Chapter 25: Equity Investments Controlling Influence, More Than 50%

Reporting Equity Securities with Controlling Influence When an investor owns more than 50% of a company’s voting stock, it is considered to have controlling influence over the investee. This control allows the investor (the parent company) to direct the investee’s management and operations. The investee company in this relationship is called the subsidiary. For reporting purposes, the consolidation method is used for long-term investments with controlling influence. Consolidation Method Overview Under the consolidation method: • • Consolidated Financial Statements are prepared, which combine the financial information of the parent and all its subsidiaries. These statements represent the entire business group as a single economic entity, showing a comprehensive view of its financial position and performance. Separate Accounting Records are maintained by each entity (parent and subsidiaries), but their individual financial results are combined during consolidation. Key Components of Consolidated Financial Statements 1. Balance Sheet: o All assets and liabilities of the parent and subsidiaries are combined as if they belong to a single entity. 2. Income Statement: o Revenues and expenses of the parent and subsidiaries are aggregated, presenting a single, unified view of the group’s profitability. 3. Statement of Cash Flows: o The cash flows of the parent and subsidiaries are combined, showing the total cash movement for the entire business group. Reporting Comprehensive Income Comprehensive income includes all changes in equity that are not the result of transactions with owners (such as investments by owners or dividend distributions). Comprehensive income is calculated by adding other comprehensive income (OCI) to net income. Key elements of OCI include: • • • Unrealized gains and losses on available-for-sale securities, Foreign currency translation adjustments, and Other specific adjustments relevant to the financial reporting period. Options for Reporting Comprehensive Income 1. Separate Statement of Comprehensive Income (most common method): o Presented as a separate report following the income statement. 2. Single Continuous Statement of Income and Comprehensive Income: o Included in the income statement’s lower section, displaying both net income and comprehensive income in a single report. Summary of Controlling Influence Reporting • • Controlling influence results in the consolidation of financial statements, providing a comprehensive view of the parent-subsidiary group as a single business entity. Comprehensive income represents all changes in equity not related to owner transactions, providing stakeholders with insights into the company's total income, including unrealized gains and losses not yet impacting net income directly.