FAR Consolidation Entries Make No Sense. What Are You Actually Eliminating?

Start with the acquisition

The parent records an investment in the subsidiary on its own books. The subsidiary has its own assets, liabilities, and equity. In consolidation, you cannot simply add every account together because that would double-count the parent's ownership.

Eliminate subsidiary equity

The subsidiary's equity is eliminated against the parent's investment, with noncontrolling interest, fair-value adjustments, and goodwill handled as required by the facts.

Intercompany balances

An intercompany receivable and payable cancel because the consolidated group cannot owe itself money. The same logic applies to many other internal balances.

Intercompany sales and inventory profit

Revenue from selling inventory to another group company is not external revenue. If inventory remains inside the group at year-end, any embedded intercompany profit is unrealized from the consolidated perspective and must be eliminated.

Land and depreciable assets

Intercompany gains on land are eliminated until an external sale occurs. For depreciable assets, consolidation may also require correcting depreciation created by the internal transfer price.

Use the one-company question

For every elimination ask: what would this account look like if the parent and subsidiary had always been one company?

The takeaway

Consolidation eliminates internal accounting effects so the statements show the group as one economic entity.

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