Consolidations / joint venture formation accounting
This page describes the complex accounting aspects of a consolidation or joint venture formation. Visit the Content on this page pertains to the complex accounting aspects of a consolidation or joint venture formation. Please visit PwC’s Acquisitions page for other key considerations.
Reporting entities may invest in other companies for several reasons. The rapid pace of business demands revolutionary ideas, and partnering with industry leaders is one path forward. Additionally, synergies established through investments may create value that could not otherwise be generated. Finally, readily available sources of financing may further encourage companies to seek opportunities to invest.
When investing, some companies may not wish to gain control of another entity—or may find it difficult to do so—in which case collaboration becomes the best solution.
Financial Reporting Complexities
The legal form, significance, and economic features associated with investments in other entities drives the way investors account for these transactions. In some cases, investors may be required to record the investment at initial cost and subsequently test for impairment. In other cases, the value of the investment may be updated to reflect the financial position of the investee. Finally, in some situations an investor can be required to consolidate the investee, presenting the financial position and results of the investee and the investor as a single entity.
The accounting standard setters recently issued new consolidation guidance, ASU 2015-02 (Consolidation – Amendments to the Consolidation Analysis). that could change whether your business consolidates another legal entity or not. This guidance, which is effective for calendar year end filers in 2016, may impact your company’s accounting for current and new investments. Companies should carefully evaluate potential changes and communicate those changes clearly to all stakeholders.
The determination of how to apply the guidance, and operationalize financial reporting preparation, requires careful analysis and planning.
- Pre-Deal: Understand the financial reporting impact resulting from an investment in another entity, including the impact on pro forma financial reporting metrics
- Implications: Consider significant business and operational implications of accounting conclusions, including how a current or potential investment will impact balance sheet and income statement line items, key ratios, financial statement metrics, and debt covenants
- Integration: Plan for integration requirements of newly consolidated investments, including potential updates to systems, processes, and controls
- Communication: Prepare communications to stakeholders outlining the impact of the investment on your business and financial results