Related Organizations

Accounting

Policies and control systems should ensure that accounting treatment for controlling and noncontrolling investments is appropriate. Ownership interests in related organizations should be accounted for in accordance with GAAP. Depending on the circumstances, the bank may account for its investment on a consolidated basis by the equity or the cost method of accounting. When determining which accounting method is appropriate, the bank should consider the entity’s legal structure, the bank’s percent of ownership, and how much control the bank has over the entity.

Consolidated financial statements combine the assets, liabilities, revenues, and expenses of the entity with those of the reporting bank. For the purposes of such a statement, the bank and its subsidiaries are a single economic entity. Generally, all significant majority-owned subsidiary corporations must be consolidated into the financial statements of the parent bank unless the subsidiary is covered by one of the limited exceptions included in the "General Instructions to the Consolidated Reports of Condition and Income" (call report instructions).

Under the equity method, the bank’s investment in the entity, which is originally recorded at cost, is adjusted periodically to record the bank’s share of the entity’s earnings and losses. Dividends and similar distributions received from the entity reduce the bank’s recorded investment. If the parent owns between 20 percent and 50 percent of the outstanding voting stock of a subsidiary, it is generally presumed to have significant influence over operating and financial policies of the related entity and the investment is accounted for under the equity method.

Under the cost method, the bank’s investment remains recorded at cost. Income is recognized only as dividends are received. If the parent does not exercise significant influence (it owns less than 20 percent of the outstanding voting stock of the subsidiary), the cost method is used.

Investments in unincorporated interests, such as partnerships or joint ventures, should be accounted for based on the substance of the partnership or joint venture agreement. If the bank has control over the entity, consolidation would be appropriate. Noncontrolling partnership interests are generally accounted for under the equity method of accounting. In certain entities, the equity investors (legal owners) do not have the characteristics of ownership (such as controlling financial interest or sufficient equity at risk). In such cases, another party generally provides the financial support that will absorb some or all of the entity’s expected losses if they occur. Such an entity referred to as "variable interest entity" (VIE). In these situations, GAAP requires that the party at risk consolidate the VIE in its financial statements.

Accounting guidance for ownership interests is included in the instructions to the call reports. Detailed requirements are included in the general instructions, the "Subsidiaries" entry of the glossary instructions, and the instructions to Schedule RC-M. This guidance is consistent with GAAP as set forth in Statement of Financial Accounting Standards 94, American Institute of Certified Public Accountants (AICPA) Accounting Research Bulletin 51, AICPA Accounting Principles Board Opinion 18, AICPA Statement of Position 78-9, and Financial Accounting Standards Board (FASB) Interpretations 35 and 46.

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