Equity Accounting and Consolidations

Chapter 14 Equity accounting and consolidations

Second edition update, June 2005.

Fair value adjustments and goodwill [p. 435 et seq.]

A parent company rarely acquires a subsidiary at a price equal to the book value of the latter’s net assets. The price it pays reflects its assessment of the cash flows those net assets are expected to generate. The amount may be more or less than book value. As a result, a positive or negative ‘consolidation difference’ arises. How is this difference accounted for?

In most countries, the difference is accounted for in two steps. First, the investor company revalues the individual assets and liabilities of the acquired company to fair value at the date of acquisition. (In countries which observe historical cost accounting strictly, this is a consolidation exercise only: the subsidiary’s books are not altered.) ‘Fair value’ means market value or a current valuation. The reason for this adjustment is clear. If the investor