Teaching Consolidations Accounting: An Approach To Easing The Challenge

Abstract

Teaching and learning accounting for consolidations is a challenging endeavor. Students not only need to understand the conceptual underpinnings of the accounting requirements for consolidations, but also must master the complex accounting needed to prepare consolidated financial statements. To add to the challenge, the consolidation process is dependent on how the parent company accounts for the investment on its parent company ledgers. Parent company ledgers either use the cost method or some variation of the equity method to account for investments to be consolidated. The variety in those accounting approaches used by parent companies is comparable to the variety of approaches to teach consolidations that are presented in advanced accounting textbooks, as documented by Luehlfing (1995). Luehlfing outlines the parent company accounting methods that are presumed to be used to teach consolidation accounting in each of the existing U.S. advanced accounting texts, noting that authors promote one method over others. Luehlfing suggests that students should be provided with a comparison of the parent company entries under the cost method and each adaptation of the equity method so that they can obtain a better understanding of the differences in the consolidation worksheet elimination/reclassification entries. Rather than having students learn different consolidation worksheet entries as a result of different recording methods used by the parent for an investment requiring consolidation, an approach can be adopted so that students only need to learn one set of consolidation worksheet entries to develop consolidated financial statements. In addition, a method of analyzing the parent’s investment account can be used to not only help understand the conceptual issues associated with consolidation accounting, but also greatly facilitate the mechanics of preparing the consolidation worksheet entries.