In order to prepare consolidated financial statements efficiently, there are three main steps that should be followed: combination of assets, offset, and removal of intragroup transactions.
Firstly, all financial data will be collected independently at the subsidiary level and then mapped out to the parent company. At this stage, any foreign exchange rates will need to be addressed and converted to the appropriate currency. Then, every balance sheet from across the parent company's subsidiaries must be combined so all of the financial information is sealed into one thorough document.
Offset occurs when you balance out the investment a parent company has in its subsidiaries. Any related equity that the parent company holds in its subsidiaries needs to be raised and removed from the final financial statement.
Finally, intercompany financial transactions between entities of the same economic group need to be removed. These will be tackled one by one and will need an elimination entry to be applied in order to zero out the activity.
Parent companies are required to prepare consolidated financial statements, although there are a few exceptions. Under the Companies Act, small groups don’t need to prepare consolidated financial statements. For this reason, the size of parent companies and groups needs to be determined correctly.
Consolidating financial statements is a complex process and therefore it’s not uncommon for issues to arise. Some of the obstacles that may be encountered during consolidation include: