HOME

TheInfoList




In
business Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." Having a business name A trad ...

business
, consolidation or amalgamation is the
merger and acquisition In corporate finance Corporate finance is the area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the Value investing, value of the firm to the shareholders, and ...
of many smaller
companies A company, abbreviated as co., is a legal entity In law, a legal person is any person A person (plural people or persons) is a being that has certain capacities or attributes such as reason, morality, consciousness or self-consciousness ...

companies
into a few much larger ones. In the context of
financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporat ...
, ''consolidation'' refers to the aggregation of
financial statements Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to un ...
of a group company as
consolidated financial statement Consolidated financial statements are the "financial statements Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is pr ...
s. The
taxation A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or Legal person, legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, ...
term of consolidation refers to the treatment of a
group of companies A group is a number of people or things that are located, gathered, or classed together. Groups of people * Cultural group, a group whose members share the same cultural identity * Ethnic group, a group whose members share the same ethnic identi ...
and other entities as one entity for tax purposes. Under the
Halsbury's Laws of England ''Halsbury's Laws of England'' is a uniquely comprehensive encyclopaedia of law, and provides the only complete narrative statement of law in England and Wales. It has an alphabetised title scheme covering all areas of law, drawing on authoritie ...
, 'amalgamation' is defined as "a blending together of two or more undertakings into one undertaking, the shareholders of each blending company, becoming, substantially, the shareholders of the blended undertakings. There may be amalgamations, either by transfer of two or more undertakings to a new company, or to the transfer of one or more companies to an existing company".


Overview

Consolidation is the practice, in business, of legally combining two or more organizations into a single new one. Upon consolidation, the original organizations cease to exist and are supplanted by a new entity.


Economic motivation

*Access to new technologies/techniques *Access to new clients *Access to new geographies *Cheaper financing for a bigger company *Seeking for hidden or nonperforming assets belonging to a target company (e.g. real estate) *Bigger companies tend to have superior bargaining power over their suppliers and clients (e.g.
Walmart Walmart Inc. (; formerly Wal-Mart Stores, Inc.) is an American multinational retail corporation that operates a chain of hypermarket Asian hypermarket in the Philippines, a branch of SM Hypermarket in SM Mall of Asia">SM_Hypermarket.htm ...

Walmart
) * Synergies


Types of business amalgamations

There are three forms of business combinations: *Statutory Merger: a business combination that results in 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 none of the previous companies survive. *Stock Acquisition: a business combination in which the purchasing company acquires the majority, more than 50%, of the
Common stock Common stock is a form of corporate equity Equity may refer to: Finance, accounting and ownership *Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other va ...
of the acquired company and both companies survive. *
Variable interest entityVariable interest entity (VIE) is a term used by the United States Financial Accounting Standards Board (FASB) in FIN 46 to refer to an entity (the investee) in which the investor holds a controlling interest that is not based on the majority of voti ...


Terminology

*Parent-subsidiary relationship: the result of a stock acquisition where the parent is the acquiring company and the subsidiary is the acquired company. *Controlling Interest: When the parent company owns a majority of the common stock. *Non-Controlling Interest or
Minority Interest In accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which has been called ...
: the rest of the common stock that the other shareholders own. *
Wholly owned subsidiary A subsidiary, subsidiary company or daughter company is a company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal personality, legal or a mixture ...
: when the parent owns all the outstanding common stock of the subsidiary. *In an amalgamation, the companies which merge into a new or existing company are referred to as transferor companies or amalgamating companies. The resultant company is referred to as the transferee company.


Accounting treatment (US GAAP)

A parent company can acquire another company by purchasing its net assets or by purchasing a majority share of its common stock. Regardless of the method of acquisition; direct costs, costs of issuing securities and indirect costs are treated as follows: * Direct costs, Indirect and general costs: the acquiring company expenses all acquisition related costs as they are incurred. * Costs of issuing securities: these costs reduce the issuing price of the stock.


Purchase of net assets

Treatment to the acquiring company: When purchasing the net assets the acquiring company records in its books the receipt of the net assets and the disbursement of cash, the creation of a liability or the issuance of stock as a form of payment for the transfer. Treatment to the acquired company: The acquired company records in its books the elimination of its net assets and the receipt of cash, receivables or investment in the acquiring company (if what was received from the transfer included common stock from the purchasing company). If the acquired company is liquidated then the company needs an additional entry to distribute the remaining assets to its shareholders.


Purchase of common stock

Treatment to the purchasing company: When the purchasing company acquires the subsidiary through the purchase of its common stock, it records in its books the investment in the acquired company and the disbursement of the payment for the stock acquired. Treatment to the acquired company: The acquired company records in its books the receipt of the payment from the acquiring company and the issuance of stock. FASB 141 disclosure requirements: FASB 141 requires disclosures in the notes of the financial statements when business combinations occur. Such disclosures are: * The name and description of the acquired entity and the percentage of the voting equity interest acquired. * The primary reasons for acquisition and descriptions of factors that contributed to recognition of goodwill. * The period for which results of operations of acquired entity are included in the income statement of the combining entity. * The cost of the acquired entity and if it applies the number of shares of equity interest issued, the value assigned to those interests and the basis for determining that value. * Any contingent payments, options or commitments. * The purchase and development assets acquired and written off. Treatment of goodwill impairments: *If
Non-Controlling Interest In accounting, minority interest (or non-controlling interest) is the portion of a subsidiary corporation's stock that is not owned by the parent corporation. The magnitude of the minority interest in the subsidiary company is generally less than 50 ...
(NCI) based on fair value of identifiable assets: impairment taken against parent's income & R/E *If NCI based on fair value of purchase price: impairment taken against subsidiary's income & R/E


