What Constitutes Control
EXECUTIVE SUMMARY * FASB ISSUED A REVISED ED SEEKING TO DEFINE what constitutes control of an entity. Under current rules, the condition for a controlling financial interest is ownership of a majority voting interest--unless control is temporary or does not rest with the owner of the majority voting interest. FASB's goal is to provide CPAs with better tools for analyzing complex corporate structures. * SOME BELIEVE THE REVISED ED GIVES CPAs A BETTER working definition of what constitutes control than a 1995 ED, which FASB did not approve. Observers generally agree the ED will pass but not all are certain it will solve the current problems. * THERE IS NOT GENERAL AGREEMENT THAT A NEW standard is needed. Only a few companies may be taking unfair advantage of the current rules. And because the current standard draws bright lines, CPAs find it less subjective and are more comfortable with it. More subjective rules might create conflicts between financial statement preparers and auditors. * OTHER COUNTRIES ALSO ARE SEEKING A BETTER definition of control. In New Zealand, for example, where the current standard is nearly identical to the United States, standard setters are trying to replace the bright-line rule with new and better guidance. * IF FASB PASSES A NEW STANDARD, CPAs STILL FACE the complex task of consolidating an entity into the accounts of the controlling entity in much the same way they do at present. In many consolidation projects, the setup is where most of the work takes place. A revised FASB ED may finally provide a long-sought answer. Within a charged political atmosphere, the Financial Accounting Standards Board issued a revised exposure draft to clarify consolidation policy after its 1995 ED failed to obtain board approval. This effectively rekindles controversy fueled by critics of existing FASB guidance--particularly investor advocates--who have been strident in their complaints about the poor quality of quarterly corporate earnings reports. Adding his criticism, SEC Chairman Arthur Levitt recently said, "Too many corporate managers, auditors and analysts are participants in a game of nods and winks. In the zeal to satisfy consensus earnings estimates and project a smooth earnings path, wishful thinking may be winning the day over faithful representation." There is a wide diversity of opinion on when and if one company "controls" another and how FASB should respond to renewed pressure to create standards that will improve financial reporting and provide CPAs with better guidance. THE MEANING OF CONTROL The issue of when a subsidiary is sufficiently controlled by a parent to merit consolidated financial reporting goes back many years (see "A History of Consolidation Policy," page 41). In the most recent step, FASB is trying to calm concerns by defining what constitutes control of an entity which, it says, will provide CPAs with better tools with which to analyze complex corporate structures. But is such a definition what critics really want? Some CPAs and other financial professionals believe existing standards are sufficient and adding more detail will only confuse financial report users. That's not the opinion of FASB's Ronald Bossio, who is spearheading the drive for a new ED to define when entities should be included in consolidated financial statements. "We're trying to move away from the `bright-line' mentality. It has been an arduous process, says Bossio, one he describes as "grinding." Jack Albert, associate to the SEC chief accountant, which has oversight responsibility for FASB, calls the push for a new ED "a work in progress" but adds, "it's safe to assume implementation guidance will be coming" Under the rule CPAs currently follow, commonly called the bright-line rule, the condition for a controlling financial interest is ownership of a majority voting interest--unless control is temporary or does not rest with the owner of the majority voting interest. …