Mastering Consolidation Accounting
Mastering Consolidation Accounting
Items in this lesson
Mastering Consolidation Accounting
What do you already know about consolidated financial statements?
Learning Objective
At the end of the lesson you will be able to explain the purpose, process, and key steps involved in preparing consolidated financial statements and identify methods and adjustments used in consolidation accounting.
What Is Consolidation Accounting?
Consolidation accounting combines the financial statements of a parent company and its subsidiaries into one set, presenting them as a single economic entity.
When Must You Consolidate?
Control is the power to direct policy or management. Usually, this means owning more than 50% of voting interests. A parent is an entity with control over one or more subsidiaries.
Control and Parent-Subsidiary
Substance Over Form
Even if companies remain legally separate, consolidated statements reflect substance over form, showing the financial reality of control.
Acquisition Method Overview
The acquisition method requires identifying the acquirer, setting the acquisition date, measuring assets and liabilities at fair value, recognising noncontrolling interest, and calculating goodwill or gain from a bargain purchase.
Calculating Goodwill
Goodwill is the excess of consideration transferred over the fair value of identifiable net assets acquired. If the difference is negative, a bargain purchase gain is recognised.
Consolidated Reporting Steps
1. Add all parent and subsidiary assets and liabilities at fair value. 2. Eliminate subsidiary equity accounts. 3. Calculate and report noncontrolling interest (NCI). 4. Present goodwill separately in noncurrent assets. 5. Eliminate all intraentity transactions and balances.
Handling Intraentity Transactions
Reciprocal Dividends
Eliminate profits on unsold inventory, remove any gains or losses from asset transfers, and treat intraentity debt as extinguished within the group.
Profits and Debt
Dividends paid between group members must be eliminated to prevent overstating group income and equity.
Other Consolidation Methods
The full consolidation method is used for control. The equity method applies when significant influence (20%-50%) exists. The proportionate method is for joint ventures, recording assets and liabilities based on ownership shares.