Reporting intercorporate interest—investments in common stock


20% ownership or less—investment

When a company purchases 20% or less of the outstanding
common stock Common stock is a form of corporate equity Equity may refer to: Finance, accounting and ownership *Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other va ...
, the purchasing company's influence over the acquired company is not significant. (APB 18 specifies conditions where ownership is less than 20% but there is significant influence). The purchasing company uses the cost method to account for this type of investment. Under the cost method, the investment is recorded at cost at the time of purchase. The company does not need any entries to adjust this account balance unless the investment is considered impaired or there are liquidating dividends, both of which reduce the investment account. ''
Liquidating dividendA liquidating distribution (or liquidating dividend) is a type of nondividend distribution made by a corporation or a partnership to its shareholder A shareholder (in the United States often referred to as stockholder) of a corporation A cor ...
s'' : Liquidating dividends occur when there is an excess of dividends declared over earnings of the acquired company since the date of acquisition. Regular dividends are recorded as dividend income whenever they are declared. ''Impairment loss'' : An impairment loss occurs when there is a decline in the value of the investment other than temporary.


20% to 50% ownership—associate company

When the amount of stock purchased is between 20% and 50% of the common stock outstanding, the purchasing company's influence over the acquired company is often significant. The deciding factor, however, is significant influence. If other factors exist that reduce the influence or if significant influence is gained at an ownership of less than 20%, the equity method may be appropriate (FASB interpretation 35 (FIN 35) underlines the circumstances where the investor is unable to exercise significant influence). To account for this type of investment, the purchasing company uses the
equity method Equity method in accounting is the process of treating investments in associate companies. Equity accounting is usually applied where an investor entity holds 20–50% of the voting stock of the associate company, and therefore has significant infl ...
. Under the equity method, the purchaser records its investment at original cost. This balance increases with income and decreases for dividends from the subsidiary that accrue to the purchaser. Treatment of ''Purchase Differentials'': At the time of purchase, purchase differentials arise from the difference between the cost of the investment and the book value of the underlying assets. Purchase differentials have two components: * The difference between the fair market value of the underlying assets and their book value. * Goodwill: the difference between the cost of the investment and the fair market value of the underlying assets. Purchase differentials need to be amortized over their useful life; however, new accounting guidance states that goodwill is not amortized or reduced until it is permanently impaired, or the underlying asset is sold.


More than 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 acquired company. Control in this context is defined as ability to direct policies and management. In this type of relationship the controlling company is the parent and the controlled company is the
subsidiary A subsidiary, subsidiary company or daughter company is a company (law), company owned or controlled by another company, which is called the parent company or holding company. Two subsidiaries that belong to the same parent company are called sis ...
. The parent company needs to issue consolidated financial statements at the end of the year to reflect this relationship.
Consolidated financial statement Consolidated financial statements are the "financial statements Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is pr ...
s show the parent and the subsidiary as one single entity. During the year, the parent company can use the equity or the cost method to account for its investment in the subsidiary. Each company keeps separate books. However, at the end of the year, a consolidation working paper is prepared to combine the separate balances and to eliminate the intercompany transactions, the subsidiary's stockholder equity and the parent's investment account. The result is one set of financial statements that reflect the financial results of the consolidated entity. There are three forms of combination: 1. horizontal integration: is the combination of firms in the same business lines and markets. 2. vertical integration: is the combination of firms with operations in different but successive stages of production or distribution or both. 3. Conglomeration: is the combination of firms with unrelated and diverse products or services functions, or both.


See also

*
Arrangements between railroads Railway company, Railway companies can interact with and control others in many ways. These relationships can be complicated by bankruptcies. Operating Often, when a railroad first opens, it is only a short spur of a Main line (railway), main lin ...
*
Associate company An associate company (or associate) in accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or ...
*
Business valuation Business valuation is a process and a set of procedures used to estimate the economic value In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), product ...

Business valuation
*
Consolidated financial statement Consolidated financial statements are the "financial statements Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is pr ...
*
Enterprise valueEnterprise value (EV), total enterprise value (TEV), or firm value (FV) is an economic measure reflecting the market value Market may refer to: *Market (economics) A market is a composition of system A system is a group of Interaction, intera ...
*
Goodwill (accounting) In accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which has been calle ...
*
Minority interest In accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which has been called ...
*
Mergers and acquisitions In , mergers and acquisitions (M&A) are transactions in which the ownership of , other business organizations, or their operating units are transferred or with other entities. As an aspect of , M&A can allow enterprises to grow or , and change ...
*
Conglomerate Conglomerate or conglomeration may refer to: * Conglomerate (company) * Conglomerate (geology) * Conglomerate (mathematics) In popular culture: * The Conglomerate (American group), a production crew and musical group founded by Busta Rhymes ** Con ...
*
Conglomerate discountConglomerate discount is an economic concept describing a situation when the stock market A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims ...
*
Successor companyA successor company takes the business (products and services) of the previous companies with the goal to maintain the continuity of the business. To this end the employees, board of directors, location, equipment and even product name may remain the ...
*
Tax consolidation Tax consolidation, or combined reporting, is a regime adopted in the tax or revenue legislation of a number of countries which treats a group of wholly owned or majority-owned companies and other entities (such as trusts and partnerships) as a sing ...
*


References

{{Authority control Financial accounting Mergers and acquisitions de:Konsolidierung