A consolidated financial statement gives investors a clear view of a corporation's global activities. A consolidated financial statement typically combines a company's operating activities with data from its subsidiaries. A consolidated financial statement helps an investor, a regulator or a corporation's top management evaluate the true financial standing of the corporation. A consolidated financial statement also may indicate an entity's financial position or cash flows during a period. Meaning of 'Consolidated Financial Statements:
Let's assume Company XYZ is a holding company that owns four other companies: Company A, Company B, Company C, and Company D. Each of the four companies pays royalties and other fees to Company XYZ. At the end of the year, Company XYZ's income statement reflects a large number of royalties and fees with very few expenses -- because they are r
...ecorded on the subsidiary income statements. An investor looking solely at Company XYZ's holding company financial statements could easily get a misleading view of the entity's performance.
However, if Company XYZ consolidates its financial statements -- "adding" the income statements, balance sheets, and cash flow statements of XYZ and the four subsidiaries together -- the results give a more complete picture of the whole Company XYZ enterprise. In Figure 1 below, Company XYZ's assets are only Rs.1 million, but the consolidated number shows that the entity as whole control Rs.213 million in assets. In the real world, generally accepted accounting principles require companies to eliminate intercompany transactions from their consolidated statements. This means they must exclude movements of cash, revenue, assets, or liabilities from one entity to another in order to avoid double counting them. Some example
include interest one subsidiary earns from a loan made to another subsidiary, "management fees" that a subsidiary pays the parent company, and sales and purchases among subsidiaries.
What is Financial Statement Consolidation? Financial statement consolidation is an accounting procedure that allows a corporation to combine its financial data with information from subsidiaries. A consolidation accountant combines all balances based on a percentage of ownership. Let's say Company A owns 100 percent of Company B. Company A has sales revenues of Rs.100 million and Rs.50 million in expenses during the month of May. Company B has Rs.20 million sales revenues and Rs.10 million in expenses. A consolidated financial statement for Company A will show Rs.120 million total sales and Rs.60 million total expenses.
A consolidated financial statement allows top management to gauge a corporation's true financial standing, profit levels, and cash flow activities. A consolidated financial statement also may provide an investor or a regulator with useful information to understand the scope of a corporation's activities. As an illustration, a regulator may review our sample company's (Company A) consolidated operations and may note that the company operates in 23 countries and five continents.
Purpose: Consolidated financial statements provide a comprehensive overview of a company's operations. Without them, investors would not have an idea of how well an enterprise as a whole is doing. Generally accepted accounting principles dictate when and how statements should be consolidated, and whether certain entities need to be consolidated. Companies that only own a minority interest in an entity usually do not need to consolidate them on their statements. For example, if Company XYZ owned only 5% of Company
A, it would not have to consolidate Company A's financial statements with its own. Companies commonly break out their consolidated statements by division or subsidiary so investors can see the relative performance of each, but in many cases, this is not required, especially if the company owns 100% of the division or subsidiary.
Consolidated financial statements are financial statements that factor the holding company's subsidiaries into its aggregated accounting figure. It is a representation of how the holding company is doing as a group. The consolidated accounts should provide a true and fair view of the financial and operating conditions of the group. Doing so typically requires a complex set of eliminating and consolidating entries to work back from individual financial statements to a group financial statement that is an accurate representation of operations.
The guiding principle of consolidated financial statements is that of the 'single entity' principle. The aim of the consolidated financial statement is to show the performance of the group as if it were a single entity. This means that all intra-group transactions (sales from one group company to another group company, for example) and intra-group balances (intercompany loans, for example) need to be eliminated as otherwise the consolidated financial statements would double count these balances.
