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Wiley GAAP 2008 by Colorado Steven M. Bragg Englewood, Ralph Nach American Express Tax and Business Inc., Barry J. Epstein

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Combinations of Entities under Common Control

FAS 141 explicitly does not apply to combinations of entities under common control (parent and subsidiary, brother‐sister corporations, etc.). Mergers among such affiliated entities must be accounted for “as if” poolings. This treatment is consistent with the concept of poolings as combinations of common stockholder interests. Notwithstanding the banning of pooling of interests accounting under current GAAP, this prescription still remains in effect.

A question arises, however, when a parent (Company P) transfers ownership in one of its subsidiaries (Company B) to another of its subsidiaries (Company A) in exchange for additional shares of Company A. If P's carrying value of its investment in B differs from B's book value, there appears to be a requirement for A to reflect its new investment in B at B's book value, rather than at P's cost (or equity) basis.

EITF 90‐5 resolved this apparent conflict by stating that A's carrying value for the investment in B is to be P's basis, not B's book value. Furthermore, if A subsequently retires the interests of noncontrolling owners of B, the transaction is to be accounted for as a purchase, whether it is effected through a stock issuance by A or by a cash payment to the selling shareholders.

The EITF further concluded (in Issue 90‐13) that when a purchase transaction is closely followed by a “sale” of the parent's subsidiary to the newly acquired (target) entity, these two transactions are to ...

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