The Complete CPA Reference

CHAPTER 5

Key Financial Accounting Areas

Consolidations

What is a consolidation?

Consolidation occurs when the parent owns more than 50 percent of the voting common stock of the subsidiary. The objective of consolidation is to present as one economic unit the financial position and operating results of a parent and subsidiaries. The consolidation shows the group as a single company with one or more branches or divisions rather than as separate companies.

The companies making up the consolidated group keep their individual legal identities. Adjustments and eliminations are for the sole purpose of financial statement reporting.

Note

Consolidation is appropriate even if the subsidiary has a material amount of debt. Disclosure should be made of the firm's consolidation policy in footnotes or by explanatory headings.

When is a consolidation not valid?

A consolidation is negated, even if more than 50 percent of voting common stock is owned by the parent, in these instances:

• Parent is not in actual control of subsidiary. Example: Subsidiary is in receivership or in a politically unstable foreign country.
• Parent has sold or contracted to sell subsidiary shortly after year-end. The subsidiary is a temporary investment.
• Minority interest is very large in comparison to the parent's interest; individual financial statements are more appropriate.

How is a consolidation accounted for?

Intercompany eliminations include those for intercompany payables and receivables, advances, and profits. ...