When two must become one

user-gravatar Headshot

Barr-Nunn Transportation is joining the growing list of carriers paying based on practical miles rather than household goods, or short, miles. The Granger, Iowa-based truckload carrier is switching to practical miles for its company drivers and owner-operators on May 1.

Wisconsin Gov. Jim Doyle in December signed legislation repealing the state’s automatic fuel tax increase in 2007. The Wisconsin fuel tax, which began in 1985 and is adjusted annually for inflation, currently is among the highest nationwide at 32.9 cents per gallon of diesel and 29.9 cents per gallon
of gas.

The Purchasing Managers Index dropped 4 points to 54.2 percent in December, a level that still signifies growth, ISM reported. November’s PMI was 58.1: A reading above 50 indicates that manufacturing generally is expanding. The average PMI for January through December 2005 – 55.5 – corresponds to a 4.6 percent increase in real gross domestic product on an annual basis.

FedEx Corp. announced that its second-quarter profit jumped 33 percent, with overall profit increasing to $471 million, up from $354 million recorded in the same quarter in 2004. Revenue for the quarter ending Nov. 30 grew 10 percent to $8.09 billion from $7.33 billion. Memphis, Tenn.-based FedEx says revenues for Internal Priority shipments grew by 14 percent, while overall revenues for FedEx Express and Ground increased by 11 percent.

Public company corporate scandals continue to affect the accounting and reporting for private firms. One of the latest that will impact companies now preparing 2005 yearend financial statements is Financial Accounting Standards Board (FASB) Financial Interpretation Number 46, “Consolidation of Variable Interest Entities.”

It is common for shareholders to have multiple business entities. For example, the simplest is to have your operating company under one S corporation or limited liability corporation and your real estate held by another S corporation or LLC. With larger organizations, there may be several, a dozen or more. FIN 46 requires any company reporting financials under Generally Accepted Accounting Principles (GAAP) to consolidate these multiple financial statements. Thus, in your financial report, all these would appear together as if one company owned them.

This normally is not a problem, and it often is good to have a consolidated report of operations, as readers of the financials want to be informed of all critical operations and investments that affect the future of a company. But what if a company that is required to consolidate its reporting really has good reasons not to consolidate otherwise? There may be loosely related companies where loan guarantees or common ownership potentially might force consolidation, even if the entities are otherwise totally unrelated.

FIN 46 was written in response to the scandal at Enron, where the fraud perpetrators used subsidiaries and other companies to keep certain poor operating results and debts off of Enron’s books. The rule originally was released in 2003, and private companies faced a Dec. 31, 2005 implementation deadline. But knowing if FIN 46 applies to your company is a complicated determination.

Critical in a FIN 46 determination is the idea of whether an entity could “stand on its own” with equity or financing, or if it requires financial support in some form, such as loan guarantees by a bigger company or by some of its shareholders. FIN 46 includes a daunting array of rule-writer lingo and “if – then” scenarios, and CPAs not versed in the nuances likely are going to lose some hair trying to understand and apply it.

For example, in accountant lingo under FIN 46, the term “primary beneficiary” means the party that would absorb the losses of a potential consolidation candidate, as well as absorb the benefit of any profits. “VIE” stands for Variable Interest Entity, and essentially is a legally organized company that can have losses as well as gains.

And solutions to avoid consolidation never are simple or clear-cut. Continuing our example, in simply dropping the corporate guaranty, you still must pay close attention to the voting rights of the individual common shareholders as “related parties,” as there are potential interpretations that could force consolidation. These relate to ability through voting control to effectively force the reporting company to pay back any personal guaranty outlays.

Bottom line? If you have a series of closely held and related companies, plan on evaluating this rule – and most likely dealing with consolidation and joint reporting. Any company owned by your main shareholders – or one for which they guarantee loans – is a candidate for consolidated reporting. And as always, don’t try to make the final determinations yourself: Consult your CPA or a specialist in this area.


“To Consolidate or Not – For Some Companies, That IS the Question,” by Thomas A. Ratcliffe, Journal of Accountancy, December 2005: website

“Management’s Summary of Off-Balance-Sheet Transactions,” from AICPA Audit Committee Toolkit, copyright 2004 by the American Institute of Certified Public Accountants Inc., New York: website

Trucking revenues up 10.5 percent in 2004
Motor carrier revenues in 2004 totaled $175 billion, up 10.5 percent from 2003, according to a report from the U.S. Census Bureau. Revenues for long-distance trucking represented $116 billion of the total and were up 11.6 percent over 2003. Revenues for local trucking were up 8.4 percent to $59 billion. Truckload revenues were up 11.6 percent over 2003 to $125.9 billion, and LTL revenues rose 7.7 percent to $49.1 billion.

For more of the report, 2004 Service Annual Survey: Truck Transportation, Couriers and Messengers, and Warehousing and Storage, go to this site.