Understanding ASPE Section 1590, Subsidiaries

1 Understanding ASPES ection 1590 , Subsidiaries2 | Understanding ASPE Section 1590 , SubsidiariesA better working world begins with better questions. Asking better questions leads to better answers. To help preparers of financial statements with Canadian accounting standards for private enterprises (ASPE) Section 1590 , Subsidiaries , we ve summarized the key aspects of the Section and offer relevant practical considerations for private mid-market companies through answering three commonly asked questions for private business owners: SubsidiariesQuestion1 Question2 How can financial statement preparers determine if an investment in another enterprise is a subsidiary?As per Section (a), an enterprise meets the definition of a subsidiary if the parent has the right and ability to obtain future economic benefits from the resources of the enterprise and is exposed to the related risks. Control of an enterprise is defined in Section (b) as the continuing power to determine its strategic operating, investing and financing policies without the cooperation of others.

2 Paragraphs through provide additional application guidance. The determination as to whether an investor has control is not just based on the level of equity interest held by the investor and is not always straightforward, as illustrated by the following examples from Section : Control may exist when an enterprise does not own the majority voting interest if it has the continuing ability to elect the majority of the members of the board of directors through ownership of rights, options, warrants, convertible debt or preferred shares or other similar instruments that, if converted or exercised, would give the enterprise the majority voting interest. Ownership of less than the majority of voting shares combined with an irrevocable agreement with other owners to exercise voting rights may result in majority voting power and may, therefore, confer should the reporting entity account for its Subsidiaries ?A reporting entity has three accounting policy choices to account for its Subsidiaries : Consolidation Equity method Cost methodThe entity must use the same accounting policy choice for all Subsidiaries .

3 Below are the key aspects of each accounting policy choice:Consolidation(described in Section 1590 ) Consolidated financial statements recognize that the parent and all of its Subsidiaries reflect a single economic unit. All of the assets, liabilities, revenues and expenses are aggregated on a line-by-line basis, intercompany transactions and balances are eliminated and non-controlling interest in a subsidiary company is recognized. The financial statements are labelled as consolidated . Understanding ASPE Section 1590 , Subsidiaries | 3 Question3 Which accounting policy should an enterprise select?The accounting policy selected should be based on the needs of the users of the financial statement and how those users view the entities within the organizational structure. In circumstances where the users view all of the Subsidiaries and the parent in an organizational structure as one business unit, then consolidation would likely be the appropriate accounting policy choice.

4 In other circumstances where the business operations of each subsidiary and the parent are monitored by the users independently of each other and viewed as separate business units, non-consolidated financial statements would likely be more relevant and therefore the cost or equity method would be an appropriate accounting policy choice. Another consideration for selecting accounting policies includes management s sensitivity to earnings variability. The cost method provides management with the ability to determine the timing of income from the investment in a subsidiary through the ability to control the declaration of dividends, which can be used to manage earnings variability. If managing earnings variability is an important consideration of the users of the financial statements, the cost method might be most significant implication of non-consolidated financial statements is that a subsidiary s assets and liabilities are not reported in the parent s financial statements.

5 These assets and liabilities may be significant to Understanding the parent s overall financial position. An entity makes one accounting policy choice as to the method used to account for its Subsidiaries , which is applied consistently across all Subsidiaries . ASPE Section 1506, Accounting changes, allows an entity to change its accounting policy for Subsidiaries without the change having to result in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity s financial position, financial performance or cash flows. Therefore, as the needs of the users of the financial statements change, an entity has the ability to change its accounting policy for its method The investment is initially recorded at cost and the carrying value is adjusted thereafter to include the parent s pro rata share of post-acquisition earnings of the subsidiary, computed by the consolidation method.

6 The amount of the adjustment is included in the determination of net income by the parent. The investment account of the parent is also increased or decreased to reflect the parent s share of capital transactions and changes in accounting policies and correction of errors relating to prior-period financial statements applicable to post-acquisition periods. Profit distributions received or receivable from a subsidiary reduce the carrying value of the investment. The financial statements are labelled as non-consolidated .Cost method(described in Section 3051) The investment account on the balance sheet of the parent is initially recorded at cost. Earnings, which are generally in the form of dividends, are recognized only to the extent received or learn more about these items or for application guidance please contact our Private Mid-Market practice at | Assurance | Tax | Transactions | AdvisoryAbout EYEY is a global leader in assurance, tax, transaction and advisory services.

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