Business Combinations/Consolidations

Question 1

What are the limitations of consolidation FS?

Answer 1

1. Noncontrolling interest shareholders, creditors, and bondholders of the subsidiary remain uninformed regarding sub’s separate FS
2. Weak performance of one company may be offset by strong performance of another
3. Ratio analysis of consolidated data is not reliable
4. RE available for parent shareholders are not segregated nor otherwise indicated

Question 2

What is the criteria of when to and when not to consolidate?

Answer 2

1. Consolidate ALL majority-owned subsidiaries (over 50% of voting interest) to have 1 mgmt and 1 economic entity
2. DO NOT consolidate when control is not with owners
3. Companies with different year ends can be consolidated (if differs by 3 months or less, can use regular FS)
4. In vertical chain where P owns >50% of S and S owns >50% of 3rd company, consolidate 3rd company into S and then S into P

Question 3

How are significant transactions during the gap period accounted for under GAAP and IFRS?

Answer 3

GAAP: disclosure

IFRS: Adjustment

Question 4

Consolidation

Answer 4

A combination of 2+ entities into a single set of FS representing a single economic unit

Question 5

If the investors has less than 20% ownership of an investee, how is it reported?

Answer 5

Cost method (FV method/AFS method) with no consolidation because the investor has to significant influence over the investee

Question 6

If the investors has greater than 20% but less than 50% ownership of an investee, how is it reported?

Answer 6

Equity method with no consolidation because investor can exercise significant influence over investee and hold 50% or less of voting stock

Question 7

If the investors has greater than 50% ownership of an investee, how is it reported?

Answer 7

Consolidated FS (externally)

Internally, may use cost or equity method to account for investment

Question 8

When would consolidated FS not be prepared even if one company has a controlling financial interest in another?

Answer 8

When the sub is in legal reorganization or bankruptcy and/or the sub operates under severe foreign currency exchange restrictions, controls, or other governmentally imposed uncertainties so sever that they cast significant doubt on the parent’s ability to control sub