Consolidation of financial statements occurs when a company owns over 50% of equity in another company and is able to exert significant influence over the company. The main accounting issues with consolidation are which method to use, how to treat accounts and other disclosures.
Dealing with investment in equity, there are three methods: cost, equity and acquisition method. Use cost method if the firm owns less than 20% of another company. Use equity method if a firm owns between 20% and 50% of a company. Use the acquisition method if the firm owns 50% or more of another company.
When creating journal entries for consolidated statements, the accounts affected are common stock in the subsidiary, APIC in the subsidiary, retained earnings in the subsidiary, investment in the subsidiary, non-controlling interest, balance sheet adjustments to fair value, identified intangible assets to fair value and goodwill.
A company must generally disclose information on the acquisition, which method management used, which periods are affected, the subsidiaries' net income and retained earnings attributable to a non-controlling interest.
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