The Financial Accounting Standards Board released the Statement of Financial Accounting Standard 141 in June 2001. This standard created new rules for accounting for business consolidations. A business consolidation occurs when a parent company brings together the books of all its subsidiaries into one financial statement.
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When to Consolidate
A parent company must consolidate the subsidiaries' financial statements when the parent owns more than 50 per cent of the stock in another company. A parent does not need to consolidate a subsidiary if it owns more than 50 per cent of the subsidiary if it cannot exert control over the company due to circumstances such as bankruptcy.
Method of Accounting
When accounting for consolidations, the company must use the acquisition method of accounting. The acquisition method is also known as the purchase method.
Adjustments When Consolidating
The equity of the subsidiary is eliminated. The investment in the subsidiary is eliminated because the subsidiary is becoming part of the parent's financial statements. The parent company must create a non-controlling interest account on its stockholder's equity section. The assets and liabilities on the subsidiary's balance sheet are adjusted to their fair values. The parent company creates a goodwill or gain account on its financial statements to account for changes in the subsidiary.
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