Consolidating business operations
The taxation term of consolidation refers to the treatment of a group of companies and other entities as one entity for tax purposes.
Under the Halsbury's Laws of England, '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.
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 dividends : Liquidating dividends occur when there is an excess of dividends declared over earnings of the acquired company since the date of acquisition.
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".
Consolidation is the practice, in business, of legally combining two or more organizations into a single new one.
(APB 18 specifies conditions where ownership is less than 20% but there is significant influence).
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.
Consolidated financial statements 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. 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.