The taxation term of consolidation refers to the treatment of a group of companies and other entities as one entity for tax purposes.Under the Halsbury's Laws of England, 'amalgamation' is defined as "a blending together of two or more undertakings into one undertaking, the shareholders of each blending company, becoming, substantially, the shareholders of the blended undertakings.
To account for this type of investment, the purchasing company uses the equity method.Consolidated financial statements show the parent and the subsidiary as one single entity.During the year, the parent company can use the equity or the cost method to account for its investment in the subsidiary. However, at the end of the year, a consolidation working paper is prepared to combine the separate balances and to eliminate the intercompany transactions, the subsidiary’s stockholder equity and the parent’s investment account.Treatment of Purchase Differentials: At the time of purchase, purchase differentials arise from the difference between the cost of the investment and the book value of the underlying assets.
Purchase differentials have two components: Purchase differentials need to be amortized over their useful life; however, new accounting guidance states that goodwill is not amortized or reduced until it is permanently impaired, or the underlying asset is sold.
When the amount of stock purchased is more than 50% of the outstanding common stock, the purchasing company has control over the acquired company.