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• W169181904 abstract "Financial Reporting Of Significant-Influence Equity Investments: Analysis and Managerial Issues The purpose of consolidated statements is to present, primarily for the benefit of the shareholders and creditors of the parent company, the results of operations and the financial position of a parent company and its subsidiaries essentially as if the group were a single company with one or more branches or divisions. There is a presumption that consolidated statements are more meaningful than separate statements . . . (Accounting Research Bulletin 51 (ARB 51): para 1, emphasis added). Users want to understand and analyze significant investments in unconsolidated entities (investees) for the same reasons they want to analyze segments: separate analysis of an investee provides insight into opportunities and risks that aggregated reporting cannot achieve. . . . Users reject the proportionate consolidation method for accounting for investees because it combines amounts users seek to disaggregate. Users want to understand the opportunities and risks of significant investees as separate entities (AICPA Special Committee on Financial Reporting, 1994: 74-75, emphasis added). These two quotes embody numerous issues that complicate the reporting and subsequent analysis of entities possessing significant equity investments in other entities. Some concerns readily apparent from the quotes are the age-old issue of aggregation versus disaggregation and the nature of required disaggregated disclosures. Some, as the Jenkins Committee reports, prefer to have all the details about constituent entities so that they can sift, combine and analyze as they wish. At the opposite extreme, others favor the big-picture view of ARB 51 - in which the entity is reported as one unit in consolidated statements - over details regarding the individual pieces. But consolidation generally has been applied only when legal control exists, as evidenced by ownership of more than 50% of the voting stock of another entity. Moreover, disaggregated (or segment) disclosures arranged along industry and geographic lines tend not to be good substitutes in analysis for details about major equity investees. Managers, in turn, often resist disclosure of information they believe to be proprietary and harmful to their competitive position. Because they also dislike reporting standards that incorporate expanded liability concepts, managers often seek to keep liabilities off the balance sheet by arranging transactions that produce off-balance-sheet financing. Our purpose in this article is to identify the appropriate reporting model for significant-influence investments, situations where one entity possesses more than a passive investment in another entity but does not control that entity. Historically, these investments involved owning equity interests of approximately 20%-50%. We critically examine the three principal reporting methods for significant-influence investments - the equity method, the expanded equity method and proportionate consolidation - and evaluate each on its ability to provide sufficient and relevant analytical information to managers and analysts. Moreover, we incorporate recent research that finds a significant relationship between firms' disclosure policies and their cost of capital. After addressing financial analysis, elements of consolidation theory and aggregation/disaggregation issues, we develop two principal conclusions. 1. We find no substantive justification for continued use of the equity method to report equity investments in noncontrolled entities due to the method's intrinsically limited informational characteristics. 2. Both the expanded equity method and proportionate consolidation provide substantially more analytically useful information about the investment than the equity method. Managers may be able to reduce information asymmetry and their firms' cost of capital by voluntarily disclosing information about their significant investees using the expanded equity method or proportionate consolidation. …" @default.
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• W169181904 title "Financial Reporting of Significant-Influence Equity Investments: Analysis and Managerial Issues" @default.
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