far 3-2 Business Combinations / Consolidations

Question 1

Consolidated financial statements

Answer 1

Consolidated financial statements ignore important legal relationships and emphasize economic substance over form. Consolidated financial statements are an economic truth but a legal fiction.

Question 2

Criteria of when to and when not to consolidate

Answer 2

A. Consolidate ALL majority-owned subsidiaries (over 50% of the voting interest is owned by parent company) to have one management and one economic entity.

B. DO NOT consolidate when control is not with owners.

C. Companies that have different year ends can be consolidated.

Question 3

Degree of control

Answer 3

A. Cost Method/Do Not Consolidate = No Significant Influence (typically < 20%)

B. Equity Method/Do Not Consolidate = Significant Influence but 50% or Less Ownership
(typically 20%-50%)

C. Consolidate = Control (greater than 50% ownership)