I own 20% of a corporation (ABC).  I want to borrow funds from another
company (XYZ) that currently owns 31% of ABC.  XYZ wants me to place
my shares of ABC with them as collateral, and then to grant them
voting rights over my shares.  If I do this (and I don't mind doing
it), can (or must) XYZ consolidate the results of ABC into their own
financial statements (since they would now have voting control over
51% of ABC's stock)?

Assuming XYZ gains voting control over your 20% in ABC, I believe the
answer is yes.  Here are some basic definitions on consolidation
accounting.

http://www.dow.com/financial/2000ann/notes01.htm

Respree, thanks for your comment.  I read the attached report from Dow
Chemical, but it does not appear to address the situation of a
controlling interest in a NON-majority owned investee.  That is the
crux of my question: does a corporation consolidate financial
statements where they own less than 50% but exercise voting control
over more than 50% of the investee's shares?

Hi Ceti:

I was trying to have you avoid reading technical material (its
horribly boring and confusing), but I guess the first link I posted
was a bit too simplistic.

Basically, consolidated financial statements boils down to control (or
voting rights).  Can the parent exercise significant control over the
'to be consolidated' company?  If the answer is yes, consolidated
financial statements are appropriate.  Please see the link below.

http://www.nysscpa.org/cpajournal/old/07133078.htm

"The objective of consolidated financial statements is to report the
financial position and results of operations of the parent company and
its subsidiaries as if the group were one economic enterprise. Since
the parent company is able to control the decision-making processes
and resources of the subsidiary, a single economic unit exists. Thus,
consolidated financial statements usually provide a more meaningful
presentation to stockholders and creditors than separate presentations
by parent and each subsidiary.

EXAMPLE: A controlling financial interest is present when the parent
company owns, either directly or indirectly, more than 50% of the
outstanding voting shares of a subsidiary. For example, Peterson owns
100% and 49% of the outstanding voting shares of Sampson and Shane,
respectively. In addition, Sampson owns 10% of the outstanding voting
shares of Shane. Peterson has a controlling financial interest in both
Sampson and Shane. Peterson has a direct controlling financial
interest in Sampson (100%), but Peterson controls Shane through direct
and indirect ownership (49% + 10% = 59%). Shane and Sampson should be
included in the consolidated financial statements of Peterson."

Respree,

Thank you so much for the further information and link.  The article
was from 1989 but I assume that since you attached it you believe that
no further clarification of the rules has been forthcoming.  The
article hit the nail on the head where it says (caps are mine),
"Similarly, consolidation of subsidiaries that are controlled by means
OTHER THAN OWNERSHIP of majority voting interest--by significant
minority ownership by contract, lease, or other agreement with
stockholders, by court degree, or otherwise--HAS NOT BEEN RECONSIDERED
because that subject is also a part of the project on the reporting
entity."

I take this to mean that they haven't really ruled on this issue,
which is the heart of my question: the entity (ABC) in my case is
controlled by "means other than ownership of majority voting interest"
-- would it be your view that consolidation of financial statements
for reporting purposes (XYZ is a public company) would certainly be
permitted, even though not required?  In this particular case, XYZ
would like to consolidate the results of ABC into their own.

Hi Ceti:

While I have some experience in accounting, I am not offering you
professional accounting advice, just my personal opinion and
interpretation.  It gets a bit complicated because of your situation. 
The short answer is that XYZ 'can' consolidated, although it 'appears'
they are not 'required' to under FASB (Financial Accounting Standards
Board) Statement 94.

http://www.fasb.org/st/summary/stsum94.shtml

If XYZ had just plain bought out your 20% in ABC, clearly they would
be REQUIRED to consolidated, under Statement 94.  Your situation is a
bit different in my opinion.  Because you have pledged your shares as
collateral for the loan, XYZ gains voting power that is 'temporary'. 
I presume, once the loan is repaid, your 20% voting power in ABC
reverts back to you. Because control is temporary, this is the reason
they are not 'required' to consolidate, under Statement 94.

Again, I would seek the concurrence of my opinion with your CPA.  Hope
that helps.

Respree...thanks again for further comments.  Your knowledge seems
pretty significant for someone who only professes to have "some
experience" with accounting!  I think your opinion makes sense and
could be the answer, but I do need to get confirmation from someone
who knows this stuff cold.  The "temporary" voting aspect is
important, as you point out....the key question now is, does anything
preclude XYZ from consolidating if they want to?  Thanks again for
your views, cheers.