Consolidation of Finance Subsidiaries: 230 Billion in Off-Balance-Sheet Financing Comes Home to Roost.

Abstract The article focuses on the consolidation of finance subsidiaries in the United States. Statement of Financial Accounting Standards No. 94 (SFAS 94), "Consolidation of All Majority-Owned Subsidiaries," issued on October 30, 1987, has eliminated the so-called "non-homogeneity exception" which allowed many majority-owned subsidiaries to be reported on a non-consolidated, equity method basis when their operations were substantially different from those of the parent. The imp act of the new reporting requirements will depend upon the nature and magnitude of specific financial statement effects as well as the reactions of financial statement users to these effects. On the one hand, existing footnote disclosures for material unconsolidated subsidiaries should preclude any impact on user decisions due simply to consolidation. Furthermore, since most finance subsidiaries are wholly-owned and highly leveraged, consolidation will result in the addition of potentially significant amounts of debt to the consolidated balance sheet with no corresponding increase in equity. Thus, traditional capital structure and debt service coverage indicators will reflect higher leverage. The SFAS 94 requirement to consolidate finance subsidiaries would defeat these motivations for forming such subsidiaries and increase the restrictiveness of accounting based debt covenants.