Saturday, June 2, 2012

The rise of the group of companies and the need for consolidated accounts

Since the end of World War II, rapid growth of domestic and multinational corporations in various countries was observed.

Noticeably, with the global inclinations of business, organizations not just build new facilities and infrastructures but also most previously separate entities combine or group themselves together. Hence, there were several business combinations here and there.

Thus, the evolution of Business Combination accounting practices.

Combinations of businesses may be done thru merger or consolidation.

Business combination is said to be merger when one company takes over all the business operations of other entities, thus dissolving the latter's organizations. 

While in consolidation, a new corporation is formed to take over the assets and operations of two or more separate entities, and those previously separate entities are dissolved.  

Business combination is believed to be the most complex and somewhat controversial areas of accounting because it involves accounting the financial transactions of huge businesses which may unfold management fiascos, empirical fortunes and executive brilliance. But, accounting business combinations is also interesting because each business involved in a business combination is unique and must be assessed and evaluated in its economic substance regardless of its legal form.

Financial reports for these business combinations are prepared into consolidated financial reports which are derived from consolidated accounts.

Note that these consolidated accounts are what almost matters to the investors in evaluating the entity's profit or loss, financial condition and the share in the business aside from the dividends.


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