How to Consolidate Financial Statements After a Merger
Mergers and acquisitions can be exciting for a business, with so many new possibilities and changes on the horizon. Organizations can increase their market share, gain new product or service lines and even eliminate competitors. However, there is a lot to consider from a financial perspective, especially when it comes to consolidating financial statements. If your organization is thinking about a merger, ensure that your company’s financial statements accurately reflect your new financial situation after the deal is done.
First, you’ll need to eliminate accounts that are no longer applicable after the merger. Sometimes, companies that merge do not need to keep subsidiary accounts open any longer for a variety of reasons. As a result, they can be eliminated from the consolidated financial statements. Record debits for the subsidiary’s account balances of common stock, retained earnings and paid-in capital. Record credits for subsidiary account investments to close out the accounts.
Any inter-company transactions between the companies involved in the merger can also be eliminated. For example, any advances, dividends and bonds on accounts receivable or accounts payable between the companies involved in the merger can be eliminated within the balance sheet.
After you’ve eliminated the accounts which are no longer required and removed inter-company transactions, examine the assets, liabilities, revenues and expenses for each of the companies involved in the merger. Here you essentially need to add up like items. The assets and liabilities of each company within the merger need to be recorded and consolidated on the balance sheets and income statements. Determine the value of the assets gained based on their market value on the date of the merger. Do the same for liabilities, revenues and expenses for the company and any remaining subsidiaries. Be sure to calculate the values as of the merger date, not before.
If there is a difference between the subsidiary’s book value subtracted from the investment in the subsidiary, this is recorded as goodwill. This is basically an intangible asset that quantifies the excess of the purchase price over the market value. If the amount remaining is positive, it’s recorded under goodwill. If it’s negative, then you’ll need to report a gain on the consolidated income statement.
Consolidating financial statements after a merger is no easy feat. It’s a specialized area of accounting and there are a number of ways of structuring the terms of a merger which affect how the assets and liabilities are measured. Don’t hesitate to seek out an accounting professional for guidance on how to consolidate your financial statements if you are not familiar with journal entries, balance sheets and income statements.