Over the last two decades the standard setters have struggled with representing businesses with multiple segments that are not fully integrated, produce different products, and are in different geographies with differing currencies and methods of accounting. Large companies that have heavy industrial and financial components (e.g. GE and GM) blend into one measure very distinct types of numbers, which can tend to obscure financial performance rather than make it more transparent. The perennial problem of determining if two entities are one and need to be consolidated, or if they are different entities has been exacerbated by the development of Special Purpose Entities (SPEs). These are originally entities of very specific and narrow denomination which even 97% ownership did not create any co-dependency for the firm. This original definition was followed by a much larger set of usage by many businesses to the extreme abuse that Enron showed. While statistics on the existence and nature of SPEs are not available, they are much more widely used than generally understood and are applied by many of the most reputable organizations in the financial markets.
The evolution of organizations in the 21st century will lead to substantial deconstruction of business[1] where using internetworking technology will allow many functions to be outsourced, partnered, or turned over to the competition. While outsourcing could be a straight forward arrangement as when implemented by single independent firm, many forms of outsourcing will exist. Simply adding the component entities in a consolidation creates a very false sense of reality. These relationships are often more than their simple formalization. Xxx The core issues are ownership, inter and intra entity transactions, obligations for residuals and commitments over time even if not contractual. One of the reasons that the solution of the consolidation problem has eluded standard setting is that one of the motivations for consolidation is the obfuscation of individual unit performance. Consequently, standard setters never had the stomach[m1] to force substantial disclosure at the business unit level, nor the desire to force narrow business units of standardized form and standardized activity, reporting with the same accuracy and detail required from the consolidated entity. While the Jenkins report strongly suggested narrow and complete reporting at the line of business level, the changes effected by the FASB were limited and did not satisfy the real need that is emerging in the 21st century of creating dynamic standards and industry bench marks for online real-time business monitoring. Comparisons among organizations should be at the sector level not at the aggregate level where the addition of non-similar parts creates substantive obfuscation. A new type of aggregate entity should be invented and enough disclosure detail provided to allow for income calculation and asset allocation across and along the value chain.
