ASPE Section 1591
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Subsidiaries
Subsidiaries is part of the Accounting Standards for Private Enterprises (ASPE).
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Conceptual Framework Linkage
Whether – and how – a parent reflects its subsidiaries
ASPE Section 1591 governs HOW a PARENT enterprise ACCOUNTS for ITS subsidiaries – and, GENUINELY distinctively, WHETHER it CONSOLIDATES them AT all. UNLIKE virtually EVERY other FRAMEWORK covered THROUGHOUT this poster LIBRARY, ASPE TREATS consolidation as an ACCOUNTING POLICY CHOICE, RATHER than a MANDATORY requirement (Section 4) – a GENUINELY fundamental, PRACTICALLY significant divergence FROM IFRS 10 and ASBE No. 33 (see the COMPANION Chinese GAAP poster EARLIER in this LIBRARY).
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Scope – Defining a Subsidiary
An entity controlled by another reporting enterprise
This Section applies TO an ENTERPRISE that CONTROLS one OR more OTHER enterprises ("SUBSIDIARIES") – GOVERNING how THAT controlling RELATIONSHIP is REFLECTED (or NOT reflected, in FULL consolidation TERMS) within the PARENT'S OWN financial STATEMENTS.
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The Definition of Control
Continuing power over strategic policies, without the cooperation of others
CONTROL of an ENTERPRISE is the CONTINUING power TO determine ITS strategic OPERATING, investing, AND financing POLICIES WITHOUT the CO-OPERATION of OTHERS – a DEFINITION CENTERED on POWER over KEY strategic DECISIONS, RATHER than a SPECIFIC voting-INTEREST percentage THRESHOLD alone.
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THE CENTRAL CHOICE – Three Accounting Alternatives for Subsidiaries
Consolidation, cost method, or equity method – a genuine election
AlternativeDescription
ConsolidationCOMBINING the PARENT'S and SUBSIDIARIES' individual FINANCIAL statements INTO a SINGLE set OF group-LEVEL statements, PER Sections 1601/1602
Cost methodTHE investment IN each SUBSIDIARY is CARRIED at COST, with INCOME recognized ONLY to the EXTENT of DIVIDENDS received FROM the subsidiary
Equity methodTHE investment IS adjusted FOR the PARENT'S share OF the subsidiary'S profit OR loss, PER the SAME mechanics USED for significant-INFLUENCE investments under SECTION 3051
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Why ASPE Permits This Choice
Cost-benefit considerations for private enterprise stakeholders
CONSOLIDATION is a GENUINELY complex, COSTLY exercise – ELIMINATING intragroup TRANSACTIONS, ALIGNING accounting POLICIES across the ENTIRE group, and MANAGING non-CONTROLLING interests. FOR a PRIVATE enterprise, the PRIMARY users of ITS financial STATEMENTS (LENDERS, tax AUTHORITIES, owner-MANAGERS) OFTEN have LESS need FOR a fully CONSOLIDATED, group-WIDE view than PUBLIC capital MARKETS investors WOULD. ASPE'S choice TO make CONSOLIDATION optional REFLECTS a DELIBERATE cost-BENEFIT judgment – ALLOWING private ENTERPRISES to AVOID the SUBSTANTIAL cost OF consolidation WHERE its INCREMENTAL benefit TO their OWN specific USER base is GENUINELY limited.
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Consolidation – Applying Sections 1601 and 1602
The most complete, but most costly, alternative
WHERE a PARENT elects CONSOLIDATION, it APPLIES Section 1601 (CONSOLIDATED Financial STATEMENTS) and SECTION 1602 (NON-controlling Interests) – COMBINING the PARENT'S and SUBSIDIARIES' financial STATEMENTS into ONE set of GROUP-level statements, ELIMINATING intragroup TRANSACTIONS and BALANCES, MUCH as WOULD be REQUIRED under IFRS 10 or ASBE No. 33.
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The Cost Method
A simple, dividend-driven income recognition approach
UNDER the COST method, the PARENT'S investment IN a SUBSIDIARY is CARRIED at ITS original COST, WITH investment INCOME recognized ONLY to the EXTENT of DIVIDENDS received (OR receivable) FROM the SUBSIDIARY – a GENUINELY simple, LOW-cost alternative, THOUGH one that DOES NOT reflect the SUBSIDIARY'S own UNDERLYING profitability WITHIN the PARENT'S own FINANCIAL statements.
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The Equity Method
A middle ground between cost and full consolidation
UNDER the EQUITY method, the PARENT'S investment IS adjusted TO reflect ITS share OF the SUBSIDIARY'S profit OR loss (and OTHER equity CHANGES) EACH period – REFLECTING the SUBSIDIARY'S underlying PERFORMANCE within a SINGLE investment LINE, WITHOUT the FULL line-by-LINE combination CONSOLIDATION requires.
