Consolidation (business)

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In business, consolidation or amalgamation is the mergers and acquisitions of many small companies into some much larger companies. In the context of financial accounting, consolidation refers to the aggregation of group financial statements as consolidated financial statements. The term consolidated taxation refers to the treatment of a group of companies and other entities as a whole for tax purposes. According to Halsbury's Law in England, 'amalgamation' is defined as "a combination of two or more attempts into one enterprise, the shareholder of each mixing enterprise, becomes, substantially, the shareholder of a mixed enterprise." There may be amalgamation, either by transfer of two or more business to a new company, or to transfer one or more companies to an existing company ".

Video Consolidation (business)

Ikhtisar

Consolidation is a practice, in business, that legally merges two or more organizations into one new organization. After consolidation, the original organization is absent and replaced by a new entity.

Maps Consolidation (business)

Economic motivation

• Access to new technology/techniques
• Access to new clients
• Access to new geography
• Funding is cheaper for larger companies
• Look for hidden or nonperformed assets belonging to a target company (eg real estate)
• Larger companies tend to have superior bargaining power over their suppliers and clients (eg Walmart)

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Business amalgamation type

There are three forms of business combination:

• Legal Merging: a business combination that generates the liquidation of the acquired company's assets and the survival of the purchasing company.
• Statutory Consolidation: a business combination that creates a new company in which no previous company survives.
• Acquisition of Shares: a combination of businesses in which a purchasing company acquires a majority, more than 50%, Ordinary shares of the acquired company and both companies survive.
• Variable interest entities

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Terminology

• The parent-subsidiary relationship: the result of the acquisition of shares in which the parent is the acquiring company and the subsidiary is the acquired company.
• Controlling Interest: When the parent company owns a majority of common stock.
• Non-Controlling Interest or Minority Interest: the remaining common shares owned by other shareholders.
• A wholly owned subsidiary: when the parent owns all ordinary shares of a subsidiary.
• In a merge, companies that merge into new or existing companies are referred to as redirection or amalgamating companies. The resulting company is called a transferee company.

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Accounting Treatment (US GAAP)

The parent company may acquire another company by purchasing its net assets or by acquiring a majority share of common stock. Regardless of the method of acquisition; direct costs, securities issuance costs and indirect costs are treated as follows:

• Direct, Indirect and general costs: the acquiring company imposes all acquisition-related costs when they occur.
• The cost of issuing securities: these costs reduce the price incurred from the stock.

Purchase Net Assets

Treatment of the acquiring company: When purchasing net assets, the acquiring company records in its books the receipt of net assets and cash disbursements, the creation of liabilities or issuance of shares as a form of payment for the transfer.

Treatment of the acquired company: The acquired company is recorded in the bookkeeping of the write-off of the net assets and the receipt of cash, receivables or investments in the acquiring company (if what is received from the transfer including the common stock of the purchasing company). If the company being acquired is liquidated then the company needs additional entry to distribute the remaining assets to its shareholders.

Purchase of Common Stock

Treatment of a purchasing company: When a purchasing company acquires a subsidiary through the purchase of a common stock, it records in its books the investment in the acquired company and disbursement of the payment for the acquired stock.

Treatment of the acquired company: The company records acquired in its books receives payments from the acquiring company and issuance of shares.

Disclosure Requirements FASB 141: FASB 141 requires disclosure in financial statement records when a business combination occurs. The disclosures are:

• The name and description of the entity gained and the percentage of the earned voting equity interest.
• The main reason for obtaining and describing the factors that contribute to the recognition of goodwill.
• The period in which the operating results of the acquired entity are included in the income statement of the combined entity.
• The cost of the entity gained and if it applies the number of shares of the issued equity interest, the value assigned to that interest and the basis for determining that value.
• Any contingent payments, options, or commitments.
• Purchase and development assets are acquired and deleted.

Treatment of damage to good faith:

• If a Non-Controlling Interest (NCI) is based on the fair value of the identifiable asset: loss against parental income & amp; R/E
• If NCI is based on the fair value of the purchase price: the decrease is taken against the income of the subsidiary & amp; R/E

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Intercompany interest reporting - investment in common stock

ownership 20% or less - Investment

When a company buys 20% or less of the outstanding common stock, the effect of the purchasing company on the acquired company is insignificant. (APB 18 determines the conditions under which ownership is less than 20% but there is significant influence).

The purchasing company uses a cost method to account for this type of investment. Under the cost method, the investment is accounted for at the time of purchase. The Company does not require any entry to adjust the balance of this account unless investment is deemed disturbed or there is a liquid dividend, both of which reduce the investment account.

Freeze dividends : Liquidate dividends occur when an excess of dividends is announced on the profits of the acquired company from the date of acquisition. Dividends are usually recorded as dividend income whenever they are declared.

Loss loss : Impairment losses occur when there is a decrease in the value of the investment other than temporary.

20% to 50% ownership - Partner company

When the amount of stock purchased is between 20% and 50% of the outstanding common stock, the effect of the purchasing company on the acquired company is often significant. The deciding factor, however, is a significant influence. If there are other factors that reduce the influence or if significant influence is attained on less than 20% ownership, the equity method may be appropriate (FASB 35 interpretation (FIN 35) highlights the circumstances under which investors can not exercise significant influence).

To take into account this type of investment, the purchasing company uses the equity method. Under the equity method, the buyer records his investment at the original cost. This balance increases with the income and decrease of dividends from subsidiaries that increase to buyers.

Treatment of Purchase Differentials : At the time of purchase, the difference in purchases arises from the difference between the investment cost and the book value of the underlying asset.

The difference in purchases has two components:

• The difference between the fair market value of the underlying asset and the value of the book.
• Goodwill: the difference between the investment cost and the fair market value of the underlying asset.

Differences in purchases should be amortized over their useful life; however, the new accounting guidance states that goodwill is not amortized or reduced to permanent disability, or the underlying asset is sold.

Over 50% ownership - Subsidiary

When the amount of stock purchased is more than 50% of the outstanding common stock, the purchasing company has control over the company being acquired. Control in this context is defined as the ability to guide policy and management. In this type of relationship the controlling company is the parent and the controlled company is a subsidiary. Parent companies need to issue consolidated financial statements at the end of the year to reflect this relationship.

The consolidated financial statements show parents and subsidiaries as a single entity. Throughout the year, the parent company may use the equity or cost method to account for its investment in a subsidiary. Every company keeps books separate. However, at the end of the year, consolidated paperwork is prepared to combine separate balances and to eliminate intercompany transactions, shareholder equity of subsidiaries and parent investment accounts. The result is a set of financial statements that reflect the financial results of the consolidated entity. There are three forms of combination: 1. Horizontal integration: is a combination of companies in the same line of business and market. 2. Vertical integration: is a combination of firms operating in different stages of production or distribution but respectively or both. 3. Conglomeration: is a combination of companies with unrelated and diverse product or service functions, or both.

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See also

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References

Source of the article : Wikipedia