18 • 1

CHAPTER

18

CONSOLIDATED FINANCIAL

STATEMENTS AND BUSINESS

COMBINATIONS

James R. Ratliff

New York University

CONTENTS

18.1 Introduction 1
18.2 Definitions 2
18.3 Fundamental Issues 2
(a) Relevant and Informative
Accounting 2
(b) Different Legal Forms of
Investment 3
(c) Transactions Between Investor
and Investee 3
18.4 Description of Accounting
Methods 3
(a) Full Consolidation 3
(b) Pro Rata, or Proportionate,
Consolidation 3
(c) Equity Method 3
(d) Cost Method 4
(e) Comparison of Methods 4
18.5 Accounting for Investments in
Subsidiaries 4
(a) Definitions of Control 4
(b) Triumph of Full Consolidation 5
(c) Required Accounting for
Investment in Subsidiaries 6
(i) United States 6
(ii) Canada 8
(iii) European Union 8
(iv) United Kingdom 10
(v) Japan 10

(vi) International Accounting

Standards 10

(d) Exclusion of Subsidiaries From

Full Consolidation 11

(i) Control Not Resting with

Legal Owners 11

(ii) Control Is Temporary 11

(iii) Significantly Different

(Nonhomogeneous) Lines

of Business 11

(e) Subissues in Accounting for

Subsidiaries 12

(i) Conceptual Approach to

Consolidation 12

(ii) Elimination of Inter-

company Profits 13

(iii) Push-down Accounting 13

18.6 Business Combinations 14

(a) Overview 14

(b) Purchase Accounting 14

(c) Pooling of Interest 15

(d) Required Accounting for

Business Combinations 15

(i) United States 15

(ii) International Accounting

Standards 18

(iii) Business Combinations

in Other Countries 19

18.1 INTRODUCTION. Corporate structures have become increasingly complex in
the last several years. Some companies have diversified into additional lines of busi-
ness through internal growth and acquisitions while others have consolidated, con-
centrating on their core and more profitable businesses. Many companies of all sizes