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Consistency of Method Across Subsidiaries
Applying the same policy uniformly
AN enterprise APPLIES the SAME accounting METHOD to ALL of ITS subsidiaries CONSISTENTLY – CHOOSING, FOR example, to CONSOLIDATE all SUBSIDIARIES, or to APPLY the COST or EQUITY method TO all of THEM, RATHER than MIXING approaches ARBITRARILY across DIFFERENT subsidiaries WITHIN the SAME group.
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Worked Example – Electing the Cost Method Instead of Consolidation
A dramatically simpler presentation
Example: A private holding company's non-consolidated statements
A private holding company owns 100% of an operating subsidiary, originally acquired for $2,000,000. During the year, the subsidiary earns $500,000 of net income and pays the parent a $150,000 dividend.
ELECTING the COST method, the PARENT'S own FINANCIAL statements SHOW the INVESTMENT at ITS ORIGINAL $2,000,000 COST (UNCHANGED), with INVESTMENT income OF $150,000 (the DIVIDEND received) – the SUBSIDIARY'S OWN $500,000 net INCOME is NOT reflected AT all WITHIN the PARENT'S non-CONSOLIDATED statements.
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Worked Example – Applying the Equity Method to a Subsidiary
Reflecting the subsidiary's underlying performance within a single line
Example: The same facts, using the equity method instead
Continuing the prior example, the parent instead elects the equity method for its 100%-owned subsidiary.
The PARENT recognizes EQUITY income OF $500,000 (its FULL share of the SUBSIDIARY'S net INCOME), INCREASING the INVESTMENT'S carrying AMOUNT to $2,000,000 + $500,000 − $150,000 (DIVIDENDS received, WHICH reduce the INVESTMENT balance UNDER the equity METHOD) = $2,350,000 – a MEANINGFULLY different OUTCOME than the COST method PRODUCED for the SAME underlying FACTS.
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Disclosure Requirements
What Section 1591 requires
Accounting policy elected (consolidation, cost method, or equity method) and applied consistentlyNature of the parent's relationship with each significant subsidiaryFor non-consolidated presentations, the fact that the statements are non-consolidated, and why
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Critical Judgments & Estimates
Where judgment matters most
SIGNIFICANT JUDGMENTS
Whether control genuinely exists over a particular investee, triggering subsidiary classificationWhich of the three accounting alternatives best serves the enterprise's users, given cost-benefit considerations
SIGNIFICANT ESTIMATES
Generally minimal beyond those inherent in the chosen method's own mechanics (e.g. impairment testing of the investment under the cost or equity method)
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Relationship to IFRS 10 and ASBE No. 33
Comparison – ASPE Section 1591 vs IFRS 10 / ASBE No. 33
FeatureASPE Section 1591IFRS 10 / ASBE No. 33
Consolidation requirementOPTIONAL – a genuine policy choiceMANDATORY for all controlled subsidiaries
Definition of controlContinuing power over strategic policiesPower, exposure to variable returns, and ability to use power to affect returns
THIS is the SINGLE most SIGNIFICANT structural DIVERGENCE this ENTIRE ASPE poster series HAS yet UNCOVERED relative TO IFRS and ASBE – CONSOLIDATION being OPTIONAL, rather THAN mandatory, REPRESENTS a GENUINELY fundamental DEPARTURE from the GROUP-reporting philosophy UNDERPINNING virtually EVERY other MAJOR accounting FRAMEWORK covered THROUGHOUT this LIBRARY.
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Statement Mapping
Where every subsidiary accounting choice lands
EventStatement(s) affectedNotes
Cost method dividend incomeBS ISInvestment unchanged; income limited to dividends received
Equity method income shareBS ISInvestment balance adjusted for the parent's share of subsidiary profit/loss
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Related Standards
Cross-reference map
SectionConnection
Section 1582Business Combinations – governs the initial acquisition accounting this Section's subsequent choice of method applies to
Section 3051Investments – supplies the equity method mechanics this Section applies to subsidiary accounting
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Quick-Reference Glossary
Non-consolidated financial statements
Financial statements presenting a parent's own investment in subsidiaries (via the cost or equity method) rather than combining subsidiaries' assets, liabilities, and results line-by-line.
Cost method
An accounting method carrying an investment in a subsidiary at its original cost, recognizing income only to the extent of dividends received.
Financial statement key (ASPE terminology)
BS Balance Sheet
IS Income Statement
SRE Statement of Retained Earnings / Statement of Changes in Equity
SCF Cash Flow Statement