An analyst is evaluating the financial statements of a company that has recently acquired a 70% stake in a competitor. The acquisition was structured such that the acquirer obtained control. How will the acquired company's financial statements be incorporated into the acquirer's consolidated financial statements under both IFRS and U.S. GAAP?
- AFull consolidation for both IFRS and U.S. GAAP.
- BEquity method for both IFRS and U.S. GAAP.
- CProportionate consolidation for both IFRS and U.S. GAAP.
- DFull consolidation for IFRS, proportionate consolidation for U.S. GAAP.
Show answer & explanationAnswer & explanation
Correct answer: A. Full consolidation for both IFRS and U.S. GAAP.
When an acquirer obtains control (typically >50% ownership) of another company, both IFRS and U.S. GAAP require the use of full consolidation. This means the acquirer combines 100% of the acquiree's assets, liabilities, revenues, and expenses with its own, with a non-controlling interest presented for the portion not owned.
Why the other options are wrong
- B. Equity method is used for significant influence (20-50% ownership), not control.
- C. Proportionate consolidation is generally prohibited under IFRS and rarely used under U.S. GAAP for control situations.
- D. Both standards require full consolidation, not a mix of methods.
Consolidation Method (Control)
When an investor obtains control (typically >50% ownership) over another entity, both IFRS and U.S. GAAP require the use of full consolidation, where 100% of the acquiree's financial statement items are combined with the acquirer's, and a non-controlling interest is reported.
- Control usually means >50% voting rights.
- Full consolidation combines 100% of assets, liabilities, revenues, expenses.
- Non-controlling interest (minority interest) is reported.
- Applies universally under both IFRS and U.S. GAAP for control.
Memory trick: Investments: Control means 'Full' combination, Influence means 'Equity' line.