 Hello and welcome to the session in which we would look at an introduction to consolidation slash combination. This topic is covered in advanced accounting courses as well as the CPA exam. So it's very important that you understand the idea of consolidation and combination before you start to do journal entries or preparing worksheet between the consolidation of two companies. Now whether you're an accounting student or a CPA candidate, I strongly suggest you take a look at my website farhatlectures.com. I don't replace your CPA review course if you are studying using one of those national review courses, keep them. I'm a useful addition. I can explain the material differently, give you alternative explanation which in turn will help you pass the actually first it will help you understand your CPA review better in turn help you pass the CPA exam. Your risk with me is a one month of subscription that's your risk your potential gain is passing the exam and if not for anything take a look at my website to find out how well your university doing on the CPA exam. I do have resources for other courses as well. You have not connected with me on LinkedIn please do so and take a look at my LinkedIn recommendation like this recording connect with me on Instagram, Facebook, Twitter and Reddit. So the first thing is why companies purchase or combine with another company. What's the idea behind it? Well you're going to see there are many reasons but it's good to kind of get an idea about some of the major reasons why companies buy another company. One is cost savings. Well what does that mean? It means when we combine both companies we could eliminate some duplicate position. This is an example of it. Save some cost. For example a good example will be Tesla in Grumman automation where Tesla basically stated that if we go through this basically not if we go through this this combination what we'll do it would reduce capital expenditure required per vehicle. This way it will save the money. So the one reason is cost saving and that's hopefully this makes sense. Two quick entry to a new market or an existing product or a foreign market. A classic example will be Microsoft buying LinkedIn. Microsoft wanted to start a social media so rather than starting a social media a quick entry is to buy an existing one or Amazon buying Whole Foods. Amazon is online selling Whole Food has physical places so rather than start you could just buy something that already exists. Another reason why companies buy other companies is the economies of scales allowing greater efficiency well basically cost savings in a sense and negotiating powers in terms of financing and purchasing ability. So if you go to the bank and you're larger you might be able to negotiate a lower rate or if you are negotiating with a supplier you might be able to negotiate a better term. So bigger is usually stronger. Also it could be a vertical integration basically helping you in your distribution or further processing of your product. A good example will be salesforce.com in MuleSoft. Salesforce expects substantial synergies with MuleSoft application programming interface enabling client to connect across various data sources. So by buying MuleSoft you would allow your clients to connect to other data sources and one of the reasons you buy other companies is diversification of business risk. You want to diversify just you know you want to be in other businesses just for the for the sake of risk and you can have unlimited reasons of why one company buys another company. One of them could be just ego, ego of the board of directors or the CEO of one company that want to expand and buy and be the largest. So there are this is a list of some sample some sample reasons. Now why consolidation so why when we buy other companies we consolidate the financial statements that we need to know why because we're going to be preparing consolidated financial statements. One it's more meaningful to outside parties than showing each separate financial statement separately because it's necessary because you're not dealing with one company you are dealing with many companies that under the same umbrella. So when you invest you're not invested in one particular company you want to take a look at the whole picture. Now you can break it down but you also want to see the big picture which is it's necessary for the fair presentation when one of the entities in the consolidated group is included because we could have direct indirect interest related party transaction we want to see the whole thing. So consolidation trends transcend the boundaries of incorporation to accomplish all the corporation under control so we're looking at everything at the whole pictures okay and bear in mind that various companies may retain their legal identities as separate corporation which we'll see because we have many different types of business combination nevertheless having them all under the same umbrella it gives more meaningful information to outside parties. Now we have five types of business combination and basically what's the business combination it's a transaction where one company the acquirer gets control of another company this is what a business combination is. So this could happen in many different ways in many different format we're going to have five types of business combinations that you need to be familiar with. The first one is statuary merger via asset acquisition or statuary merger via stock acquisition, statuary consolidation via capital asset or asset acquisition acquisition of more than 50% of the common stock in variable interest and obviously once you have a list if you follow my lectures I will go through