CONSOLIDATED BALANCE SHEETS 1. Reasons for consolidations.—From the Texts on "Business Organization" and "Corporation Fi nance" the reader has noticed the important reasons for mergers, consolidations and amalgamations. The principal advantages claimed for these types of or ganization are: reduction of managerial expenses; elimination or reduction of ruinous competition; ad vantageous terms of fmancing.
According to the advantages gained -the type of organization will be of one form or another.
The holding company, as already explained, was organized for the purpose of acquiring the stocks or other securities of affiliated companies, thus effecting a combination which would bear the test of legal scrutiny. The earlier pools and so called trusts did not accomplish this result to the satisfaction of big industrial enterprises.
tinder the newer form of consolidation each com pany not only retained its corporate entity, but also in the eyes of the law, remained a separate corpora tion. Nevertheless, the virtual consolidation of ownership was beyond question.' Such being the case, the results of this ownership can only be prop erly expressed in a statement of their accounts by consolidating the balance sheets of the "unit" com panies into one balance sheet. If that is not done the balance sheet of the holding company would not furnish the owners of the corporation with the in formation about its financial position to which they are justly entitled.
A consolidated balance sheet, therefore, is intended to reveal the financial position of the whole group of affiliated companies, considered as one enterprise.
2. Possible legal basis for consolidated statements. —In discussing the consolidated income account, at tention was called to the fact that there was no legal basis for the preparation of such a statement, unless it is the theory of a true valuation of assets. It is evident that changes in the conditions of the assets and liabilities of a holding company are due in part, at least; to the results of operations of the subsidiaries. The increase in the surplus accounts of subsidiaries, unreduced by dividends, enhances the value of the stock which the holding company owns.
While it is not a desirable practice to write up all assets simply because they have appreciated in value, yet it is a common practice to reflect in financial state ments all changes that have resulted directly from trading operations. On the theory, therefore, that the financial statements of a holding company should reflect such increases in value of its investments, we may eventually require by law, consolidated state ments which will show the exact condition of affairs for the group as a whole. Appreciations in value other than those resulting from trading or manufac turing operations would, of course, be omitted.
3. Investments carrying less than a stockholder, the investing corporation has an undi vided interest in the assets of the sub-companies to the extent of its holdings stock, and it is desirable to show the value of this investment at its actual worth instead of at its cost to the purchasing com pany. We have our choice of recording such invest ments, by either of the following methods.
4. Carrying at first method is that of carrying the investment at its original cost to the pur chaser. This plan has much to commend it from the conservative standpoint. This is especially true, if care is taken to write down the asset when its value has depreciated. The main objection to such a pro cedure, however, is that cost and value do not remain constant for any length of time.
5. Periodic brings us to the question of whether or not a periodic revaluation of the investment is possible. While this might be the most satisfactory solution under theoretical condi tions, it will not be found to work out satisfactorily in practice, because accuracy in the revaluation is im possible. There is no true basis on which a revalua tion can be made other than the actual physical in ventory or market price of the stock. The market price is dependent upon many outside factors, while the actual revaluation is sometimes physically impos Bible. At best, actual revaluation would simply be the opinion of men who might or might not be qual ified to make the revaluation.