Technical Terms: Associate company An associate company (or associate) in accounting and business valuation is a company in which another company owns a significant portion of voting shares, usually 20–50%. In this case, an owner does not consolidate the associate's financial statements. Ownership of over 50% creates a subsidiary, with its financial statements being consolidated into the parent's books. Associate value is reported
in the balance sheet as an asset, the investor's proportional share of the associate's income is reported in the income statement, and dividends from the ownership decrease the value on the balance sheet. In Europe, investments into associate companies are called fixed financial assets. Associate value in the enterprise value equation is the reciprocate of minority interest. Consolidation (business)
Consolidation or amalgamation is the act of merging many things into one. In business, it often refers to the mergers and acquisitions of many smaller companies into much larger ones. In the context of financial accounting, consolidation refers to the aggregation of financial statements of a group company as consolidated financial statements. The taxation term of consolidation refers to the treatment of a group of companies and other entities as one entity for tax purposes. Under the Halsbury's Laws of England, 'amalgamation' is defined as "a blending together of two or more undertakings into one undertaking, the shareholders of each blending company, becoming, substantially, the shareholders of the blended undertakings. There may be amalgamations, either by transfer of two or more undertakings to a new company or to the transfer of one or more companies to an existing company". Thus, the two concepts are, substantially, the same. However, the term amalgamation is more common when the organizations being merged are private schools or regiments. Minority interest
Minority interest (also known as Non-controlling interest) in business is an accounting concept that refers to the portion of a subsidiary corporation's stock that is not owned by the parent corporation. The magnitude of the minority interest in the subsidiary company is generally less than 50% of outstanding
shares, otherwise the corporation would generally cease to be a subsidiary of the parent.[1] It is, however, possible (e.g. through special voting rights) that a controlling interest requiring consolidation be achieved without exceeding 50% ownership depending on the accounting standards being employed. Minority interest belongs to other investors and is reported on the consolidated balance sheet of the owning company to reflect the claim on assets belonging to other, non-controlling shareholders.
Also, minority interest is reported on the consolidated income statement as a share of profit belonging to minority shareholders. The reporting of 'minority interest' is a consequence of the requirement by accounting standards to 'fully' consolidate partly owned subsidiaries. Full consolidation, as opposed to partial consolidation, results in financial statements that are constructed as if the parent corporation fully owns these partly owned subsidiaries; except for two line items that do reflect partial ownership of subsidiaries: net income to common shareholders and common equity.
The two minority interest line items are the net difference between what would have been the common equity and net income to common if all subsidiaries were fully owned, versus the actual ownership of the group. All the other line items in the financial statements assume a fictitious 100% ownership. Some investors have expressed concern that the minority interest line items cause significant uncertainty for the assessment of value, leverage, and liquidity.[2] A key concern of investors is that they cannot be sure what part of the reported cash position is owned by a 100% subsidiary and what part is owned by a 51% subsidiary.
Minority interest is an integral part of the enterprise value of a
company. The converse concept is an associate company. Under IFRS the minority interest (non-controlling interest) is reported in the Equity section of the consolidated balance sheet. Under generally accepted accounting principles, minority interest can be reported in the liabilities section, the equity section, or the mezzanine section of the balance sheet. The Mezzanine section is located between liabilities and equity. Significantly alter the way a parent company accounts for NCI in a subsidiary. It is no longer acceptable to report minority interest in the Mezzanine section of the balance sheet.
Importance (Advantages): Why Is it Important to Consolidate Financial Statements? Some companies may need to consolidate the financial statements of the various entities they own. Depending on the amount of ownership interest that a parent company has in a subsidiary company, accounting rules will require that the parent company report its own financial results and its subsidiaries in a single set of financial statements. Without such consolidated financial statements, shareholders of a parent company may not have the full view of the business operations and financial conditions of subsidiary companies. Subsidiary companies may also maintain their separate financial records for their minority shareholders
Companies consolidate financial statements as a result of their controlling various subsidiary companies. Companies obtain controlling interests in other companies by acquisitions and purchases. The acquired or purchased companies may maintain their separate legal entity status afterward, if they are not merged into the acquiring companies. But such a business combination often creates the need for a parent company to add financial statements of subsidiaries to its own original financial statements to better reflect the new business reality. Accounting Requirements
style="text-align: justify;">Companies consolidate financial statements to meet both business needs and accounting requirements. Accounting rules require that a parent company holding more than half of the ownership interest in a subsidiary company report the financial results of the subsidiary company on its own financial statements. Consolidated financial statements provide a comprehensive overview of all the business operations that a parent company is involved in and has control over. A parent company may break out its consolidated financial statements by subsidiaries, which nonetheless is not required if the parent owns 100 percent of a subsidiary. Consolidated Statements
Consolidated financial statements combine the assets, liabilities, revenues, and expenses of a parent company with those of its subsidiaries. While a parent company's assets reflect its investments in subsidiary companies, plus any other assets that the parent company may hold, the financial statements of the parent company alone do not show assets that subsidiary companies own by means of debt financing besides using parent company investments. Therefore, without consolidating financial results with those of subsidiaries, a parent company may understate its total assets and thus operations.
Companies do not consolidate their own financial statements with those of other companies in which they hold only a minority interest, namely under 50 percent. The issue of minority interests may also relate to a subsidiary that a parent company doesn't own outright, with other investors holding the balance of the minority interest. The parent's consolidated financial statements cannot serve the needs of those minority investors, and thus a subsidiary may also report its financial statements separately for the benefit of its minority shareholders. The Advantages of Consolidating Financial Statements
justify;">Financial statements, including the balance sheet, the income statement, and the cash flow statement, are primary financial tools for every business. They provide vital information in easy-to-understand ways and enable analysts to quickly form financial ratios to compare different numbers. However, for some businesses, financial statements are not easy to create. Large corporations tend to be segmented with several different divisions that all have different financial operations. Consolidated financial statements combine all these divisions into a single report.
