Consolidating U.S. and Foreign Subsidiary Financial Statements

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The article analyses two different sets of financial statements that can be prepared and presented by companies. The company considered here has a holding company in the U.S. and other foreign subsidiaries. The two forms of accounts are consolidated financial statements and separately prepared financial statements. The superiority of separately prepared accounts over consolidated financial statements is clearly explained in the article. This article also recommends that companies with a holding company and foreign subsidiaries should maintain a separately prepared set of accounts.

Do you agree with the author’s conclusion? Explain

Support your response with a rationale, well-reasoned explanation.

I disagree with the author’s conclusion. The holding company and the foreign subsidiaries should be able to maintain a separate set of accounts. However, in preparing the financial statements the relevant standards should be adhered to. A detailed explanation as to why a separate set of accounts should be maintained is presented below.

The holding company and the foreign subsidiaries are located in different countries. The holding company uses the U.S. dollar while the subsidiaries use different currencies. In the preparation of consolidated financial statements, the accounts are first translated to one currency. The process of translating the financial statements of subsidiaries to U.S. dollars may be cumbersome and may also lead to the loss of substantial information. The values obtained from the calculations may not be as accurate as expected due to human errors and truncation of the values that have to be done for uniformity.

The rates of exchange used in the translation are not constant as they tend to change with time. The rates used on the day of preparation may be different from the prevailing rates on the day of presentation. As a result, these accounts may not be representative of the true economic situation on the ground. This will negatively impact the decisions made by the users of the financial statements. The whole process of translation also takes time leading to delays in the availability of information to the users thus affecting their decisions (Holt, 2004, p.162).

The subsidiaries operate in different economies from that of the holding company. The holding company in the U.S. seems to enjoy the benefits of a strong economy while some subsidiaries operate in a hand-to-mouth economy especially those in developing countries. The economic level of the country has an impact on the performance of a company. The foreign subsidiaries located in countries that have poor economic levels will perform poorly while those in strong economic regions will perform well. When the consolidated financial statements are prepared, this is not taken into consideration as such details are not provided.

The preparation of a separate set of accounts by each subsidiary and the holding company will provide such details and thus the public will make informed decisions. The financial statements from poor economic areas may have little or no impact on the consolidated financial statements but if presented as separate sets then their relevance can be detected.

There are different business enterprises that the holding company and the subsidiaries can venture into. In a situation where they decide to engage in different business activities, it becomes difficult to prepare the consolidated set of financial statements. During the preparation of the consolidated financial statements, the financial statements are combined in one set. As a result of engaging in different business activities, the financial statements may contain different details. One financial statement may contain items that are not in other financial statements causing a major challenge in combining such a set of financial statements. This can be solved by preparing separate sets of financial statements by each subsidiary and the holding company (Muller, 2011, p.331).

The act of maintaining consolidated financial statements may deny the right people a chance to the information and present it to the wrong people. Taking an example of the subsidiaries in the foreign countries and the holding company in the U.S., the consolidated financial statements will be available to the people of the U.S. and not the residents of the foreign countries. The residents of the foreign countries are the relevant users of the financial statements of the subsidiaries as they are the major investors at the subsidiary level. If a separate set of accounts is kept they will have access to this information and they will make better decisions.

There are different ways of recognizing the occurrence of a transaction. One subsidiary may record a transaction when money changes hands while another may record a transaction when there is commitment. This difference also makes it difficult to prepare a single set of accounts for the subsidiaries and the holding company. The accounting bases used may also be different from one subsidiary to another. In one subsidiary, revaluation of assets may be done after every year while in another the same assets may be depreciating. Combining such divergent ideas in the consolidated financial statements becomes a major challenge. This is because the bases and policies used are to be explained as footnotes of the financial statements. To avoid this, each subsidiary should present its financial statements and the corresponding notes separately.

A holding company may buy a subsidiary from another company to dispose of the subsidiary within a short period. It is the requirement of international financial standards that every business activity of a company should be taken into consideration while preparing the consolidated financial statements. This is because the financial statements of such a subsidiary may mislead the public in deciding on how to invest. This will not be the situation if a separate set of accounts is presented. The subsidiary can comfortably prepare its financial statements and indicate at the footnotes that are to be held by the mother company for a short period. This kind of information enables the public to make accurate and sound decisions.

