ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

A Study on Logistic Regression in Applying the Substantial & De Facto Control in Preparing Consolidated Financial Statements

  • Sang Keun Lee Major in Accounting, School of Business, The Catholic University of Korea

Asian Tax Journal Vol. 15 No. 6 (2014), pp. 295-319

Abstract

This study analyzed the actual applications of substantial and de facto control and the respectivebases used for the entities that have disclosed their consolidated financial statements as primaryfinancial statements as of the end of 2011. We divided the entities into two groups － one thathas applied the substantial and de facto control in preparing the financial statements and anothergroup that has not － and inferred the motives for the application of substantial and de factocontrol from the statistical verification of the relationship between financial attributes(size of anentity, profitability and financial structure) of an entity and the relationship between the financialattributes and the average ownership percentage of the consolidated subsidiaries. In order to identify the motives for the application of substantial and de facto control, we usedseveral hypotheses in the aspects of entity size, profitability, financial structure and an averageownership percentage of subsidiaries subject to consolidation, and from the size aspect, thehypothesis for the increase rates of assets and sales was statistically proved and it was statisticallyverified that increases in assets and sales is a very significant motive for consolidation ofsubsidiaries with less than 50% ownership. On the other hand, an operating margin of aconsolidating entity in the profitability aspect and debt ratio improvement rate, financial cost ratioand interesting coverage ratio of a consolidating entity were identified to be partly associated withthe application of substantial and de facto control but the statistical significance was not proved. For the relationship between average ownership percentage of subsidiaries with less than 50%ownership and entity size, increase rate of assets was proved to have a statistical significance. This proved the hypothesis that the lower the average ownership percentage of the subsidiaries,the larger the consolidation effect in the aspect of entity size. However, no statistically significantresults were generated for the profitability and financial structure aspects. In the end, our study has statistically reconfirmed that for Korean public companies, the mostsignificant motive for the inclusion of subsidiaries with less than 50% ownership in theirconsolidation lies in the intent to maximize assets and sales.

Keywords

  • De Facto Control
  • Entity Size
  • Profitability
  • Financial Structure

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