What is the steps to prepare consolidated financial statements?

Answer 1

• Purpose of Consolidated Financial Statements

The purpose of preparing consolidated financial statements is to report financial condition and operating result of a consolidated business group, which is assumed as one entity comprised of more than one companies (including entities other than "companies") under a common control.

• General Principles

1. Consolidated financial statements should provide true and fair view of financial condition and operating result of the business group.

1. Consolidated financial statements should be prepared based on legal-entity based financial statements of the parent and subsidiaries that belong to the business group, which are prepared in accordance with the generally accepted accounting principles.

1. Consolidated financial statements should display clearly financial information necessary for interest parties not to mislead their judgments about the condition of the business group.

1. Policies and procedures used for preparing consolidated financial statements should be applied continuously and not be changed without reason.

• General Standards

1. Scope of Consolidation

1. In principle, the parent should consolidate all subsidiaries.

2. A parent is a company that controls effectively other companies, and the other companies are subsidiaries.

- If a company is a reorganized, liquidated, bankrupt or other similar company and there is no unity of organization because of no effective control, the company is not a subsidiary.

- An effective control is a control over the decision-making body of a company. A company that shows one of the following indications is assumed as a subsidiary, unless any counter evidence supports that no effective control exists over the decision making body:

a. A company holds effectively the majority of the voting interests in the other company. If voting shares or interest is owned in a company's account, whomever the ownership is titled to, such as executives of the company, the shares or interest is supposed to be owned in substance by the company.

b. A company holds less than 50 percent but significant minority of the voting interests in the other company, and there is certain facts that support the existence of control over the decision making body of the other company.

3. If a parent and its subsidiaries or the subsidiaries control effectively other companies, the other companies are assumed as subsidiaries as well.

4. A subsidiary that meets one of the following conditions should not be consolidated:

a. The control over the subsidiary is temporal.

b. Even if the subsidiary does not meet the condition (a), consolidation of the subsidiary would mislead significantly the judgments of the interest parties.

If a subsidiary is immaterial in assets, sales, and other elements, so that non-consolidation of the subsidiary would not affect rational judgments about financial conditions and operating result of the business group, the subsidiary may not be consolidated.

1. The Balance Sheet Date of the Business Group

1. The accounting period for consolidated financial statements should be one year, of which the balance sheet date should be chosen from any one day of within the period, with reference to the accounting period of the parent.

2. If the accounting periods of the subsidiaries differ from those of the parent, the subsidiaries should perform appropriate accounting procedures as of the balance sheet date of the consolidated entity, which are essentially the same as the formal accounting procedures in preparing financial statements.

If a difference in the balance sheet dates does not exceed three months, the consolidation may be based on the unmodified financial statements of the subsidiary. In this case, only material differences in accounting records related to intercompany transactions that arise from the difference in balance sheet dates should be modified.

1. Accounting Policies and Procedures of the Parent and Subsidiaries

In principle, accounting policies and procedures for similar transactions under similar circumstances should be unformed among the parent and subsidiaries.

• Guidelines for Preparing Consolidated Balance Sheets

1. Basic Principles for Preparation of Consolidated Balance Sheets

A consolidated balance sheet should be prepared based on the amounts of the assets, liabilities, and capital on the legal-entity balance sheets of the parent and subsidiaries, with remeasuring assets and liabilities of the subsidiaries and offsetting the investments and net assets and rights and obligations among consolidated entities.

1. Remeasurement of Assets and Liabilities of Subsidiaries

1. Assets and liabilities of a subsidiary should be remeasured at fair value as of the date of acquisition of the control, based on the following alternative methods:

a. A portion of the assets and liabilities of the subsidiary that is attributed to the parent's interest is marked to fair value as of the dates of the investments, and the remaining portion of the assets and liabilities that is attributed to the minority interest is carried over with the book amounts on the legal-entity balance sheet. (hereafter, the "partial fair value method").

b. Full portion of the assets and liabilities of the subsidiaries is marked to fair value as of the acquisition of the control (hereafter, "full fair value method").

Even when a reporting entity adopts the partial fair value method, the portion of assets and liabilities of the subsidiary that is attributed to the parent may be remeasured at the date of acquisition of the control if such procedure does not affect in material respects the result of consolidation.

If an acquisition date of shares or control differs from the balance sheet date of the subsidiary, the acquisition may be supposed to be done at the nearest balance sheet date from the acquisition date.

2. The differences of fair values and book amounts of assets and liabilities of the subsidiary (hereafter, "remeasurement differences") should be included in capital of the subsidiary.

3. If the remeasurement differences are immaterial, the assets and liabilities of the subsidiary may be carried over with the book amounts.

1. Offsetting Investments and Net Assets

1. Investments by a parent in its subsidiary and the corresponding net assets of the subsidiary should be offset and eliminated for consolidation purpose.

2. If there is a difference between the investments by a parent in its subsidiary and the offsetting net assets of the subsidiary, the difference should be accounted for as a consolidation adjustment (goodwill).

A consolidation adjustment should be amortized over no more than 20 years after the acquisition by the straight-line method or other appropriate methods. If the amount of the consolidation adjustment is immaterial, the amount may be recognized as a gain or loss of the period of the acquisition.

