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IFRS and US GAAP, with Website: A Comprehensive Comparison by Steven E. Shamrock

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12

INVESTMENTS IN SUBSIDIARIES

Consolidation, or presenting the results, cash flow, and financial position of many entities as a single one, is a key tool for users of financial statements to understand the amount, timing and risks to the cash flows that are under the purview of a management. Consolidation allows a user, say an investor, to evaluate the kind of job that current management is doing with the resources entrusted to it. It provides a bird-eye view of the entity’s assets, obligations, and equity. Without consolidation, someone wanting to assess the performance of the company with multiple divisions would have to lay out all the financial results of subsidiaries, determine how much business the companies did with each other, whether that business was done at arm’s length, and put all those together to present one picture of the financial performance of the company.

The principles used in consolidation are designed to do the above for the user. But the first question that must be asked about whether an entity is consolidated is whether the management of that entity can effectively influence the results of another entity. If entities over which a manager did not have effective control were consolidated, the manager would either get credit for good results that were not his/her doing, or get unfairly tainted by poor performance that he/she was not responsible for. In either circumstance, an investor’s assessment of the skill of the manager would be skewed and not from the ...

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