June 4, 2012
A subsidiary is its own legal entity that is governed by a board of directors. For independence, the subsidiary corporation has its own liability and is separate from the parent corporation for taxation and regulatory guidance from state and federal agencies. Control over the subsidiary is maintained by the parent corporation holding more than fifty-percent shareholder value and voting rights in the subsidiary charter.
The professional responsibilities of the certified public accountant (CPA) are to provide assurance services and attestation services that include an audit and review of historical financial statements and ...view middle of the document...
Methodology to Determine Deferred Taxes
Under the parent company concept for accounting for deferred taxes for a subsidiary, beneficial interests of the assets and liabilities of the subsidiary is included in the consolidated financial statements of the parent corporation. For our purposes, the parent corporation has a beneficial interest to share in the profits of the subsidiary. As a majority shareholder, the parent is also subject to receive dividend payments to recoup investment assets into the subsidiary. Deferred tax liability for the parent corporation is based on fair value while non-controlling interests is recognized at book value which does not include a deferred tax liability. The fair value of the subsidiary’s net assets should decrease in proportion to the parent corporation’s deferred tax liability. Alternatively, goodwill increases for the parent corporation by the deferred tax liability amount. The deferred tax liability is computed by multiplying the tax rate of forty percent by the fair value of the net difference between assets and liabilities of the parent and subsidiary corporation on the consolidated financial statements. FASB Statement 109 supports this approach of determining the deferred tax liability for the parent’s share in the subsidiary.
Accounting Changes and Error Corrections
Changes in accounting principle for inventory valuation for the subsidiary corporation would increase asset values that results in an increase in deferred tax liability for the parent company. In addition, a change in accounting principle from cash basis to accrual basis would also affect the deferred tax liability calculation. Changes in accounting estimates are part of the normal accounting cycle and corrections may be recorded in a subsequent accounting period and do not require additional disclosures on the consolidated financial statements. A change in reporting entity for the subsidiary corporation from the parent company concept...