American Accounting Association 2006 Midwest Region Meeting March 30 – April 1 Chicago, Illinois

Friday, March 31, 10:20 a.m.-12:00 noon
Concurrent session 2B - Business Combinations (Financial Accounting and Reporting)

Title: Consolidations Revisited

David W. Cornell University of Missouri-Kansas City

J. Gregory Bushong University of North Carolina at Asheville

ABSTRACT: The Financial Accounting Standards Board (FASB) has released an Exposure Draft (ED) requiring the economic entity approach to consolidating financial statements. This approach competes with the parent company theory and the proportionate consolidation approach. We provide a brief description of the three methods of consolidating companies. We also discuss the use of a proportionality table to aid in the production of consolidated financial statements using the economic entity theory when intercompany inventory transactions have occurred. The proportionality table is easy to produce and incorporates all of the amounts required in the consolidation entries. While we use the Hoyle, Schaefer, and Doupnik mnemonic for labeling the consolidation entries in this paper, the proportionality table is not textbook-specific. Additionally, it incorporates the different types of intercompany transactions with ease and highlights the fact that the problems caused by intercompany transactions reverse over time. We have found it to be a very beneficial tool in helping students understand the consolidation process.

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