Business Combinations/consolidations

Front 1

What is meant by "Consolidation"?

Back 1

It is a combination of the FSs of two or more entities into a single set of FSs representing a single economic unit.

Front 2

Note

Back 2

Consolidated FSs are more meaningful than parent company FSs &/or parent company FSs together with separate subsidiary FSs.

Front 3

Note

Back 3

Consolidated FSs (including segment reporting) are necessary for fair presentation.

Front 4

Note

Back 4

The equity method is not a valid substitute for consolidation.

Front 5

Note

Back 5

Consolidated FSs ignore important legal relationships & emphasize economic substance over form. Consolidated FSs are an economic truth but a legal fiction.

Front 6

What are the limitations of Consolidated FSs?

Back 6

1- NCI shareholders, creditors, & bondholders of the subsidiary remain uninformed regarding the subsidiary's separate FSs.
2- Weak performance of one company (entity) may be offset by the strong performance of another company.
3- Ratio analysis of consolidated data is not reliable.
4- REs available for parent shareholders are not segregated nor otherwise indicated.

Front 7

Note

Back 7

Consolidate ALL majority-owned subsidiaries (over 50% of the voting interest is owned by parent company) to have one management & one economic entity. This includes domestic, foreign, similar, & dissimilar subsidiaries.

Front 8

Note

Back 8

DO NOT consolidate when control is not with owners (e.g. , under legal reorganization or when control of a subsidiary is with a trustee).

Front 9

Note

Back 9

Companies that have different year ends CAN be consolidated . The subsidiary merely prepares special FSs to correspond closely with the parent's fiscal year end.

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Note

Back 10

If the year ends differ by three months or less, the parent company can use the subsidiary's regular FSs of a different period, giving recognition to material intervening events during the gap period to expedite the consolidation process.

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Note

Back 11

Under U.S. GAAP, significant transactions during the gap period require disclosure.

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Note

Back 12

Under IFRS, the subsidiary FSs must be adjusted for significant transactions during the gap period.

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Note

Back 13

In a vertical chain, where parent company owns more than 50% of a subsidiary company & the subsidiary owns more than 50% of a third company, consolidate Third company into subsidiary company, & Subsidiary company (now consolidated with third company) into parent company.

Front 14

Note

Back 14

The degree of control the investor has over the investee dictates how the investor reports the investment in corporate equity securities.

Front 15

Note

Back 15

Front 16

Note

Back 16

The investor accounts for the investment using the cost method if the investor does not have the ability to exercise significant influence over the investee (holds 0% - 20% of the voting stock).

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Note

Back 17

Cost method is also referred to as FV method, or AFS method

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Note

Back 18

The investor accounts for the investment using the equity method of accounting if the investor can exercise significant influence over the investee & holds 50% or less of the voting stock.

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Note

Back 19

Externally, the investor should prepare consolidated FSs with its investees when the investor has control (more than 50% ownership) of the subsidiary, But internally, the investor may use either the cost method or the equity method to account for its investments.