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Acquisition Method and Equity

Under the acquisition method, we combine the subsidiaries’ assets, liabilities, revenues and expenses with the parents’ company’s assets, liabilities, revenues and expenses. Why are we not combining the equity portion too, but rather using the parent’s company equity ?

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The short answer is that the parent’s balance sheet won’t balance when you do that.

Another answer is that the subsidiary’s equity is already included in the parent’s equity; if you were to add the subsidiary’s equity separately, you’d be counting it twice.

The answer that might help lead to understanding is that the parent paid (cash, let’s say) to buy their share in the subsidiary.  Thus, assets are reduced (by the amount of cash paid), so the combination of liabilities and equity has to be reduced by the same amount.  If we’re consolidating all of the liabilities, then the reduction has to be in the form of reduced equity: don’t consolidate equity.

Simplify the complicated side; don't complify the simplicated side.

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I agree with the first answer particularly. Because we are using the equity method, the subsidiary’s equity would have been accounted for already in the parent’s equity.