Equity Method Reporting for Major Finance Company Subsidiaries.

Abstract A number of different approaches are being used in reporting investment income from non-consolidated finance subsidiaries. Although finance subsidiaries tend to be fully consolidated when the parent is also a finance company, one non-finance parent in the study also consolidated its finance subsidiary. Of the various methods used in applying the equity method, only Method E (offsetting against interest expense) appears to be related to the circumstantial variables examined. This approach seems to be a novel substitute for consolidation. While other circumstantial variables might be examined, there is nothing to suggest additional variables that might have more explanatory power. In summary, the study indicates that the particular approach to reporting the operations of finance company subsidiaries under the equity method is related to the economic circumstances of the parent and subsidiary in only a few cases. In most other cases, there seems to be little justification for the specific equity-method approach (as distinguished from the equity method in general) used by the companies in the study. This diversity of reporting practices makes financial statement analysis and comparisons between companies much more difficult, especially since the financial statements contain little to clarify the underlying rationale for the procedures used. If a reduction in the number of reporting alternatives is of concern to the Financial Accounting Standards Board or other authoritative bodies, further clarification of the appropriate approach to reporting under the equity method appears to be in order.