Combinations/Consolidations

Question 1

limitations

Answer 1

• weak performance of one co. offsets strong performance of another
• ratio analysis not reliable (interco eliminations)
• RE not segregated

Question 2

criteria

GAAP vs IFRS

Answer 2

GAAP

• subsidiaries majority owned (50%+)
• do not consolidate when control is not with owners
• companies with different year-end can be consolidated

IFRS, consolidate UNLESS ALL are met:

• parent company is a sub
• parent company is not public
• parent company produces consolidated F/S under IFRS

Question 3

consolidation

GAAP vs IFRS

Answer 3

GAAP, significant transactions require disclosure

IFRS, subsidiary F/S must be adjusted for significant transactions

Question 4

no significant influence

< 20%

Answer 4

do not consolidate

use cost method

Question 5

significant influence

50% < x > 20%

Answer 5

do not consolidate

use equity method

Question 6

control

> 50%

Answer 6

consolidate

use cost or equity method

Question 7

do not consolidate if sub is under…

Answer 7

• legal reorganization
• bankruptcy
• severe foreign conditions
• other governmentally imposed uncertainties that pose significant doubt on parent ability to control