F3 Business Combinations/Consolidations

Question 1

Consolidated Financial Statements

Answer 1

• ignore legal relationships and emphasize economic substance over form
• they are an economic truth but a legal fiction

Question 2

Criteria of When to Consolidate

Answer 2

• consolidate ALL majority owned subsidiaries ( over 50% of the voting interest is owned by the parent company)
• do not consolidate when control is not with owners ( example is bankruptcy and legal reorganization)
• companies that have different year ends can be consolidated
• under US GAAP significant transactions during the gap period require disclosure
• under IFRS, the subsidiary financial statements must be adjusted for significant transactions during the gap period

Question 3

External Reporting

Answer 3

• Cost Method = 0-20%
• Equity Method = 20-50%
• Acquisition ( cost or equity method used internally)
  = 50 -100%