The Economic Unit Approach to Consolidated Financial Statements: Support from the Financial Economics Literature

A theoretical foundation is developed for consolidation through a review and synthesis of the financial economics literature on corporate control transactions which result in minority ownership interests in subsidiary companies. This area of literature provides strong support for the economic unit concept and little support for either of the other 2 alternatives presented in the FASB Discussion Memorandum, Consolidation Policy and Procedures. The literature generally supports the view that minority interests are stockholders with interests in the entire consolidated entity. This theoretical framework and the details of the research findings in financial economics also provide guidance for selecting among alternative practices within the concept of the economic unit method itself.