Jan 25, 2018 in Research

Consolidation of Foreign Subsidiaries


This paper is about the consolidation of foreign subsidiaries worldwide. It deals with businesses partnership globally. The main issue is the changing of American business system from Generally Accepted Accounting Principles (GAAP) to International Financial Reporting Standards (IFRS). This intention is geared towards making business to be of one standard worldwide. The papers has also looked at the advantages of both IFRS and GAAP.


Consolidation, or amalgamation, refers to the act of joining many things in order to form one thing. In business, it refers to mergers and acquisitions of various small companies in order to form a much larger one (Johnson et al., 1967). Acquisition means full purchase of one company by another, while merger means that two or more companies come together, but only one of them remains existing afterwards. Currently, more U.S businesses are operating internationally, as compared to the much earlier years. The rise in the quantity of multinational organizations has made the business complexity to be on the rise, also leading to the increasing tax complexity (Holt, 2004).

The United States is regarded as the largest and the most technologically powerful, in terms of market orientation, economy in the world. The Generally Accepted Accounting Principles (GAAP) demands the companies owning over 50% of the voting stock of the foreign companies to prepare consolidated financial statements. This means that the currency in use has to be changed into the U.S dollars, and then returned to the GAAP of the USA. This has certain consequences on the consolidated finance structure of the business and management behavior. The original foreign financial statements are more useful than the recast ones, which cannot be analyzed without reference made to the foreign environment (Holt, 2004).

Do you agree with the author’s conclusion?

I disagree with the author’s opinion that consolidated U.S and foreign-based financial statements mask useful information and that with time all countries will be operating using the International Financial Reporting Standards (IFRS). The GAAP are based on the certain principles and are detailed. These principles, when followed, will help in ensuring equality all over the world. These five principles include the following ones: fair value, revenue recognition, share-based payment, financial liabilities and equity, and consolidation (Sinn, 1990).

The useful information is not masked, as there is progress to converge and harmonize FASB and IASB in order to make the easy the interpretation of the foreign financial statements. It is upon the United States’ CPAs (Certified Public Accountants) to ensure that they control these developments and that the latter are conversant with the GAAP. The users should be in a position to adjust what they expect about language, currency, accounting practices, methods, and presentation, when using foreign statements. This is because every country has its own accounting rules (Sinn, 1990).

The GAAP do not allow the practice of hidden reserves, which is most prominent in the European area. This refers to the amount of money that a company gets from the increased account expenses. It is stored for use in case if there is a potential loss in the future. They can be accessed later in order to improve the poor performance of the company. As a result of its refusal of opaqueness, GAAP are regarded as more honest and truthful in terms of reporting the economic performance of a company (Shao, 2004).

Do you believe convergence to IFRS addresses the author’s concerns?

The convergent of IFRS solves most problems like masked information, as the rules as now globalized and are the same everywhere. There is transparency in the accounting financial statements. Standardized financial statements all over the world mean that the investors have easy way of reading and understanding the financial statements. This opportunity will help investors in understanding the opportunities of investment, as compared to the current state. This gives the investors an opportunity to understand and have high confidence in high quality financial statements (Johnson et al., 1967).

Industrial sector has been in the lead in pushing for the convergence. Convergence will enable the industries all over the world to be viewed from the same plane. This accelerates cross-border trade and investments. They are provided with more information to allocate their finances with a lot of ease. Conversion will also help in market liquidity and low capital cost for all businesses (Johnson et al., 1967).

Does the U.S. and the International community need to reconsider the role of consolidated financial statements?

There is a need to review the financial statement, as the information is not presented in a consistent manner. The events or transactions are not well stated in both statements. This makes it difficult for the business people to compare their cash flow and their spending. Both IFRS and the GAAP allow for alternative information entity, which are direct and indirect. This alternative complicates the issues, when users want to compare information across entities (Kaminarides, 1981).

The information is not sufficiently broken down in the financial statement as IFRS and GAAP provide minute guidelines in the presentation of information. This may confuse the users in trying to know the way the cost of goods may influence the future cash flow. The users have developed the habit of analyzing the entity’s financial performance distinctively of the structure of its capital. The changes happening due to fluctuations in the market may not as well be made easy. All these leads to the blind dealings, as there is no clear report of transactions (Kaminarides, 1981).

In consolidated financial statements should be in a position to show the financial position of the consolidated entity. But in GAAP the profits which were made before the joining of the company should not be included in the statement of the consolidated entity. This will affect the stability of the consolidated entity as it will lack finances to start operations (Kaminarides, 1981).

Consolidated balance sheet by first eliminating the effects of any transaction of inter-company. These eliminations includes; elimination of stock ownership, elimination of inter-company debt, and finally elimination of inter-company revenue and expenses. This means that the individual companies will have problems in paying debts after the consolidation. Its debts will not be catered for by the consolidated company (Kaminarides, 1981).

The value relevance of consolidated statements

They help with the provision of information on the financial position, performance, and changes in the financial position of the reporting entity. This is useful to the investors in making decisions concerning economy. The statement is relevant in economic decision-making process to both general users and the investors (Kaminarides, 1981).

Consolidated statements help in the provision of the accounting information of the companies. For example, the accounting information of the companies that were listed between 2003 and2008 in the European stock market. Consolidated variables provide explanatory variables for return of stocks; thus, it upgrades the information content of earnings to the shareholders (Marcos et al., 2006).

The consolidated financial statements are used for the corporations with separate companies. They merge the financial positions and operational results of a parent company and of another one, or more controlled entity; thus, treating them like a single entity. Hence, improving the companies’ relationships. They give a clear picture of all the resources of the joined company under the umbrella of one entity. They benefit all creditors, shareholders, and resource providers of the controlling entity (Marcos et al., 2006).

What alternative might you suggest?

The equity method is an alternative or providing the subsidiary financials as supplementary disclosure. As compared to the consolidated financial statements, subsidiary financial suplements are for those companies working as separate entities. Creditors, shareholders, and resource providers enjoy all the profits, as the parent entities have no shares. The entities with fewer majorities in ownership can find place as well.


As the world is going towards globalization, there are many efforts being put across in order to ensure that the world’s business is running under one umbrella. This is done by transferring the United States of America from the GAAP system of business control to the IFRS system. Plans are underway to ensure that worldwide trade is made under the IFRS system. IFRS will set standards of financial, economic, and accounting practices to be viewed from the same platform all over the world. This will, therefore, help in the achievement of consolidation of the foreign subsidiaries.

The consolidated financial statements have also been the tools used in order to ensure the implementation of the IFRS. It helps in provision of the standardization of the trade terms, which also includes the standardization of financial accounting, so that the companies and entities all over the world can work as a team with a lot of ease.

Incidentally, consolidated variables provide the explanatory variables for return of stocks; thus, they upgrade the information content of earnings to the shareholders. They also give an opportunity to prepare the financial statements for the corporations consisting of the separate companies. Consolidated financial statements merge the financial positions and operational results of a parent company and another one, or more controlled entity; thus, treating them like a single entity. Hence, improving the companies’ relationships. They give a clear picture of all the resources of the joined companies under the umbrella of one entity. They benefit all creditors, shareholders, and resource providers of the controlling entity.


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