and no other legal entity).

Consolidated financial statements show the financial position of the company itself along with it’s subsidiary companies, associate companies and joint ventures.

For a consolidated balance sheet, loans to the subsidiary from the parent are removed, along with any sales and purchases between the two entities.

By eliminating these accounts, duplications are avoided and the statements more closely reflect the financial position of a single entity.

It has been an arduous process, says Bossio, one he describes as "grinding." Jack Albert, associate to the SEC chief accountant, which has oversight responsibility for FASB, calls the push for a new ED "a work in progress," but adds, "it's safe to assume implementation guidance will be coming." Under the rule CPAs currently follow, commonly called the bright-line rule, the condition for a controlling financial interest is ownership of a majority voting interest--unless control is temporary or does not rest with the owner of the majority voting interest. 94, , doesn't define control, temporary or otherwise.

"The notion of control has always been in the literature, but it was never defined," says Larry Dodyk, a partner at Pricewaterhouse Coopers.

"I would say there's a high probability this new wording will pass." COMPARING OLD AND NEW John Brozovsky, an associate professor of accounting at Virginia Tech, has examined the differences between the new ED and the old one and is optimistic the revision will meet FASB criteria.