Akl1 CH03
Akl1 CH03
Akl1 CH03
Financial Statement
Consolidated Entity
CONSOLIDATION PROCESS
• Intercorporate Stockholdings
• Common stock of the parent is held by
those outside the consolidated entity and
is viewed as the common stock
of the entire entity.
• Common stock of the subsidiary is held entirely within the
consolidated entity and is not stock outstanding from a
consolidated viewpoint.
• Note: A company cannot report in its financial statements an
investment in itself
• Intercorporate Stockholdings Parent’s
• Parent’s retained earnings (less the common
stock
Consolidated Entity
• Intercompany Receivables and Payables
• A single company cannot owe itself money, that is, a company
cannot report (in its financial statements) a receivable to itself
and a payable to itself.
• Therefore, an intercompany receivable/payable is eliminated
from both receivables and
payables in preparing the
consolidated balance sheet. Parent
Intercompany
receivable/
payable
Subsidiary
Consolidated Entity
• Intercompany Sales
• The sale should be removed from the combined
revenues because it does not represent a sale to an
external party. Cost of
Subsidiary
Consolidated Entity
Difference between Fair Value and Book Value
• Fair value of the consideration given usually reflects
the fair value of the acquired company and differs
from its book value.
• An acquiree’s assets and liabilities must be valued
based on their acquisition-date fair values, and any
excess of the consideration given over the fair values
of the net assets is considered goodwill.
Single-Entity Viewpoint
To understand the adjustments needed, one
should focus on:
1. identifying the treatment accorded a particular item by
each of the separate companies and
2. identifying the amount that would appear in the financial
statements with respect to that item if the consolidated
entity were actually a single company.
Mechanics of the Consolidation Process
•A worksheet is used to facilitate the process of
combining and adjusting the account balances involved
in a consolidation.
• While the parent company and the subsidiary each
maintain their own books, there are no books for the
consolidated entity.
• The balances of the accounts are taken at the end of
each period from the books of the parent and the
subsidiary and entered in the consolidation workpaper.
• Where the simple adding of the amounts from the
two companies leads to a consolidated figure
different from the amount that would appear if
the two companies were actually one, the
combined amount must be adjusted to the desired
figure.
• This is done through the preparation of
eliminating entries.
Noncontrolling Interest
• For the parent to consolidate the subsidiary, only
a controlling interest is needed—not 100%
interest.
• Those shareholders of the subsidiary other than
the parent are referred to as “noncontrolling” or
“minority” shareholders.
• Noncontrolling interest or minority interest refers
to the claim of these shareholders on the income
and net assets of the subsidiary.
COMBINED FINANCIAL STATEMENTS
• Financialstatements are also prepared for a group of
companies when no one company in the group owns a
majority of the common stock of any other company in the
group.
• Combined financial statements are those that include a
group of related companies without including the parent
company or other owner.
• Procedures are essentially the same as those used in preparing
consolidated financial statements.
SPECIAL PURPOSE ENTITIES