FAR 3-2: Business Combinations & Consolidations

Question 1

State the criteria to consolidate subsidiaries

Answer 1

• Consolidate when the parent is able to control the subsidiary. Usually this is indicated by greater than 50% ownership of the voting stock of the subsidiary.
• Do not consolidate when control is not with owners (as in bankruptcy of subsidiary)

Question 2

Identify the 3 levels of control & the appropriate accounting method for each

Answer 2

No significant influence:
*Trading or available-for-sale securities, at fair value

Significant influence but 50% or less ownership:
*Equity method

Control:

• Cost or equity method (internal accounting)
• Consolidated financial statements (external reporting)