Consolidating equity investment
In such a case, any other variable interest determines consolidation decisions.
In making this judgment, consideration is given to the legal form of the arrangement, the contractual terms and conditions as well as other facts and circumstances.
Consolidation takes place when a company includes financial information of the companys investee.
Typically, consolidation should take place when the company exercises control over the investee. All entities are classified into VIEs (variable interest entities) and non-VIEs.
If Federated Department Stores, the owner of Macy's and Bloomingdale's, purchased 5 percent of Saks Fifth Avenue, Inc., it stands to reason that Federated would be entitled to 5 percent of Saks' earnings.
This begs the question of how Federated would report their share of Saks' earnings on their income statement.
The relative size of ownership (generally, more than 50 percent of shares) is the key factor in assessing existence of control.
However, in certain circumstances, under effective control concept control may exist with less than 50 percent of ownership.
A consolidated income statement includes both financial results of a parent company and its subsidiaries.
On the other hand, if the stock dropped to .50 per share, this would reduce the investment's value to million.
The balance sheet value would be written down to reflect the loss of a deferred tax asset established to reflect the deduction that would be available to the company if it was to take the loss by selling the shares.
In a consolidated balance sheet, all assets and liabilities are added up.
Necessary adjustments are made to the assets and liabilities for the purpose of consolidation, such as excluding account(s) Investment in subsidiary from the parents financial statement, elimination of intergroup accounts, representation of equity and reserves only of a parent company.