Question

Describe the different types of legal arrangements that can take place to create a business combination. Explain what the term consolidated statements means. Give an example of a consolidated entity and what its Annual Report reveals about the entity.

Answer 1

Whenever two or more entities agree to combine all their asset and liabilities and which then get manage by a single management then it is called business combination or else if said in technical term then whenever acquirer obtain control over acquiree then we say that business combination has taken place.

Different types of legal arrangement are:

1)Merger:- when two or more companies agree to combine themselve and after combination only one companies remains in existence.For ex- X+Y+Z=Y

2)Amalgamation:-when two or more companies agree to combine and form a new companies then we called it amalgamation.for ex-A+B=C

3)Holding and subsidiary relation: when one companies gain control over another company by obtaining another company more than 51% voting stock.

Parent entity is one who ultimate control all the other group companies.

Subsidiary entity is that group company which get ultimate control by parent entity.

When Parent entity prepare the financial statement by combining financial statement of all its group company then we called that financial statement consolidated statement.

suppose their are two entity X and Y. X holds 100% share of Y which show that Y is a Group company of X and X is a Parent company of Y.

Now if we will see X standalone financial statement then in that, investment in the share of Y will be shown as investment but in consilidated statement it will not be shown as investment rather all the asset and Liabilities of Y will be added to the respective asset and liabilities of X. This will not effect the share capiatl of X.