Rules for consolidating subsidiaries
One additional way that banks arbitraged capital regulations was by maintaining minority-owned, non-consolidated subsidiaries.
A parent bank’s asset exposure to such a subsidiary was taken to be limited to its equity investment in the subsidiary, although effectively banks had to guarantee all the liabilities of such subsidiaries.
Control does not rest with the majority owner (Significant doubt on the parent's ability to control the subsidiary) b.
Non-homogeneous operations (Parent company in manufacturing and a subsidiary in banking or insurance industry) a.
Had these subsidiaries been consolidated, average reported equity-to-assets ratios would have been 3.5% lower.
These findings suggest that some US banks were actively misrepresenting the riskiness of their assets prior to the crisis.
(2013) show how US banks set up asset-backed commercial paper conduits to arbitrage capital regulations.
Shin (2009) points out that securitisation enabled banks to increase their credit supply by effectively leveraging up their available capital.
After their acquisitions, these smaller companies, or subsidiaries, may have remained legally separate from the large corporation, or parent company.
Because the parent company now fully controls the subsidiary, by accounting rules, the parent company must present its subsidiary’s and its own financial operations in a consolidated manner (even though the two companies may be separate legal entities).
The parent company does so by publishing a consolidated financial statement, which combines the assets, liabilities, revenue, and expenses of the parent company as well as those of its affiliates (that is, its subsidiaries, associates, and joint ventures).
The accounting for subsidiaries, joint ventures and associates in the consolidated financial statements requires extensive financial information from those respective investees.
For starters, for examples, the financial statements of the subsidiaries, associates and joint ventures must also be prepared following the Indian accounting standards and conform to the accounting policies of the parent company.
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In addition, AS 23, ‘Accounting for Investments in Associates in Consolidated Financial Statements’ and AS 27, ‘Financial Reporting of Interests in Joint Ventures’ deal with accounting for investments in associates and joint ventures, respectively, in the consolidated financial statements.