each one of those then a little bit more in the tails starting with merger via asset acquisition what does that mean just look at the wording asset acquisition so what are you doing you are buying actually not only the assets you are basically purchasing their assets and liabilities think of buying their inventory think of buying their buildings think of buying their furniture you're buying the company's asset itself in exchange of cash other assets that stocks or a combination of these so basically you might be showing that to buy them you might be giving them stocks but buying everything all the assets and liabilities so the acquired company sees to exist so if you buy this company basically you bought everything the company is basically empty so basically you're looking at company a plus company b let's assume company a buys company b what survive is company a so all assets our liabilities are absorbed by the purchasing company this the inquiry company is basically gone so at the combination date all the assets and liabilities are transferred so one company exist survive and the other one dissolved and this is basically a single event a single event we'll do it once and we'll get done with it and we'll work an example going over this not in the session and they in future session and basically company b will have zero balances and they will close out basically company b is gone it was older assets and liabilities are absorbed by company a now this is statuary merger via stock acquisition so what are we doing here we are buying purchasing 100 of the stock not 99 not 98 100 of the stock we transfer their assets and liabilities to our company so rather than buying the asset and the liabilities we buy them through this by buying the stocks and we legally dissolve the other company simply put a plus b if they is if a is buying b b is gone and what survive is a so all our assets and liabilities are also absorbed by the purchasing company at the combination date one company is dissolved one company survive the survivors company a and it's a single event and you're going to see why keep repeating it's a single event because we're going to see later that when you have another type of buying when you buy less than 100% you're going to have work work papers and entries every year to consolidate both now company bb will have a zero balance and their their account will be closed out at the end of the year another type of consolidation is statuary consolidation via capital or asset acquisition how does this work here you have two or more companies that transfer their either their assets or their stocks into a third company simply put company a plus company b they combine and they form company c now this is called statuary consolidation that has nothing to do with the accounting consolidation which we'll talk about soon a little bit about soon and more about later so just basically the name is statuary consolidation it doesn't mean you do consolidation in this type of transaction an example will be dimerall and Chrysler they combine into dimerall and Chrysler company is a new company it's again it's a single event both companies will have zero balances closed out and the new company will start now we also have acquisition of more than 50% of the voting stock of the other company here you purchase more than 50% could be 51 could be 99 and what happened here once you more go more than 50% you achieve control there's no dissolution you did not dissolute the other company the company remain in existence and a prime example there are many examples amazon and whole foods what's the logic so why don't you kind of whole food absorbs amazon well there are some business reasons why behind it if you keep the company exist on its own they better utilize their trade names they they work over this over the years their licenses any experience that they have employee employee loyalty because they're still working for the same company customer loyalty customer are familiar with whole foods brand and other company reputations that can be possible when you keep the company as a separate legal entity so here the subsidiary whole foods will keep its sole value keep its own value and this is good when if we want to sell it or spend it off later down the road make sense and parent company establish an investment account so basically how do we account for it we account for it through an investment account but here's the thing we have to prepare consolidation at the end of every year at the end of every year using work papers and this is basically again now we're starting to head toward the major course this is what we're going to be doing down the road looking at these consolidation work papers the fifth method to acquire a company or do a combination is control via contractual agreement this is called a variable interest entity will be discussing this concept later on in future chapters if you're interested and want to learn about it now I'm going to post a link for you in the description I do have a lecture about variable interest entity I will cover it again in this course at the end of this recording I would like to remind you that if you're studying for the CPA exam take a look at my website farhatlectures.com I don't replace your CPA review course I am a useful addition to that course so I can help you understand the material better I can provide you alternative explanation alternative resources which in turn will help you do better on the CPA exam at the end of this recording I'm going to remind you that this you you pass your CPA once in your lifetime study hard good luck don't change don't shortchange yourself 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