Maintaining uniformity is also a challenge in the preparation of the consolidated financial statements. Assuming there are several holding companies in the U.S with foreign subsidiaries, all these companies are expected to present a set of consolidated financial statements. The companies may opt to use different translating methods and thus the rates used will be different from one company to another. Comparing such financial statements will not be possible since one method of translating the financial statements cannot be embraced. The various subsidiaries should be allowed to keep a separate set of accounts to avoid such difficulties.

Different managing bodies may be working at the various subsidiaries and the parent company. As a result of this, the management techniques used may differ from one subsidiary to another. The financial statements are a major yardstick for checking the performance of a business enterprise. It is from the performance depicted in the financial statements the managers can tell the effectiveness of the management methods to employ. Keeping a consolidated set of financial statements will deny them a chance of evaluating the effectiveness of the techniques applied. Poor managers can also take advantage of the consolidated financial statements as separately prepared financial statements reveal the weaknesses of managers and as a result, they tend to improve their managerial skills to avoid embarrassment.

The author should not base his conclusion on financial standards. These standards tend to become irrelevant with time. This is because the decisions people make change daily and new uses of financial statements emerge every day. The financial statements are supposed to aid these uses thus those preparing the financial statements are expected to be as flexible as possible. They should not let the financial standards mislead them as these will deny the public the right to make informed decisions.

The process of preparing financial statements should not be rigid. If the process is to be done by international financial standards, then the whole process will just be a formality. Either the standards should change with time or accountants should be allowed to deviate from the requirements of the standards in some situations. This will enable the accounts to serve functions that they could not have served if they were strictly prepared by the outdated standards. These standards were suggested by people after long periods of observing business activities. They might have made wrong observations and sticking to the standards will be of no benefit. Hence, the standards should be updated regularly to make them efficient otherwise they will be obsolete (Hsu, Duh & Cheng, 2012, p.220).

The international community and the U.S. should re-evaluate the roles of financial statements. The economy is fast-changing and decisions made yesterday are very different from those made today and in the future. In making these decisions, one requires the financial information presented in the statements. New roles tend to emerge with time and they should be incorporated in the indigenous roles of the financial statements. The financial statements do not aid in some roles that they used to in the past. The international community should scrap these roles from the list of roles of the financial statements. The roles should be amended as a whole if the statements are expected to be relevant.

I suggest that every subsidiary and holding company be allowed to prepare and present its own set of accounts. This will enhance decision-making as detailed information will be available unlike in the case where one consolidated set of statements is kept for a group of companies. The challenges faced when translating financial statements will be eliminated if different sets of accounts are maintained. Material information should be guarded as much as possible. Accountants should ensure that the information they avail to the public and the form in which they avail it makes it useful. They should be as flexible as possible in the preparation of the financial statements.

The preparation of financial statements should not be a formality but a process that provides useful information to the users. The standards used in preparation are supposed to be adjusted to fit the current economic situation and an international conference of accountants should be held where the accountants should be given time to suggest better accounting standards. Their suggestions should be evaluated carefully and a set of new standards developed. Such conferences should be held regularly to update the standards to ensure they remain relevant (Hsu & Duh 2012, p.231).


Hsu, W. A., Duh, R., & Kang, C. (2012). Does the Control-based Approach to Consolidated Statements Better Reflect Market Value than the Ownership-based Approach? The International Journal of Accounting, 47(2), 198-225.

Holt, P. E. (2004). A case against the consolidation of foreign subsidiaries’ and a United States parent’s financial statements. Accounting Forum, 28(2), 159-165.

Muller, V. (2011). Value relevance of consolidated versus parent company financial Statements: Evidence from the largest three European capital markets. Accounting and Management Information Systems, 10(3), 326-350.

Duh, R., & Hsu, W. A. (2012). Response to Discussant of “Does the Control Based Approach to Consolidated Statements Better Reflect Market Value than the Ownership-based Approach?” The International Journal of Accounting, 47(2), 232-234.

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BusinessEssay. (2022) 'Consolidating U.S. and Foreign Subsidiary Financial Statements'. 20 October.


BusinessEssay. 2022. "Consolidating U.S. and Foreign Subsidiary Financial Statements." October 20, 2022.

1. BusinessEssay. "Consolidating U.S. and Foreign Subsidiary Financial Statements." October 20, 2022.


BusinessEssay. "Consolidating U.S. and Foreign Subsidiary Financial Statements." October 20, 2022.