Ch13 Business Combinations

Question 1

What are consolidated financial statements?

Answer 1

Consolidated financial statements are financial statements of a group of companies, in which the assets, liabilities, equity, income, expenses and cash flows are presented as those of a single economic entity.

Question 2

Which 3 conditions need to be cumulatively satisfied that we can say that one company has CONTROL over the other company?

Answer 2

To exercise control the company needs to:

1. have the POWER OVER THE INVESTEE in the form of voting rights or the ability to direct the relevant activities or through contractual arrangements,
2. have the RIGHT TO VARIABLE RETURNS from the investee,
3. have the ABILITY TO AFFECT THE AMOUNT OF THE INVESTOR’S RETURNS.

Question 3

Which consolidation method do we use when the company has control over the subsidiary?

Answer 3

We use FULL CONSOLIDATION.

Question 4

Which consolidation method do we use when the company has significant influence over the associate?

Answer 4

We use EQUITY METHOD.

Question 5

List some of the characteristics of SIGNIFICANT INFLUENCE.

Answer 5

1. Ownership > 20% of the voting power of the investee,
2. Representation on the board of directors or equivalent governing body of the investee;
3. Participation in policy-making processes (…);
4. Material transactions between the investor and the investee;
5. Interchange of managerial personnel;
6. Provision of essential technical information.