Consolidating business operations
When the amount of stock purchased is more than 50% of the outstanding common stock, the purchasing company has control over the acquired company.
Control in this context is defined as ability to direct policies and management.
To account for this type of investment, the purchasing company uses the equity method.
Regardless of the method of acquisition; direct costs, costs of issuing securities and indirect costs are treated as follows: Treatment to the acquiring company: When purchasing the net assets the acquiring company records in its books the receipt of the net assets and the disbursement of cash, the creation of a liability or the issuance of stock as a form of payment for the transfer.
Treatment to the acquired company: The acquired company records in its books the elimination of its net assets and the receipt of cash, receivables or investment in the acquiring company (if what was received from the transfer included common stock from the purchasing company).
When the amount of stock purchased is between 20% and 50% of the common stock outstanding, the purchasing company’s influence over the acquired company is often significant.
The deciding factor, however, is significant influence.Replica of an East Indiaman of the Dutch East India Company/United East India Company (VOC).