Consolidated financial statements are financial statements of a corporation with multiple divisions or subsidiaries. Companies are free to use the word “consolidated” in financial statement reports to refer to the reporting of the entire business as a whole.
On the other hand, the Financial Accounting Standards Board emphasizes that the consolidated reports of the financial statements are the reports of an entity constituted by a parent company and its subsidiaries.
Typically, to consolidate financial statements, an organization is required to total up and reconcile all its financial operations in order to obtain the consolidated reports, where overall performance is indicated in the balance sheet, income statement and cash flow statement. .
The decision to present the financial statements globally, including all divisions, is taken annually. This is mostly done due to taxes and other benefits they offer.
Consolidation with subsidiaries
The principle of presenting a consolidated financial statement with the different companies is essentially based on the proportion of ownership that the corporation has in each company.
Broadly speaking, if ownership in another organization catalogs the same as a subsidiary and grants the company a license to include it in a consolidated financial statement.
In certain cases, less than 50% ownership could be accepted if the corporation demonstrates that the subsidiary’s management is closely aligned with the corporation’s decision-making process.
What are consolidated financial statements for?
These serve to present the financial statements of a group of companies, which are shown as those of a single economic entity.
These statements are useful for reviewing the financial condition and results of a group of businesses together, providing a comprehensive view of the operations of a corporation as a whole.
Otherwise, if investors looked at the individual results of each group’s business, they would have no idea how well the financial health of the company as a whole is.
Companies often make the decision to make their financial statements consolidated each year so that they can include all of their companies.
This decision made annually is supported by the tax benefits that the corporation can obtain by presenting a consolidated statement of income instead of presenting it as not tied to a fiscal year.
As the corporation and its divisions form a single economic body, investors, government institutions and customers find consolidated financial statements very useful in assessing the overall condition of the entire corporate group.
Changes to the consolidated financial statements
Public companies generally choose to create between consolidated or unconsolidated financial statements over a longer period. If a public company wants to change its consolidated financial statements to unlimited, it will likely need to submit a change request.
Changing reports from consolidated to unconsolidated can cause alarm for investors or confusion for auditors, so presenting consolidated financial statements turns out to be a long-term financial accounting decision.
However, there are some situations where a change in corporate structure may require a change in consolidated financial statements, such as a spin-off or acquisition.
Characteristics of Consolidated financial statements
These inform the general result of the different joint reports of legally separate companies.
The outcome of these financial statements will remain the same as they will also be comprised of the balance sheet, income statement and cash flow statement.
Each separate legal entity has its own financial accounting processes and will therefore create its own financial statements.
Subsequently, the corporation will comprehensively total these statements to generate the final consolidated balance sheet, income statement, and statement of cash flow reports.
The main ideas used for the construction are:
– A group must consist of a parent company and all its subsidiaries.
– A subsidiary must be a company controlled by a parent company.
Therefore, these are the financial statements as a whole of a corporate enterprise and its subsidiaries.
Consolidation criteria
Companies often divide their consolidated statements into divisions or subsidiaries, so that investors can see performance related to each. However, in many cases this is not imperative, especially if the corporation owns 100% of the subsidiaries.
Companies that only have a minority interest in a company are not required to consolidate them in their financial statements. For example, if Company ABC owned only 6% of Company Z, it would not need to consolidate Company Z’s financial statements with its own.
It is also possible to have financial statements for only part of the group of companies, such as a subsidiary and other organizations belonging to that subsidiary.
Private organizations have very few requirements for reporting financial statements, but public companies must report in accordance with generally accepted accounting principles by the Financial Accounting Standards Board.
How are they calculated?
In general, the company and its divisions adopt these accounting frameworks to develop their individual as well as consolidated financial statements.
Organizations that prefer to manage consolidated financial statements need to allocate a lot of money in the accounting infrastructure, as a consequence of the accounting unifications that are indispensable to be able to present these final consolidated financial reports.
These require remarkable perseverance for their preparation. This is because it is necessary to eliminate the impact of any business transaction between the companies being reported.
There are certain fundamental rules that organizations using consolidated financial statements must comply with.
The principal requires that the parent or any of its subsidiaries may not transfer cash, sales, assets or liabilities between them to arbitrarily improve earnings or reduce taxes owed.
Under the accounting provisions being used, the standards that determine the proportion of assets required to include a subsidiary in the consolidated financial statements may be different.
basic procedure
When preparing a consolidated financial statement, this basic procedure should be followed. First remove all items that are considered an asset in one company and a liability in another, then add all items that were not eliminated.
Therefore, if there is a sale of products between the subsidiaries of a parent company, that intercompany sale must be eliminated from the consolidated financial statements.
If a negotiation is made between different companies of the group, the accounts receivable of one company will cancel the accounts payable of the other company.
Another typical cancellation among corporations is when the corporation pays interest to subsidiaries on money borrowed by them for use in investments. Interest income must be eliminated from the consolidated financial statements.
The share capital account in the subsidiary’s financial statement will cancel the “investment in subsidiaries” account. Instead, it will be treated as an asset in the corporation. Only the company’s corporate capital account will be included in the consolidated.
Examples of Consolidated financial statements
HSC Corp
Assume the international company HSC Corp has $4,000,000 in revenue and $2,000,000 in assets appearing on its own financial statements.
However, HSC also controls five subsidiaries, which in turn have revenues of $49,000,000 and assets of $80,000,000.
As you can see, it would be extremely funny to only present the parent company’s individual financial statements, when its consolidated results show that it is actually a company with revenues of $53 million, which controls $82 million in assets.
Berkshire Hathaway
It is a parent company willing to own a large number of different organizations. Make hybrid consolidated financial statements, which can be seen in your financial reports.
In the consolidated financial statements, it divides its businesses into Insurance, Railways, Public Services and Energy.
Coke
It is a global company with many subsidiaries. It has subsidiaries around the world, which help it in many ways to support its global presence.
Each of its subsidiaries contributes to its food retail sales objectives with subsidiaries in bottling, beverage, branding and more.
