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Chapter20: Accounting Changes and Error Corrections

Change In Reporting Entity

A reporting entity can be a single company, or it can be a group of companies that reports a single set of financial statements. For example, the consolidated financial statements of PepsiCo Inc. report the financial position and results of operations not only for the parent company but also for its subsidiaries which include Frito-Lay and Gatorade. A change in reporting entity presentation of consolidated financial statements in place of statements of individual companies, or a change in the specific companies that constitute the group for which consolidated or combined statements are prepared. occurs as a result of (1) presenting consolidated financial statements in place of statements of individual companies or (2) changing specific companies that constitute the group for which consolidated or combined statements are prepared.8



   Some changes in reporting entity are a result of changes in accounting rules. For example, companies like Ford, General Motors, and General Electric must consolidate their manufacturing operations with their financial subsidiaries, creating a new entity that includes them both.9 For those changes in entity, the prior-period financial statements that are presented for comparative purposes must be restated to appear as if the new entity existed in those periods.

   However, the more frequent change in entity occurs when one company acquires another one. In those circumstances, the financial statements of the acquirer include the acquiree as of the date of acquisition, and the acquirer's prior-period financial statements that are presented for comparative purposes are not restated. This makes it difficult to make year-to-year comparisons for a company that frequently acquires other companies. Acquiring companies are required to provide a footnote that presents key financial statement information as if the acquisition had occurred before the beginning of the previous year. At a minimum, the supplemental pro forma information should display revenue, income before extraordinary items, net income, and earnings per share.

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   A change in reporting entity is reported by recasting all previous periods' financial statements as if the new reporting entity existed in those periods.10 In the first set of financial statements after the change, a disclosure note should describe the nature of the change and the reason it occurred. Also, the effect of the change on net income, income before extraordinary items, and related per share amounts should be indicated for all periods presented. These disclosures aren't necessary in subsequent financial statements. Hartford Life Insurance Company, a financial services company, changed the composition of its reporting entity and described it this way:


A change in reporting entity requires that financial statements of prior periods be retrospectively revised to report the financial information for the new reporting entity in all periods.

Change in Reporting Entity—Hartford Life Insurance

Real World Financials


1. Basis of Presentation and Accounting Policies (in part)
Effective March 31, 2009, Hartford Life changed its reporting entity structure to contribute certain wholly owned subsidiaries, including Hartford Life's European insurance operations, several broker dealer entities and investment advisory and service entities from Hartford Life and Accident to the Company. The contribution of subsidiaries was effected to more closely align servicing entities with the writing company issuing the business they service as well as to more efficiently deploy capital across the organization. The change in reporting entity was retrospectively applied to the financial statements of the Company for all periods presented. The contributed subsidiaries resulted in an increase in stockholder's equity of approximately $1.3 billion as of March 31, 2009.

8FASB ASC 810: Consolidation and 840: Leases (previously “Consolidation of All Majority-Owned Subsidiaries,” Statement of Financial Accounting Standards No. 94 (Stamford, Conn.: FASB, 1987)).

9The issuance of SFAS No. 94, “Consolidation of All Majority-Owned Subsidiaries,” [FASB ASC 810: Consolidation and 840: Leases] resulted in hundreds of entities consolidating previously unconsolidated finance subsidiaries.

10Any prior periods' statements are recast when those statements are presented again for comparative purposes.

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