Business Combinations and Its Accounting System

The word “acquisition” at recent times is very familiar amongst people in business world. As more and more companies are entering the market, it has led to a very tight competition among those in the same industry. It reminds me of a popular saying about this modern business competition that state; “If you cannot beat them, buy them!” It is actually obvious that when our attempt to conquer competitors and lead the market could not be accomplished, then integrating the power of two or more companies under one management is a solution.
In addition, expanding business by doing business combination has other reasons which are worth considering such as cost advantage, lower risk, avoidance of takeovers, etc. The so-called business combination has several forms e.g. merger and consolidation. A merger will caused a company which is taken over to dissolve and remain only the company which has bought them. Meanwhile to consolidate means to take over the assets and operations of two previously separated companies to eventually form a new single corporation.
When a business acquired another one to be controlled within a single management, the financial report of the company will have to be consolidated as well. We usually use the term “parent company” as the one who acquire and “subsidiary” as the acquired company. In preparing consolidated financial report, we need to have at least more than 50% of control towards assets and operation, thus the method we use is equity method. In this post, we are not going to discuss about the other methods beside equity method.
Equity method which is often called a one-line consolidation requires a consolidated-financial statement to show the same income and the same net assets as the parent company have before being consolidated with subsidiary. The difference is in consolidated-financial statement, we need to include the details of revenues and expenses as well as assets and liabilities.
So why am I telling you this stuff? Well, I think it’s gonna be useful enough for you who are going to jump in business world. For those of you who need further example how to make a consolidated-financial statement, you can consult the book in reference below. See you at the next post! ^_^

Source:
Beams, F.A., Anthony, J.H., Bettinghaus B., & Smith K. (2012). Advanced accounting. New Jersey, US: Pearson Prentice Hall.