What Are Consolidated Financial Statements?

Consolidated financial statements are reports that combine the financial data of a parent company and its subsidiaries. This means they show the financial performance and position of the entire corporate group, rather than just the parent company.

These statements include:

• Consolidated Balance Sheet: Shows the group’s total assets, liabilities, and equity.

• Consolidated Income Statement: Displays the group’s combined revenue, expenses, and profits.

• Consolidated Cash Flow Statement: Reflects the group’s total cash inflows and outflows.

The purpose of consolidating is to give a complete view of the group’s financial status and to remove any transactions between the parent and its subsidiaries, avoiding double-counting.

Why Are Consolidated Financial Statements Important?

1. Unified Financial Picture: They provide a clear and complete picture of the financial health of the entire group, not just the parent company.

2. Compliance with Regulations: Many countries require companies to prepare these statements, especially if they’re publicly listed, to ensure transparency and consistency in financial reporting.

3. Investor and Stakeholder Insights: They help investors, analysts, and policymakers see the full scope of a company’s activities, making it easier to make informed decisions.

When Do You Prepare Consolidated Financial Statements?

Consolidation happens when a parent company controls one or more subsidiaries. A parent company is considered to have control if it owns more than 50% of a subsidiary’s voting shares or has the power to influence its financial and operating decisions.

How Are Consolidated Financial Statements Prepared?

The process involves several key steps to ensure everything is combined correctly:

1. Identify Subsidiaries: Determine which companies are subsidiaries that need to be included in the consolidation.

2. Align Accounting Policies: Make sure all entities use the same accounting principles to keep everything consistent.

3. Remove Intra-Group Transactions: Eliminate transactions between the parent and its subsidiaries, like sales or loans between them, to avoid double-counting.

4. Combine Financials: Add the financials of the parent and subsidiaries together, adjusting for things like non-controlling interests and goodwill.

What Standards Are Followed in Consolidation?

There are global standards that guide how consolidation should be done:

• IFRS 10 – Consolidated Financial Statements: This standard explains the rules for consolidation, including when a parent company must combine its financials with those of its subsidiaries.

• IAS 27 – Separate Financial Statements: This standard deals with how to account for investments in subsidiaries when a company also prepares separate financial statements.

These standards ensure that all companies follow the same rules when preparing consolidated financial statements.

Example of Consolidated Financial Statements

Let’s say ABC Corp is a parent company that owns 80% of a subsidiary called XYZ Ltd. When preparing consolidated financial statements, ABC Corp will combine its financial information with XYZ Ltd’s, eliminating any sales or transactions between the two.

The consolidated income statement would show combined revenues and expenses, while the consolidated balance sheet would show the total assets and liabilities of both companies as if they were one.

Key Takeaways

• Consolidated financial statements offer a full view of the financial status of a parent company and all its subsidiaries.

• They are required by accounting standards like IFRS and GAAP for companies that control other businesses.

• These statements are essential for giving a clear picture of a company group’s financial health and ensuring transparency for investors and regulators.