Definition of Control in Accounting
1. Control in Business Context
Control is the ability to direct the financial and operating policies of an undertaking with the intention of gaining economic benefits from its activities. When one company has control over another, the controlling company needs to produce consolidated financial statements that include the financial activities of the controlled entity.
2. Control in Asset Context
Control also refers to the ability to obtain the economic benefits that flow from an asset. This means having the authority to use the asset and bear the risks and rewards associated with it.
Examples of Control in Accounting
Example 1: Parent-Subsidiary Relationship
Company A owns 80% of Company B’s shares, granting Company A the power to direct Company B’s significant financial and operating decisions. Company A must consolidate Company B’s financial statements with its own.
Example 2: Ownership of an Asset
Company C owns equipment used in its manufacturing processes. Company C has control over the asset as it can make decisions regarding its use and can reap the benefits generated from its use while also bearing any associated risks.
Frequently Asked Questions (FAQs)
What constitutes control in a parent-subsidiary relationship?
Control in a parent-subsidiary relationship typically arises when the parent company owns more than 50% of the subsidiary’s voting shares, enabling it to direct the subsidiary’s significant financial and operating policies.
Why is control important in accounting?
Control is crucial because it determines whether financial statements need to be consolidated. Entities that have control over others are required to present consolidated financial statements, providing a holistic view of the financial position and performance.
What are consolidated financial statements?
Consolidated financial statements combine the financial information of a parent company and its subsidiaries into a single set of financial statements, eliminating intercompany transactions to present the financial position and results of the entire group as a single entity.
Can control exist without ownership?
Yes, control can exist without direct ownership of shares if the controlling entity can direct the financial and operational policies through means such as contractual agreements or having a dominant influence over the other entity.
How is control assessed?
Control is assessed by evaluating the ability to direct the relevant activities of an entity, the exposure or rights to variable returns from the entity, and the ability to affect those returns through the power over the entity.
Related Terms
Consolidated Financial Statements
Financial statements that present the assets, liabilities, equity, income, expenses, and cash flows of a parent company and its subsidiaries as a single economic entity.
Controlling Interest
An ownership interest in a corporation that allows the holder to control the corporation by owning a majority of the voting stock (typically more than 50%).
Economic Benefits
The benefits that flow from the use of an asset, such as revenue, cost savings, or other financial advantages.
Financial Reporting
The process of providing financial information to company stakeholders to make informed decisions about the company’s financial health and performance.
Online References
- Investopedia: Consolidated Financial Statements
- IFRS: Control and Consolidation
- Financial Accounting Standards Board (FASB) – Consolidation
Suggested Books for Further Studies
- “Financial Accounting: An Introduction to Concepts, Methods and Uses” by Roman L. Weil and Katherine Schipper
- “Advanced Accounting” by Debra C. Jeter and Paul K. Chaney
- “Consolidated Financial Statements: A Step-by-Step Guide” by Simon M. Cornwell
Accounting Basics: “Control” Fundamentals Quiz
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