When the amount of stock purchased is more than 50% of the outstanding common stock, the purchasing company has control over the acquired company.Control in this context is defined as ability to direct policies and management.If the acquired company is liquidated then the company needs an additional entry to distribute the remaining assets to its shareholders.
If other factors exist that reduce the influence or if significant influence is gained at an ownership of less than 20%, the equity method may be appropriate (FASB interpretation 35 (FIN 35) underlines the circumstances where the investor is unable to exercise significant influence).
To account for this type of investment, the purchasing company uses the equity method.
Regardless of the method of acquisition; direct costs, costs of issuing securities and indirect costs are treated as follows: Treatment to the acquiring company: When purchasing the net assets the acquiring company records in its books the receipt of the net assets and the disbursement of cash, the creation of a liability or the issuance of stock as a form of payment for the transfer.
Treatment to the acquired company: The acquired company records in its books the elimination of its net assets and the receipt of cash, receivables or investment in the acquiring company (if what was received from the transfer included common stock from the purchasing company).
In this type of relationship the controlling company is the parent and the controlled company is the subsidiary.
The parent company needs to issue consolidated financial statements at the end of the year to reflect this relationship.
Upon consolidation, the original organizations cease to exist and are supplanted by a new entity.
A parent company can acquire another company by purchasing its net assets or by purchasing a majority share of its common stock.
The purchasing company uses the cost method to account for this type of investment.
Under the cost method, the investment is recorded at cost at the time of purchase.
The result is one set of financial statements that reflect the financial results of the consolidated entity. horizontal integration:is the combination of firms in the same business lines and markets. vertical integration: is the combination of firms with operations in different but successive stages of production or distribution or both. Conglomeration: is the combination of firms with unrelated and diverse products or services functions, or both.