Understanding ASPE
Section 1590, Subsidiaries Three questions for private business owners: Subsidiaries
A 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.
How can financial statement preparers How should the reporting entity account for determine if an investment in another its subsidiaries? enterprise is a subsidiary? A reporting entity has three accounting policy Question Question 1 As per Section 1590.03(a), an enterprise 2 choices to account for its subsidiaries: meets the definition of a subsidiary if the parent has the right and ability to obtain future • Consolidation economic benefits from the resources of the • Equity method enterprise and is exposed to the related risks. • Cost method Control of an enterprise is defined in Section 1590.03(b) as the continuing power to The entity must use the same accounting policy determine its strategic operating, investing and choice for all subsidiaries. Below are the key financing policies without the cooperation of aspects of each accounting policy choice: others. Paragraphs 1590.04 through 1590.14 provide additional application guidance. Consolidation(described in Section 1590) The determination as to whether an investor has Consolidated financial statements recognize control is not just based on the level of equity that the parent and all of its subsidiaries interest held by the investor and is not always reflect a single economic unit. All of the straightforward, as illustrated by the following assets, liabilities, revenues and expenses examples from Section 1590.12: are aggregated on a line-by-line basis, Control may exist when an enterprise does not intercompany transactions and balances are own the majority voting interest if it has the eliminated and non-controlling interest in a continuing ability to elect the majority of the subsidiary company is recognized. members of the board of directors through The financial statements are labelled as ownership of rights, options, warrants, “consolidated”. 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 control.
2 | Understanding ASPE Section 1590, Subsidiaries Equity method Which accounting policy should an enterprise select?
The investment is initially recorded at cost The accounting policy selected should be based on the needs and the carrying value is adjusted thereafter of the users of the financial statement and how those users Question to include the parent’s pro rata share of 3 view the entities within the organizational structure. post-acquisition earnings of the subsidiary, computed by the consolidation method. In circumstances where the users view all of the subsidiaries and the parent in an organizational structure as one business The amount of the adjustment is included in unit, then consolidation would likely be the appropriate the determination of net income by the parent. accounting policy choice. In other circumstances where the The investment account of the parent is also business operations of each subsidiary and the parent are increased or decreased to reflect the parent’s monitored by the users independently of each other and share of capital transactions and changes in viewed as separate business units, non-consolidated financial accounting policies and correction of errors statements would likely be more relevant and therefore the relating to prior-period financial statements cost or equity method would be an appropriate accounting applicable to post-acquisition periods. policy choice. Profit distributions received or receivable from Another consideration for selecting accounting policies a subsidiary reduce the carrying value of the includes management’s sensitivity to earnings variability. investment. The cost method provides management with the ability to The financial statements are labelled as “non- determine the timing of income from the investment in a consolidated”. subsidiary through the ability to control the declaration of dividends, which can be used to manage earnings variability. If Cost method(described in Section 3051) managing earnings variability is an important consideration of The investment account on the balance sheet the users of the financial statements, the cost method might of the parent is initially recorded at cost. be appropriate. Earnings, which are generally in the form of The most significant implication of non-consolidated financial dividends, are recognized only to the extent statements is that a subsidiary’s assets and liabilities are not received or receivable. reported in the parent’s financial statements. 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 subsidiaries.
To learn more about these items or for application guidance please contact our Private Mid-Market practice at [email protected].
Understanding ASPE Section 1590, Subsidiaries | 3 EY | Assurance | Tax | Transactions | Advisory
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