Consolidated reporting serves to condense complicated financial statements across multiple entities – into an accessible and insightful report. These reports are highly beneficial for management and shareholders, who use them to easily review the overall operations and performance of an organisation. They are created to offer an easier, more accessible way to get a true and fair view of a company's financial health across all of its divisions and subsidiaries.
Companies may choose to complete combined financial statements, along with consolidated statements – both offering different insights into a business’s performance. Combined reporting involves creating statements that list all of the financial activities of a group of connected companies within a single document. In this document, each entity remains separate, meaning that their individual financial status can be linked directly to their own performance. This is helpful for management when looking to analyse the performance of individual companies within a group.
Consolidated reporting, meanwhile, combines all information and presents it as belonging to one single entity – presenting the overall financial performance of a company, rather than delving into which subsidiaries are performing well.
The decision around whether a company plans to produce consolidated reports is made on an annual basis. Factors influencing this decision will change depending on whether the company is private or publicly traded. Private companies can base their decision on the possibility of tax advantages from filing a consolidated income statement for that tax year, whereas public companies are more strictly controlled by GAAP reporting requirements.
For public companies, the requirements for what needs to be included in consolidated reports rely heavily on the amount of ownership a parent company has in its subsidiaries. In general, if a parent company has 50% or more ownership in another company, it will be counted as a subsidiary and must be included in the consolidated reports. If the parent company has less than 50% ownership, they will have to consider how much influence they have over the subsidiary's decision making, in order to determine whether it should be included in the consolidated reports as well. When a subsidiary is not included in the report, it will usually use the cost or equity method of reporting instead.
In general, a group of companies is required to include consolidated reporting in their financial procedures. However, if the group is classified as small, they may be exempt. The threshold of being a small group includes having less than £10.2 million turnover, less than £5.1 million in total assets and no more than 50 employees. These criteria must be met for two consecutive financial years to qualify.