3. The investments and the net assets between subsidiaries should be offset, as if the offset is between a parent and its subsidiary.

1. The Minority Interest

1. A portion of the net assets that is not attributed to the parent should be attributed to the minority interest.

- Stated and additional paid-in capital and retained earnings as of acquisition date of shares or control should be divided into the portion attributed to the parent and the portion attributed to the minority shareholders. The former portion should be offset with the investment by the parent and eliminated, and the latter portion should be accounted for as the minority interest.

2. If accumulated losses of a subsidiary that would otherwise be attributed to the minority interest exceeds the accumulated amount of the minority interest should be attributed to the parent's interest. In this case, if the subsidiary raises net income in succeeding periods, the income should be attributed to the parent's interest until the accumulated losses that has previously been attributed to the parent are recovered.

3. Retained earnings earned after the acquisition date of shares or control that are attributed to the minority shareholders should be accounted for as minority interest.

1. Offsetting Rights and Obligations

Rights and obligations among consolidated entities should be offset and eliminated for consolidation purposes.

• The rights and obligations to be offset include accrued or deferred revenues or expenses that have arisen from intercompany transactions.
• If a note issued by a consolidated company is refunded at a bank by another consolidated company, the note should be transferred into debt account on the consolidated balance sheet.
• Provisions for credit losses should be reconciled to the amount corresponding to the consolidated loans after the offset of rights and obligations between consolidated companies.
• Provisions for which it is clear to be recognized for consolidated companies should be eliminated for consolidation purposes.
• If a consolidated company acquires temporally any debt securities issued by another consolidated company, the debt securities may not be offset.

• Guidelines for Preparation of Consolidated Income Statements

1. Basic Principle for Preparation of Consolidated Income Statement

A consolidated income statement should be prepared based on the amounts of revenues and expenses on legal-entity income statements of the parent and subsidiaries, with eliminating intercompany transactions among consolidated entities and unrealized gains and losses on the transactions and applying other related procedures.

1. Eliminating Intercompany Transactions among Consolidated Entities

Items related to intercompany transactions between the parent and its subsidiary or among the subsidiaries should be eliminated.

Even when transactions between consolidated companies are performed through any unrelated companies, the transactions should be accounted for as if they are related transactions between consolidated companies, if the transactions are clear to be in substance related transactions.

1. Eliminating Unrealized Gains and Losses

1. Unrealized gains and losses included in inventories, fixed assets, or other assets that are obtained by intercompany transactions among consolidated entities should be eliminated. For unrealized losses, however, if the cost before eliminating the unrealized losses is not recoverable, the unrealized losses should not be eliminated.

2. Immaterial unrealized gains or losses may not be eliminated.

3. If there is a minority interest in the selling subsidiary, the unrealized gains and losses should be allocated between the parent's interest and the minority interest based on the proportionate ownership of the parent's interest and the minority interest.

• Guidelines for Preparation of Consolidated Statements of Retained Earnings

1. Preparation of Consolidated Statements of Retained Earnings

1. For consolidated retained earnings carried on the consolidated balance sheet, a consolidated statement of retained earnings, which display changes in the earnings, should be prepared.

2. Changes in consolidated retained earnings should be calculated based on legal-entity consolidated income statements and the appropriations of retained earnings of the parent and its subsidiaries, with eliminating intercompany payments and receipts of dividends among consolidated entities.

3. Consolidated amounts of appropriations of retained earnings should be calculated based on the appropriations of the parent and its subsidiaries that are performed during the consolidated accounting period. However, the consolidated amounts may be calculated based on the appropriations of the parent and its subsidiaries that relate to the earnings of the accounting period.

• Notes to Consolidated Financial Statements

The following information should be noted.

1. Consolidation Policy and Related Information

Information about consolidated subsidiaries, nonconsolidated subsidiaries, and nonconsolidated subsidiaries and affiliates in which investments are accounted for by the equity method, and other important information about consolidation policy, as well as material changes, if any, in the consolidation policy.

2. Differences in Balance Sheet Dates

If the balance sheet date of a subsidiary differs from that of the parent, the balance sheet dates and a summary description of accounting procedures applied to the subsidiary for consolidation purposes.

3. Accounting Principles and Procedures and Related Information:

a. Measurements of important assets, depreciation methods, and other accounting methods, and changes in such methods, if any, as well as the reasons and influences of the changes.

b. Summary description of differences in accounting principles and procedures, if any, between the parent and its subsidiaries.

c. Remeasurements of assets and liabilities of subsidiaries

4. Appropriations of Retained Earnings: Accounting policy for appropriations of retained earnings for consolidation purposes.

5. Other Important Information

Other important information for judgments about financial positions and operating results of the business group.

Material subsequent events that have occurred before the preparation date of the consolidated financial statements should be disclosed in the notes to the consolidated statements.

Subsequent events are events that have occurred after the consolidated balance sheet date (for subsidiaries whose balance sheet dates defer from that of the parent, events that have occurred after the balance sheet date of those subsidiaries) and affects financial conditions and operating results for the future accounting periods.