The ingenious folks at Enron used hundreds of dummy corporations which no one seemed to own, to avoid taxes and hide boatloads of debt. The Federal Accounting Standards Board (FASB) came up with FASB Interpretation Number (FIN) 46 to avoid this problem in the future. This is a complicated economic test of related corporations to determine if a “Mother Ship” corporation might benefit most from the activities of the related entity. If the “Mother Ship” would benefit most, then FASB says the CPA must consolidate the financial statements of the related entity into the “Mother Ship”. So what? Well, it’s possible, but not always true, that the LLC which owns your building, might have to be consolidated into your construction company’s financial statement. What other LLC’s or corporations do you own? Maybe they need to be consolidated. That, of course, will cost you more money, time, and maybe raise questions with banks and sureties. Are you starting to see the ugly side of the gift in Fin 46?
So how do you know when to consolidate? You probably don’t. Hopefully, your CPA is sophisticated enough to figure this one out. The issue of whether to consolidate or not is very complicated, and the reasoning and understanding by the CPA has to be documented very carefully. So even if the answer is that you don’t need to consolidate, the CPA had to spend a good deal more time (i.e., money) to do your financial statements this year. There is another issue, and that is that bonding companies are, by nature, nosey. If they don’t see that a related entity is consolidated, they may want to get assurances from your CPA that things were done correctly.