have expanded into foreign markets, frequently through newly formed entities. Ac-
counting rule makers and regulators are more and more focused on how to account
for these business combinations and under what circumstances consolidated financial
statements should be prepared. This chapter will concentrate on how to account for
business combinations and under what circumstances consolidated financial state-
ments should be prepared. First to be discussed is the preparation of the consolidated
financial statements.
18.2 DEFINITIONS. Some definitions are:
- Acquisition.A business combination in which one entity (the acquirer) obtains
control over the net assets and operations of another (the acquiree) entity in ex-
change for the transfer of assets, the incurrence of liabilities, or the issuance of
equity. - Business combinations.The bringing together of separate enterprises into one
economic entity as a result of one enterprise uniting with or obtaining control
over the net assets and operations of another. - Consolidated financial statements. The financial statements of a group presented
as those of a single enterprise. - Goodwill.The excess of the cost of a business accounted for by the purchase
method over the fair value of the net assets. - Minority Interest.That part of the net results of operations and net assets of a
subsidiary attributable to interests that are not owned, directly or indirectly
through subsidiaries, by the parent. - Pooling-of-interest method.An accounting method used for business combina-
tions, which is predicated upon a mutual exchange and continuation of owner-
ship interests in the combining entities. It does not result in the establishment of
a new basis of accountability. - Purchase method.An accounting method used for business combinations, which
recognizes that one combining entity was acquired by another. It establishes a
new basis of accountability for the acquiree. - Subsidiary.A subsidiary is an entity that is controlled directly or indirectly by
another entity, its parent. As discussed in section 18.5(a) control may be defined
in a number of different ways. The key feature is that it is controlled by a single
entity. A subsidiary may be organized as a corporation or a partnership.
18.3 FUNDAMENTAL ISSUES
(a) Relevant and Informative Accounting. The primary purpose of financial report-
ing is to provide the reader with useful information about the reporting entity (in-
cluding the accounting for investments in subsidiaries) that helps users make rational
investment, credit, or economic decisions. The accounting for investments in sub-
sidiaries should be evaluated from this viewpoint:
- Does the Statement of Financial Position give relevant information related to the
assets, liabilities, and equity of the reporting enterprise, including the assets it
controls and the liabilities it incurs through the ownership of subsidiaries?
18 • 2 CONSOLIDATED FINANCIAL STATEMENTS AND BUSINESS COMBINATIONS