FASB presents views on consolidated statements.

Slowly but surely the Financial Accounting Standards Board is drawing closer to deciding which entities should be included in consolidated financial statements.

After a dozen years since it began studying the issue (which was included in a 1982 FASB project undertaken in response to questions about consolidation policy from the American Institute of CPAs, the Securities and Exchange Commission and others), the board published its Preliminary Views on Major Issues Related to Consolidation Policy and called for comments from the public.

The issue of what constitutes control of another entity long has been problematic. The FASB document--and the final statement the board eventually will issue--represent a change from the board's past position and will provide needed guidance.

"I think this is a significant step in an area where there have been a lot of questions," said Ernest F. Baugh, Jr., a partner of Joseph Decosimo and Co., Chattanooga, Tennessee, and a member of the Institute's accounting standards executive committee. "Prior to this, FASB's position was that you prepared a consolidated financial statement when you owned over 50% of another company. But there were many cases when things were not clear-cut. You could control a company with less stock than that. For example, two companies could each own 49% of a subsidiary, and an individual could own the other 2%. If one of the companies really controlled that individual, it actually would control the subsidiary, but that would not be shown on the financial statements. Or a company might put some of its fixed assets and all of its debt related to that into a subsidiary and not have that appear on its balance sheet. Thus, creditors or customers would not see the whole picture."

The FASB proposal addresses this problem by defining control of an entity as "power over its assets"--power to use or direct the use of the individual assets of the subsidiary to achieve the parent's objectives. A parent company would have to consolidate all its subsidiaries unless its control was temporary when an entity became a subsidiary.

These consolidation rules also would be extended to include not-for-profit organizations, trusts and partnerships as well as business corporations, toward which current standards for consolidation policy are primarily directed. "The board believes it can achieve a significant improvement in practice by developing a consolidation policy that can be applied to all entities and that focuses on the economic relationships among organizations rather than their legal form," said Ronald W. Lott, the FASB's project manager. The document noted, however, that although the concept of control for purposes of consolidated financial statements is the same for both business enterprises and not-forprofits, there are differences in organizational characteristics that probably would significantly affect the way it is applied in practice.

The document gives examples of specific situations illustrating application of the proposed requirements. Among these:

* Domination of the process of nominating and electing directors of a corporation by an owner of a significant minority interest.

* Creation of a limited partnership with a single general partner.

* Creation of a special-purpose corporation to benefit its creator.

Comments on the preliminary views must be received by December 31. After it considers the response to its views, the board expects to issue an exposure draft of a proposed standard that would cover both consolidation policy and procedures.

To receive one copy of the document (product no. ITC14) without charge until December 31, write to the FASB order department, 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116; telephone: [phone], ext. 555.