Which situation necessitates a change in reporting entity when Company A purchases Subsidiary S?

The correct choice indicates that a change in reporting entity is necessary when Company A combines with Subsidiary S for financial statement reporting.

When a company acquires another entity, the relationships between the entities change. A combination for reporting purposes means that the financial statements of both Company A and Subsidiary S will be presented as a single economic entity. This reflects the reality of the economic relationship that exists after the transaction has taken place, as the parent company (Company A) now has a controlling interest in Subsidiary S and assumes complete responsibility for its financial results.

This combination enhances the relevance and usefulness of the reported financial statements for users. It provides a more comprehensive view of the overall financial position and performance of the combined entities. Such reporting aligns with the principles of consolidation in accounting, which aim to provide a true representation of an entity’s financial condition.

The other situations do not necessitate a change in reporting entity because they either signify a reduction in control or independence rather than a combination that requires unification in financial reporting. This understanding is crucial in determining how businesses communicate their financial positions to stakeholders, making it essential knowledge in intermediate accounting.