Consolidation of Financial Statements - under U.S. GAAP (ASC 810) and IFRS 10

✦ Consolidation starts with proving control, then applying the acquisition method to merge assets, liabilities, equity, revenue, and expenses.

✦ Intercompany balances and transactions must be eliminated, and profit as well as OCI allocated between the parent and noncontrolling interests.

✦ Goodwill, variable-interest entities, and measurement options for NCI introduce valuation and presentation challenges addressed by ASC 810 and IFRS 10.

✦ Robust disclosures on group composition, judgments, and VIE exposure let users see the risks and financial position of the consolidated group.

Let's find out how to combine a parent and its subsidiaries into one set of financial statements by applying the recognition, measurement, presentation, and disclosure guidance in ASC 810 and IFRS 10. The sections below deliver step-by-step procedures, journal entries, an example, and disclosure checklists ready for immediate use.

Defining Control

✦ Control (ASC 810-10-15 / IFRS 10.6) — power to direct relevant activities, exposure or rights to variable returns, and the ability to use that power to affect those returns.

✦ Parent / Subsidiary — the controlling entity and the entity controlled.

✦ Noncontrolling Interest (NCI) — the portion of a subsidiary’s equity not attributable to the parent.

Investment companies that meet ASC 946 or the IFRS 10 investment-entity exemption measure qualifying subsidiaries at fair value instead of consolidating them.

Testing for Control

✦ Evaluate voting rights, potential voting rights (options, convertibles), contractual arrangements, and de-facto power.

✦ Control can exist with less than 50 % of voting shares if practical ability to direct relevant activities is demonstrated.

Applying the Acquisition Method

✦ At the acquisition date, measure identifiable assets and liabilities at fair value and recognise goodwill for any excess of consideration over the parent’s share of net assets (or a bargain-purchase gain if negative).

✦ Choose the full-goodwill (fair-value) or partial-goodwill (proportionate) method and apply it consistently to all business combinations.

Example — 80 % Acquisition of Subsidiary S

Facts (1 January 20X5)

✦ Consideration transferred: $1,200,000

✦ Fair value of S’s net identifiable assets: $1,300,000

✦ Fair value of NCI (20 %): $325,000

Goodwill calculation (partial-goodwill method)

P’s share of net assets (80 %) $1,040,000

Consideration transferred $1,200,000

Goodwill $ 160,000

Acquisition-date journal entry

Dr. Investment in S – 1,200,000 / Cr. Cash – 1,200,000

Consolidation elimination (simplified)

Dr. Common Stock (S) – 500,000

Dr. Retained Earnings (S) – 540,000

Dr. Fair-Value Adjustments – 300,000

Cr. Investment in S – 1,200,000

Cr. NCI – 140,000

Goodwill of $160,000 remains on the consolidated balance sheet.

Eliminating Intercompany Transactions

✦ Inventory sales — eliminate intercompany revenue and unrealised profit in ending inventory.

✦ Intercompany loans — eliminate receivable/payable balances and related interest income/expense.

✦ Intercompany dividends — eliminate dividend income and adjust NCI for its share of subsidiary dividends.

Update related-party disclosures after posting eliminations.

Building the Consolidation Worksheet

Import trial balances for parent and subsidiary.
Post fair-value adjustments from the purchase-price allocation.
Record elimination entries for the investment, intercompany items, and dividends.
Allocate current-period profit or loss to the parent and NCI.
Reconcile consolidated equity with opening balances and period changes.

Presentation Requirements

✦ Statement of Financial Position — present NCI within equity, separate from parent shareholders’ equity (ASC 810-10-45-15).

✦ Statement of Profit or Loss — show net income attributable to the parent and to NCI.

✦ Statement of Cash Flows — classify cash flows with NCI owners (e.g., dividends, share buybacks) as financing activities.

✦ Statement of Comprehensive Income — allocate each OCI component between parent and NCI.

Disclosure Requirements

✦ Group composition — name, jurisdiction, ownership percentage, and voting rights of significant subsidiaries.

✦ NCI information — profit or loss attributable to NCI, accumulated NCI, and any significant restrictions on subsidiary assets.

✦ Goodwill roll-forward — opening balance, additions, impairments, disposals.

✦ Significant judgments — key assumptions used to assess control, especially when the parent holds less than a majority of voting rights.

✦ Intercompany eliminations — material intercompany balances and transactions that were eliminated.

✦ Variable-Interest Entities (US GAAP) — primary-beneficiary assessment, carrying amounts of VIE assets and liabilities, and any financial support provided.