FASB ASC 810-10-05

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The amount of control the firm has over its subsidiary will be the determining factor in deciding when to consolidate financial statements annually. If the firm acquires another company, the firm must own fifty percent or more of the subsidiary’s outstanding voting stock in order for the two to consolidate. With this ownership level, the firm will be able to persuade the subsidiary into making decisions that would not only benefit the subsidiary, but also benefit the firm (parent) as well. “When majority of voting stock is held, investor-investee relationship is so closely connected that the two corporations are viewed as a single entity for financial reporting” (Hoyle, n.d.). Thus with this control in place both companies will combine their …show more content…

“More specifically, ASC 810-10-25-38 states a reporting entity shall consolidate a VIE when the reporting entity has a variable interest that will absorb a majority of the VIE’s expected losses, received a majority of the VIE’s expected residual returns, or both” (Chan, 2010). Consolidation can even be applicable if both firms remain as separate legal entities/ corporations. In this case, both companies will manage their own financial statements that list only their asset and liability account balances. In addition, the acquiring company will record this business combo under their investment account on their balance sheet while the subsidiary makes no note of this transaction. Therefore, stock is moved from the shareholders of the subsidiary to the parent. However, if the business results in a statutory merger, the firm would be the only one in existence after this acquisition thus the company will have to move all of the aquiree’s net assets into their own financial records since the acquiree is no longer a going concern entity. “On the date of combination, the surviving company records the various account balances from each of the dissolving companies. No further consolidation procedures are necessary since accounts are brought together …show more content…

As part of this process, reciprocal accounts and intra-entity transactions must be adjusted or eliminated to ensure that all reported balances truly represent the single entity” (Hoyle, n.d.). The consolidation process varies depending if the business combo took place as a statutory merger/consolidation or if the companies remained as separate legal entities. With mergers/consolidations, consolidation should occur annually because the accounts of the parent and subsidiary were brought together permanently. With separate entities, the consolidated process starts brand new annually since there’s no permanent consolidation. So if the firm goes this route they’d have to consolidate each year through the use of worksheets. Attached is a demonstration of the worksheet that would be

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