Consolidation /M&A Accounting

If an investing company owns more than 50% equity interest in an investee company, the investor is considered to have a controlling interest. The investor is called the parent company and the investee is called a subsidiary. This investment is accounted for using full consolidation under which only one set of financial statements are prepared for the parent and its subsidiaries

Purchase Consideration: The buyer or parent company has to compensate shareholders of the target company. It can do so in cash, through shares or a mix of both. The amount payable by the acquirer to shareholders of the target company is known as “Purchase Consideration”

Goodwill: The excess of the purchase consideration over the fair value of identifiable net assets of the target company is known as goodwill

Non controlling interest or NCI is the portion of equity ownership in a subsidiary that is not attributable to the parent company.


At the acquisition date, goodwill is recognized as an asset on the acquirer’s balance sheet. Goodwill is no longer amortized, but is tested for impairment annually. Why does an acquirer pay higher than fair value to acquire a target? This may be because:

  • The combined business may have synergies and unquantifiable benefits
  • It is getting a “control” over the company
  • The acquirer is getting ready access to an established company (organic v/s inorganic)
  • The target has a strong brand name, relationships, human capital and intellectual property

In some rare cases, there can be negative goodwill as well. This means that the consideration paid is less than fair value of assets acquired


The following procedures are applied when preparing financials for the group as a single entity:

  • Consolidated financial statements are prepared by combining financial statements of the parent and all its subsidiaries on a line by line basis, adding together those items of assets, liabilities, equity, income and expenses that are alike
  • The subsidiaries’ or target’s share capital is eliminated
  • Goodwill is recognized on the balance sheet.
  • The NCI share of the net income in subsidiaries is identified and reported below consolidated net income
  • The NCI share of net assets in subsidiaries is identified and presented on the consolidated balance sheet within equity, but separate from the parent company’s shareholders' equity
  • All intra group balances and transactions are eliminated in full


On 31st December 2016, ABC Inc acquired an 80% interest in XYZ Inc. The cost of this investment was $4,000 and equity of XYZ Inc on that date was $4,000. If fair value of fixed assets is $3,000 then how will this transaction be recorded in the books of ABC Inc ?

ABC is investing $4,000 for a 80% stake in XYZ Inc. Grossing this up we get an equity value of $5,000 for a 100% of XYZ. At the date of acquisition, XYZ Inc had a book value of $4,000. Assets and liabilities for XYZ are revalued at acquisition to reflect fair market value or FMV. Fixed assets of XYZ are marked up from $2,500 to $3,000, so the assets side of XYZ’s balance sheet increases by $500. Shareholders’ equity is the difference between assets and liabilities. Since assets have increased by $500, shareholders’ equity should also increase by $500 for the balance sheet to balance.

The next step is to calculate goodwill. Equity value is $5,000. Book value of shareholders equity is $4,000. This leaves an excess of $1,000 which is to be allocated to assets and liabilities. Fair value of fixed assets is marked up by $500. Therefore goodwill can be calculated as the excess of $1,000 over the fixed assets write up of $500. This comes to $500. Another way to calculate goodwill is to simply subtract XYZ’s shareholders equity of $4,500 after the FMV mark up, from the equity value of $5,000.

How does the consolidated balance sheet look at the date of acquisition i.e 31 Dec 2016? XYZ, the subsidiary is accounted for at 100% using line by line consolidation. This means that all assets and liabilities of the parent and the subsidiary are added on a line by line basis. At acquisition, cash for ABC is $5,000 and for XYZ it is $4,000. The parent company has spent $4,000 on it’s investment in XYZ, which is a cash outflow. Closing cash balance is therefore $5,000 which is calculated by subtracting $4,000 from the sum of $5,000 and $4,000. Fixed assets for ABC are $4,000. FMV for XYZ’s fixed assets is $3,000. Adding these up, we get consolidated fixed assets of $7,000. Other assets for ABC are $1,000. FMV for XYZ’s other assets is $1,500. Adding these up, we get consolidated other assets of $2,500. Purchased goodwill of $500 is reflected on the assets side. The assets side of the balance sheet adds up to $15,000.

Now to consolidated liabilities and equity. Liabilities for ABC are $5,000. FMV for XYZ’s liabilities is $4,000. Adding these up, we get consolidated liabilities of $9,000. In the process of consolidation, shareholders equity of the target will be completely eliminated. The consolidate balance sheet will reflect only the parent’s shareholders equity which is $5,000. ABC has purchased an 80% stake in XYZ Inc. But in preparing its own consolidated balance sheet, it has taken into account a 100% of XYZ even though it owns only 80%. The remaining 20% of XYZ belongs to NCI. NCI can be calculated as 20% of $5,000 which is equity value and comes to $1,000. The sum total of all items on the liabilities and equity side of the consolidated balance sheet comes to $15,000. This equals the assets side and the consolidated balance sheet for ABC Inc is in balance.