Final answer:
Under U.S. GAAP, Company A and Company B's financial information should be consolidated when one has control over the other, typically indicated by owning more than 50% of voting shares. Control can also exist through other means such as board majority or special agreements that grant control. If significant influence exists without control, the equity method is used instead. Consolidation combines all financial aspects and requires the elimination of intercompany balances for accurate representation.
Step-by-step explanation:
Consolidation of Financial Statements in U.S. GAAP
According to U.S. GAAP, the financial information of Company A and Company B should be consolidated on one balance sheet when one company has control over the other. Control is usually evidenced by ownership of more than 50% of the voting shares of the other company. This means that when Company A owns more than half of the voting stock of Company B, it has the ability to direct the financial and operating policies of Company B enough to benefit from its activities. This level of control requires Company A to present its financial statements on a consolidated basis.
It is important to note that even if a company owns less than 50% of another company, it might still be required to consolidate if it has existing control through other means, such as through a majority of the board of directors or through special agreements that grant control. In cases where there is no clear majority ownership but there is a significant influence over financial and operating decisions (typically ownership of 20% to 50%), the equity method of accounting is used instead of consolidation.
Consolidation involves combining the assets, liabilities, equity, income, expenses, and cash flows of both companies into a single set of financial statements. This process requires the elimination of intercompany transactions and balances, which can be complex and require careful consideration. The consolidated balance sheet must provide a complete picture of the financial position of the combined entity.
To illustrate, consider a simplified balance sheet, or a T-account, which shows assets on one side and liabilities on the other. When Company A and Company B consolidate, their individual assets and liabilities will be aggregated in such a manner on the consolidated balance sheet, only excluding any intercompany balances that may skew an accurate representation of the financial position.