Dive into the complex world of acquisition accounting and learn about the two different methods, Equity Method and Consolidation, used in M&A accounting.
Acquisition accounting has always been a challenge for analysts and associates. I think it’s partly because the presentation of purchase accounting (the method prescribed under US GAAP and IFRS for handling acquisitions) in financial models conflates several accounting adjustments.
There are two ways a company would handle M&A accounting.
First would be an Equity Method, which is applied when an investor has a significant influence but not control over the investee (usually a purchase of 20-50% of stake).
When using an equity method, an investor company reports the revenue earned by the other company on its Income Statement, in the amount proportional to the percentage of its equity investment to another company.
The second M&A accounting method is consolidation. It has to be done when the investor has control over an investee (over 50% of stake ownership). All revenue, loss, assets and liabilities of all subsidiaries should be included in the parent’s company financial statements.
We will take a closer look into both Equity method and Consolidation in the following videos.