Question

A company acquires a subsidiary and will prepare consolidated financial statements for external reporting purposes. For internal reporting purposes, the company has decided to apply the initial value method. Why might the company have made this decision?Consolidation is not required when the parent uses the initial value method.It is a relatively easy method to apply.GAAP now requires the use of this particular method for internal reporting purposes.Operating results appearing on the parent's financial records reflect consolidated totals.

Answer 1

Answer:

It is a relatively easy method to apply.

Explanation:

When accounting for a subsidiary, equity method is followed, whenever the shareholding percentage is equal or more than 20%.

But here, the parent company uses, initial value method for internal reporting.

Under initial value method the value of investment in subsidiary is recorded at cost, and then adjusted at year end at fair value, this clearly shows the gain or loss at each year end from such investment as per market norms.

There is no statutory requirement to follow such initial value method for internal reporting.

The correct reason therefore, is:

It is a relatively easy method to apply.