Consolidated vs consolidating financial statements

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IAS 27 Consolidated and Separate Financial Statements outlines when an entity must consolidate another entity, how to account for a change in ownership interest, how to prepare separate financial statements, and related disclosures.

To illustrate the difference, consider a simple example, where company A owns 60% of company B.

Company A can report its financial results in a parent company statement or in a consolidated statement. If it chooses to report the financial results in a parent company statement, the operating income statement will center on just company A's operating results.

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AMONG ENRON’S PROBLEMS WAS ITS USE of variable interest entities, which allowed it to leave significant amounts of debt off its balance sheet.

In response to concern about this practice, FASB issued Interpretation no.

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A VIE’S PRIMARY BENEFICIARY TYPICALLY IS ABLE to make decisions about the entity and share in profits and losses.

Consolidation is based on the concept of 'control' and changes in ownership interests while control is maintained are accounted for as transactions between owners as owners in equity.

IAS 27 was reissued in January 2008 and applies to annual periods beginning on or after 1 July 2009, and is superseded by IAS 27 Separate Financial Statements and IFRS 10 Consolidated Financial Statements with effect from annual periods beginning on or after 1 January 2013.

The revenues and operating income will reflect only company A's operations.

However, there will be a line item on the income statement, below the operating income line, which will include 60% of the net income of company B.