Chapter 17 - Principles of Consolidated Financial Statements

Question 1

What is a parent?

Answer 1

an entity that controls one or more entities

Question 2

What is a subsidiary?

Answer 2

an entity that is controlled by another entity

Question 3

What 3 elements does control comprise of?

Answer 3

• power over investee
• exposure, or rights to, variable returns from its involvement with the investee and
• the ability to use its power over the investee to affect the amount of the investor’s returns’

Question 4

What is the single entity concept?

Answer 4

Both the parent and subsidiary are separate legal entities, the economic substance of the relationship is that they are a single economic unit

Question 5

What is a structured entity?

Answer 5

An entity designed so that voting rights are not the dominant factor in establishing control

Question 6

How is control gained by the investor?

Answer 6

if the remaining shareholders are dispersed and unconnected.

Question 7

What are other sources of power the parent company would have?

Answer 7

• contractual agreements between the parent and other parties
• holding a minority shareholding but with the remaining equity held by a large, dispersed and unconnected group of shareholders
• potential voting rights resulting in control being gaines

Question 8

When would a parent be exempt from preparing consolidated financial statements?

Answer 8

• the parent itself is a wholly owned sub or partially owned sub and its owners have been informed about, and do not object to, the parent not preparing CFS
• parents debt or equity instruments are not traded in public market