The basic advantage when consolidating financial statements is the broad picture it gives. Investors do not want to go through several different financial statements to add up information and find out how the corporation is doing overall. The consolidated statements provided by the parent company accomplish the task automatically and make an excellent reference point for shareholders, leaders and anyone interested in how all the different parts of the business are functioning as a whole. Balance
Consolidating financial statements also lets a corporation effectively balance its appearance to outside parties. For example, during one period a parent company may lose revenue and perform poorly, but the subsidiaries may perform very well and increase revenues. The consolidated statement will balance the poor parent's performance with the positive subsidiary performance, allowing the company to show that through its diversification it remained profitable. Exclusions
According to consolidated financial statement guidelines, a corporation can also exclude certain divisions from the statements. This is also an advantage because it allows investors to see -- and companies to show -- that some financial aspects are not long-term. For example, subsidiaries are exempt if the parent company's ownership of them is
temporary or if the control of the company does not actually rest with the majority owner, which can happen through bankruptcy. Necessity
Consolidated financial statements are required by most governments as an accurate representation of a parent company's financial activity. In general, tax laws require that a single accounting entity be represented out of the net resources and operating results of all the divisions that a company owns. As a result, many companies have become used to producing consolidated statements for governments, investors, and internal analysis.
Many companies acquire other businesses to complement their current operation. The acquiring company takes on the role of parent company and oversees the actions of the new business. The new business becomes a subsidiary and reports its financial results to the parent company. The parent company combines the financial results with its own and creates consolidated financial statements.
One benefit of consolidated financial statements considers the fact that a complete overview of the parent company and all of its subsidiaries appears in one set of reports. These financial statements provide a financial overview of all the companies owned by the parent. A financial statement user determines the financial health of the entire organization by reviewing the consolidated financial statements. Less Paperwork
Another benefit of consolidated financial statements is the reduced amount of paperwork created for the statements. When a parent company owns multiple subsidiaries, a set of financial statements exists for each individual company. Each set of financial statements includes four separate reports. If a parent company owns nine subsidiaries, the complete set of individual financial statements includes 40 reports. If the parent company consolidates
the financial statements, the set of financial statements only includes four reports.
Consolidated financial statements also provide a simplified view of the organization's results. When one subsidiary sells products to another, it creates an intercompany transaction. One company records a sale, while another company records a purchase. The sale and purchase cancel each other out from the complete organization perspective. Consolidated financial statements eliminate these transactions and simplify the financial statements. Why Is Noncontrolling Interest Significant When Preparing Consolidated Financial Statements? Consolidating financial statements helps investors make sense of how a company -- or group of affiliated businesses -- marshals its operating resources to make money and expand. To accurately combine corporate accounting reports, financial managers must heed important concepts, which run the gamut from ownership stake and controlling equity to significant interest and elimination entries.
Consolidating financial data means taking the necessary steps to review a company's operations, identify the potential entities over which the business wields influence, categorize accounting data by the financial report, and combine the operating information of affiliated companies in accordance with accounting standards. These include generally accepted accounting principles, United States Securities and Exchange Commission directives, and international financial reporting standards. In financial consolidation, the idea is to look at a parent company's data and ensure that its affiliates' information effectively flows into the parent company's financial reports.
Equity is money a company pours into another business, thereby creating a parent-subsidiary situation. The parent business also may invest resources other than cash in the affiliated entity, transferring ownership of equipment and land to the subsidiary. An organization has controlling interest in another business if it owns
more than 50 percent of the stock of the investee, another word for affiliate or subsidiary. The company's equity interest becomes noncontrolling if it holds less than half the equity of an investee. In some cases, a company may have a noncontrolling interest in a subsidiary -- say, 10 percent ownership -- and still have significant clout in the way the subsidiary manages its businesses. For example, if the parent company is the most important shareholder, it may significantly shape the subsidiary's operating reality. Financial Statements
A financial statement is a document that catalogs a company's economic ups and downs, singling out strategies the business relies on to make money and stay financially afloat in the long term. There are four types of accounting reports, each of which opens a particular window into an organization's economic life. A balance sheet sheds light on the company's solvency, whereas a statement of profit and loss covers corporate profitability. A statement of cash flows deals with liquidity trends, and an equity statement puts the company's ownership structure into perspective.
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