FAR Consolidations: Business Combinations Guide

Introduction to FAR Consolidations

Preparing for the Financial Accounting and Reporting (FAR) section of the CPA exam requires a deep understanding of complex financial reporting topics. Among the most challenging areas candidates face is the topic of far consolidations. This subject area tests your ability to combine the financial statements of two or more legally separate entities into a single set of consolidated financial statements. Candidates must understand how to present the financial position and results of operations for a parent company and its subsidiaries as if they were a single economic entity.

According to the AICPA CPA Exam Blueprints, the FAR section tests candidates on the preparation of consolidated financial statements, including the elimination of intercompany transactions and balances. This means you must be prepared to handle workpaper adjustments, elimination entries, and the consolidation of balance sheets, income statements, and statements of cash flows. Understanding these concepts is essential for passing the exam and is a core skill for anyone learning how to become a CPA.

To structure your study plan effectively, you should review the overall structure of the exam. You can learn more about the different exam parts by visiting CPA exam sections. Additionally, reviewing the official guidelines at CPA exam blueprints will help you identify the exact depth of knowledge required for consolidation tasks. Candidates often find that consolidations require a mix of conceptual understanding and detailed journal entry practice.

Place consolidations in the full section plan with the FAR CPA exam guide, then use this article for the topic-level rules and calculations.

The Acquisition Method and Business Combinations

Under US GAAP, business combinations are accounted for using the acquisition method. This method requires the acquiring entity to recognize the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at their acquisition-date fair values. Candidates must master the specific steps of this method to succeed on the FAR exam.

Under the acquisition method of accounting for business combinations tested in FAR, candidates must calculate goodwill or a bargain purchase gain arising from the transaction. Goodwill is recognized when the purchase price (plus the fair value of any noncontrolling interest and the fair value of any previously held equity interest) exceeds the net fair value of the identifiable assets acquired and liabilities assumed. Conversely, if the net fair value of the identifiable assets acquired exceeds the acquisition-date consideration, a bargain purchase gain is recognized in earnings on the acquisition date.

Another critical aspect of business combinations is the treatment of transaction costs. The CPA Exam Blueprints require candidates to identify the correct accounting treatment for acquisition-related costs, which are generally expensed as incurred under US GAAP. These costs include finder's fees, advisory, legal, accounting, valuation, and other professional or consulting fees. They are not capitalized as part of the cost of the acquisition. Direct registration and issuance costs of equity securities, however, are treated as a reduction of additional paid-in capital.

Accounting for Noncontrolling Interests (NCI)

When a parent company acquires less than 100 percent of a subsidiary, a noncontrolling interest (NCI) exists. This represents the portion of equity in a subsidiary not attributable, directly or indirectly, to the parent. Candidates taking the FAR section must demonstrate the ability to calculate and account for noncontrolling interests (NCI) both at the acquisition date and in subsequent periods.

At the acquisition date, the NCI must be measured at fair value. This fair value is added to the consideration transferred by the parent when calculating goodwill or a bargain purchase gain. In subsequent periods, the NCI balance must be adjusted to reflect its share of the subsidiary's income and dividends. Specifically, consolidated net income is allocated between the parent and the NCI based on their respective ownership percentages.

To master these calculations, candidates should practice comprehensive problems that track NCI over multiple years. You can test your understanding of these calculations using the resources at CPA practice questions. Regular practice ensures that you can quickly calculate NCI balances under exam time constraints.

Variable Interest Entities (VIEs)

Consolidation is not always based on holding a majority voting interest. In some cases, control is exercised through contractual or other financial arrangements. These entities are known as Variable Interest Entities (VIEs). The FAR exam blueprint requires candidates to evaluate whether an entity is a Variable Interest Entity (VIE) and determine if consolidation of the VIE is required.

To determine if an entity is a VIE, candidates must evaluate whether the entity's equity investment at risk is insufficient to permit the entity to finance its activities without additional subordinated financial support. Alternatively, an entity is a VIE if the equity holders as a group lack the characteristics of a controlling financial interest, such as the power to direct the activities that most significantly impact the entity's economic performance.

If an entity is identified as a VIE, the next step is to identify the primary beneficiary. The primary beneficiary is the party that has both the power to direct the activities of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The primary beneficiary must consolidate the VIE, regardless of the percentage of voting shares held.

Eliminating Intercompany Transactions and Balances

A fundamental rule of consolidation is that a consolidated entity cannot report transactions with itself. Therefore, all intercompany transactions and balances must be completely eliminated during the consolidation process. This includes intercompany receivables and payables, intercompany sales and purchases, and intercompany interest or dividends.

Candidates are expected to adjust consolidated financial statements for unrealized intercompany profits, such as those remaining in inventory or land at year-end. When one consolidated entity sells inventory to another at a markup, the profit is considered unrealized from the perspective of the consolidated group until the inventory is sold to an unrelated third party. If the inventory remains in the buyer's ending inventory at year-end, the unrealized profit must be eliminated from both ending inventory and cost of goods sold.

Similarly, if land is sold between consolidated entities at a gain, that gain is unrealized until the land is sold to an outside party. The consolidation entry must eliminate the unrealized gain and reduce the carrying value of the land back to its original historical cost. Failing to make these adjustments leads to overstated assets and net income on the consolidated financial statements.

Study Strategies and Exam Preparation

Mastering far consolidations requires a structured study approach and consistent practice. Candidates should focus on understanding the underlying journal entries for both the individual entities and the consolidation workpaper. Visualizing how the trial balances combine and how elimination entries impact the final consolidated columns is highly beneficial.

To optimize your study schedule, utilize the CPA study planner to allocate sufficient time to this complex topic. You should also take advantage of the free CPA practice test to assess your current knowledge level and identify areas that need improvement. Combining conceptual study with active recall is the most effective way to prepare.

If you find yourself struggling with specific consolidation adjustments, consider performing a weakness analysis to pinpoint your errors. Whether you struggle with calculating goodwill, allocating NCI, or eliminating intercompany inventory profits, targeted practice will help you build confidence. For more general preparation advice, review our comprehensive CPA study tips.

Frequently asked questions

Sources

• AICPA CPA Exam Blueprints (retrieved 2026-07-09)
• NASBA (retrieved 2026-07-09)