A Study On The Scope Of Consolidated Financial Statements

Issue of consolidated financial statements is acknowledged as one of the four major difficult problems internationally, which has caused extensive attention from the academic community in recent years. Meanwhile, since the worldwide progress of group development for enterprises has accelerated, problems in business merger and acquisition practice is kept emerging, calling for sophisticated standards and regulations. Although the main problems underlying the bankruptcy of Enron in 2002 and a bunch of the biggest investment banks during the recent financial crisis, such as Lehman, rooted deeply in their corporate governance mechanisms, defects in accounting standards, especially standards on consolidated financial statements, should be blamed as one of the fundamental factors, which covered up these problems from the market until the explosion of negative effects and bankruptcy in the end. Therefore, consolidation scope directly influences the completeness and usefulness of financial information in the consolidated financial statements and proper determination of consolidation scope is an essential prerequisite of the preparation of consolidated financial statements. However, determination of consolidation scope is full of controversy. International Accounting Standard Board(IASB), the international standard setter, has basically reached consensus on consolidation process, consolidation method, and consolidation theory with Financial Accounting Standard Board(FASB), yet, has not issued a consistent final standard on consolidated financial statements so far. As a result of the extensive attention drawn by the issue of off-balance sheet entities' consolidation which emerged during the lately economic crisis, a single standard of high quality on consolidated financial statements has become the common demand of regulators and accounting standard setters.This paper takes consolidation scope as its research object. Through analysis of theories on consolidated financial statements and control, it sets out the basic framework of consolidation scope determination, that is, consolidation scope should be determined on the basis of entity theory using effective control as the criterion. And then, through comparison of the specific regulations on consolidation scope issued by IASB, FASB, and China Ministry of Finance, this paper discusses how to define the situation when effective control exists. After that, this paper reviews the development of special purpose entity in recent years, which constitutes the most challenging problem in the field of consolidation scope determination, its exacerbation during recent financial crisis, and IASB's responses to this problem(ED 10). Constructive suggestions on how to establish the systematic standards on consolidation scope determination are given in the end of this paper.