FAR 3 - Marketable Securities and Business Combinations (Business Combinations/Consolidations)

Question 1

Do consolidated financial statements ignore important legal relationships?

Answer 1

Consolidated financial statements ignore important legal relationships and emphasize economic substance over form. Consolidated financial statements are an economic truth but a legal fiction.

Question 2

When do you consolidate and when do you not consolidate?

Answer 2

1) Consolidate ALL majority-owned subsidiaries (over 50% of the voting interest is owned by parent company) to have ONE management and ONE economic entity.
2) DO NOT consolidate when control is not with owners.
3) Companies that have different year ends can be consolidated.

Question 3

Difference between U.S. GAAP and IFRS for gap period reporting (the period in which corporations) have different year ends.

Answer 3

Under U.S. GAAP significant transactions during the gap period require disclosure.

Under IFRS, the subsidiary financial statements must be adjusted for significant transactions during the gap period.

Question 4

What are the degree of controls for external reporting?

Answer 4

1) Cost Method (do not consolidate) - No significant influence ( Less than 20%)
2) Equity Method (do not consolidate) - Significant influence but 50% or less ownership (20%-50%)
3) Consolidate = Control (greater than 50% ownership)