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Accounting Question

Have an accounting question where I hope someone can provide guidance:

Assume a company acquires another company (100%) - All agree to use the consolidation method

Other scenario: a company has five subsidiaries each acquires 20% of a company - Should the equity method be method be used based on ownership (20%) or the consolidation method because effectively all subsidiaries belong to the same parent company?

Keen to hear your views on accounting treatment

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Nice question tho, I also want to know the answer for this.

In my opinion, it is really unlikely there would be a transaction like this. At an individual level of financial statements, each subsidiary would have a minor participation in the purchased company, so equity method would apply.

Parent company would consolidate subsidiaries and the result will be different than consolidation method. It would look like equity method also.

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Might be worth checking in with FASB or IASB to see if they have any mention of fringe issues like or related to this. Agreed, interesting question… my two cents is it must be very situation specific and the organizational relationship and management of the parent and its subsidiaries’ investments. 

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There are parent, sub-parents and target. If parent control all subsidiaries, then parent has direct control to target through sub-sub in case of Consolidation method applies on top level.

This is not unlikely in real life and there is even IFRS 3 named Business combinations. I’m pretty sure that USGAAP has it covered as well, especially after Enron case. Try to Google it.

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Yeah, this is actually a scenario in the company I am working for and that is why I am asking.

I did actually see IFRS 3 named in connection with this so I will research it further. At the top level (parent company) I see no change if it consolidates, the sub parents possibly will account using equity. There must also be some process of allocating all the assets, liabilities, revenue and expenses up to the parent if it decides to consolidate otherwise it would only have the five carrying amounts of the investment accounts and the investee’s shares of net income.

Depends where you want to (and/or have to, in line with standards requirements) to consolidate. If you consolidate at any of the subsidiaries’ level, you would use the equity method. On the ultimate parent level, you would consolidate using the full consolidation, as the parent controls indirectly the sub-subsidiary. 

No need for consolidation on sub-parent level unless the stocks of sub-parent quote on financial market.

I do not ask for the trust nor give it to you.