Controlling Interest Investments: Accounting for Business Combinations
Control of a subsidiary typically occurs when the parent/investor company owns more the 50% of the investee’s voting stock. However, an investor company can retain control with less than 50% voting ownership.
IFRS and GAAP require that the financial statements of a controlling investor company and its controlled subsidiaries be consolidated.
Business Combination Types (4)
- Statutory Merger – two companies combine, but only one entity survives; the investor may pay cash, issue stock, or issue debt to finance its investment.
- Statutory Consolidation – two companies combine, but both cease to exist and a new company is formed.
- Acquisition – the two companies remain legally distinct entities, but are associated through a parent company-subsidiary relationship. In situations where the parent owns less than 100% of the subsidiary, then minority interest will be reported on the parent company’s financial statements.
- Variable Interest Entities (VIEs) – also called Special Purpose Entities (SPEs), VIEs are consolidated when the parent company, serving as the VIE’s sponsor, is the primary beneficiary of the VIE’s activities.
Methods of Accounting for Business Combinations (3)
Purchase Method: Under the purchase method, the assets and liabilities of the acquired company are combined onto the financial statements of the acquiring company at fair market values on the transaction date.
Pooling of Interests Method: Under the pooling method, the assets and liabilities of the parent and subsidiary are simply combined. The method simply adds the asset and liability book values appearing on the parent’s and subsidiary’s balance sheet. This method was disallowed by GAAP in 2001 and disallowed by IFRS in 2004.
Acquisition Method: U.S. GAAP requires the acquisition method when accounting for controlling interest business combinations, starting in December 2008. The acquired identifiable assets and liabilities are recognized at full fair value, even if the parent purchases less than 100% of the subsidiary.
- CFA Level 2: Financial Reporting Part 2 – Introduction
- Intercorporate Investments Accounting - Ownership Categories
- Minority Passive Investments – Accounting Classes
- Minority Active Investments and the Equity Method for Financial Reporting
- Joint Venture Investments
- Controlling Interest Investments: Accounting for Business Combinations
- Purchase Method of Accounting for Controlling Interest Investments or Acquisitions
- Pooling of Interests Method to Account for Controlling Interest Investments
- Purchase Method vs. Pooling of Interest Method
- Acquisition Method to Account for Controlling Interest Investments
- GAAP Purchase Method, IFRS Purchase Method, and GAAP Acquisition Method Accounting
- Variable Interest Entities (VIEs) and Special Purpose Entities (SPEs)
- Defined Benefits Plans vs. Defined Contribution Plans
- Measuring the Defined Benefit Obligation
- Pension Expense (both GAAP & IFRS) for the Income Statement
- Defined Benefit Plans & the Company Balance Sheet
- The Role of Actuarial Assumptions in DB Plan Accounting
- Economic Pension Expense
- Pensions and the Statement of Cash Flows
- Accounting for Stock (or Share) Based Compensation
- Financial Statement Consolidation of Multinational Operations
- Consolidation: Presentation Currency vs. Functional Currency vs. Local Currency
- Foreign Currency Translation
- Temporal Method for Translation of Foreign Statements
- Current Rate Method for Translation of Foreign Statements
- Consolidating Financial Statements: Determining the Functional Currency
- Translation Methods and Financial Statement Effects
- Accounting for Subsidiaries in Hyperinflationary Economies
- CFA Level 2: Financial Reporting 2 - Recommendations
- MBS Weighted Average Life