Consolidations/ joint venture formation accounting

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 elements to consider.

Reporting entities may make investments in target companies for a variety of reasons, ranging from capital appreciation to strategic business alliances.  The investor's accounting for these transactions will be driven by the legal form, significance, and economic features of its investment.  In some cases, even when no investment will be made in legal form, a reporting entity's involvement through a contractual relationship (e.g., a management services agreement, supply contract, or purchasing contract) will require assessment under the rules governing consolidation.

  All forms of economic involvement with target companies / third parties should be carefully evaluated. The accounting for such transactions may range from recording the investment at initial cost and subsequently testing for impairment, to full consolidation of the investees assets, liabilities and operations, with various different models "in between".  Reporting entities should engage in discussions regarding accounting treatment early in the process of making an investment or becoming strategically involved with another entity in order to understand, and be able to accurately communicate, the expected impact of the new relationship on its key ratios and covenant

The accounting rules governing investments in equity or debt, and consolidation in general, are complex and may require significant judgment. Our experience has been that early identification of these areas of complexity and open lines of communication between the parties negotiating the transaction and the parties responsible for the accounting treatment are instrumental in avoiding unexpected or adverse accounting implications.

Chad Kokenge, Partner

Impacts to companies:

  • In many cases, consolidation of an investee will have a pervasive impact on the balance sheet and income statement of an investor.
  • Investments that do not result in consolidation will impact various balance sheet and income statement line items, depending on the accounting model applied.
  • Reporting entities may be required to update their systems, processes, and controls, in anticipation of reporting requirements in the periods after an investment is made.
  • The effects these transactions have are not just accounting-related. Many have significant business and operational implications, and may require significant lead time to analyze and implement, especially for larger companies.

What companies should do:

  • Work closely with internal teams responsible for negotiating the investment in order to identify complexities and expected accounting impact early in the process.
  • Consider the impact of an investment on financial statement line items, key ratios, and debt covenants, if applicable.
  • Plan for the post-investment integration requirements, which may be extensive.
  • Prepare communications to stakeholders to outline the impact of the investment on your business and financial results.

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