Question

In a multilevel ownership structure, the general process of consolidation is to start making eliminating entries with the subsidiary farthest removed from the parent company and then move up the levels until the direct subsidiary is consolidated with the parent. Why is this the accepted procedure?

Answer 1

The consolidation method is a type of investment accounting used for consolidating the financial statements of majority ownership investments. This method can only be used when the investor possesses effective control of the investee or subsidiary, which often, but not always, assumes the investor owns at least 50.1% of the subsidiary shares or voting rights.

The parent company will report the investment in subsidiary as an asset, with the subsidiary reporting the equivalent equity owned by the parent as equity on its own accounts. At the consolidated level, an elimination adjustment must be added so that the consolidated statement is not overstated by the amount of equity held by the parent. The elimination adjustment is made with the intent of offsetting the intercompany transaction, such that the values are not double-counted at the consolidated level.