I understand the difference differently than Kricket explained it….
A consolidation is when one company owns over 50% of another company.
(Here we're referring to parent and sub)
A combination is when more than one company is over 50% owned by the same entity, is under common management, or cannot be consolidated due to bankruptcy or reorganization.
(Here we're referring to brother and sister companies, except for the bankruptcy/re-org situation which would be a parent/sub relationship that is being reported similarly to a brother/sister relationship)
Difference in reporting:
Intercompany transactions are eliminated in BOTH scenarios.
HOWEVER, notice these differences:
Consolidation (Parent/sub relationship):
Equity accounts of the Sub are eliminated, therefore consolidated equity = Parent's equity ONLY
Net Income of the Sub is eliminated, therefore consolidated net income = Parent's Net Income ONLY
Combination (brother/sister relationship):
Equity accounts of EACH of the combined companies are ADDED together.
Net income of EACH of the combined companies are ADDED together.
In general, I've noticed in the practice questions – if they are mentioning 3 businesses (i.e. A owns B and C), then they are often using the rules of combination.
But, if they are referring to only 2 businesses where one owns over 50% of the other, then they are referring to the rules of consolidation.
Hope that helps. Please let me know if anything above is incorrect!
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Study resources:
Becker
Wiley test bank
.