Consolidated Financial Statements
In simple terms, consolidation means combining separate parts into a single, more complete whole. In accounting, financial consolidation refers to the process of bringing together the financial information of multiple entities into one set of accounts. More specifically, it involves combining the assets, liabilities, income and expenses of two or more entities into a single consolidated entity. This is done through consolidated financial statements, where the results of all subsidiaries are reported under the parent company. Although subsidiaries are often separate legal entities and prepare their own individual financial statements, they are still included in the group’s consolidated accounts. In some cases, consolidation may apply to only part of a wider group - for example, where a parent produces consolidated financial statements for a particular subsidiary and the entities it controls.
Their importance to businesses
Consolidated financial statements give a high-level overview of the company’s financial performance. This is essential information for management teams, shareholders, investors, lenders and financial journalists. Auditors also use these statements to ensure the organisation is complying with legislation and regulations.
In a wider sense, accurate and timely consolidated financial reporting is about much more than the consolidated financial statements needed for compliance. Consolidated data on a range of KPIs plays a crucial role in ensuring important business decisions are based on evidence rather than gut feel or guesswork. It gives leadership teams a detailed view of, for example, the best and worst-performing business units or products, and can help them to identify risks and opportunities.
Consolidation reporting requirements
Consolidated financial statements are prepared by the parent company but include the records of its subsidiaries. The specific accounting rules for consolidation are based on the type of business and the amount of ownership they have over other firms. Typically, if a parent company has more than 50% ownership of a subsidiary, it must be included in consolidated financial statements.
What is included in a consolidated financial statement?
Consolidated financial statements include reports of all the financial activity and positioning of a group of commonly-owned businesses. Typically, this includes statements of: income, financial position, cash flow and funds.
Typically, a consolidated financial statement would include:
- Consolidated statement of income: showing income and expenditure
- Consolidated statement of financial position: showing assets, funds, and liabilities
- Consolidated statement of cash flows: from operating and investing activities
- Consolidated statement of changes in funds.
Cost and Equity Methods
Financial statements for the subsidiary are prepared in the same way as for the parent company and included in the consolidated accounts. There can be some exceptions to this. For example, when:
- The parent company does not have a controlling stake in the subsidiary
- The subsidiary is privately held.
If you’re unsure about the compliance and reporting requirements for your group or for specific subsidiaries, you should seek professional advice.
If a company has ownership in subsidiaries but chooses to exclude them from its consolidated financial statements, then it will usually account for its ownership of the subsidiary using the cost or equity method.
Read more about: ‘How to consolidate subsidiary accounts’
Can companies choose between consolidated and unconsolidated financial statements?
Reporting requirements vary between public and privately held companies and across different international jurisdictions. However, in most circumstances, private companies can make the decision to produce unconsolidated or consolidated financial statements on an annual basis.
Public companies normally make this decision on a longer-term basis, as changing from filing consolidated to unconsolidated financial statements may raise concerns with investors or cause complications with auditors. They may also need to file a change request. In some circumstances, such as a spinoff or new acquisition, the parent company may call for a change in consolidated statements.
What are the benefits of consolidated financial statements?
The main purpose of consolidated financial statements is to portray an accurate picture of the group’s financial position, including assets, expenses, profits and equity. Some of the benefits of this are:
- Potential investors can judge the financial health of the group and its subsidiaries
- It reduces the burden of preparing separate financial statements for all subsidiaries
- Inter-company transactions can be properly accounted for.
Financial consolidation software helps you create consolidated financial management reports. This data is essential to make informed business decisions and can help in producing consolidated financial statements.
