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Consolidated Financial Statements is the financial statements of the overall group which represents the sum total of its parents and all of its subsidiaries. It includes all three key financial statements – income statement, cash flow statement and balance sheet.
Meaning of Consolidated Financial Statement is very important for an investor to understand. A parent company when owns a major stake in another company, the latter is called subsidiary. Even if both have separate legal entities and both record their own financial statements, they need to prepare a consolidated financial statement to help the investors get a better understanding.
In this article, we will look at the meaning f Consolidated Financial Statement meaning in detail and will find out how to create a consolidated financial statement using the IAS and GAAP. In this article, you will learn –
- What is Consolidated Financial Statement?
- Preparing Consolidated Financial Statement under IAS 27
- Preparing Consolidated Financial Statement under US GAAP
- Consolidated Financial Statement Example
What is Consolidated Financial Statement?
From the name itself, we can guess that the financial statement we are talking about here is not of one company. Here we are looking at the financial statements of all the companies which are the subsidiaries of a parent company. And legally they have a separate entity.
Let’s take a consolidated financial statement example to understand this.
- MNC Company is an electric power supply company and its stocks trade on a stock exchange. Now, MNC Company has acquired PPC Company. Both of these companies have separate legal entities. Here, MNC Company is the parent company and PPC Company is the subsidiary.
- Both of these companies will issue their financial statements separately. But for aiding the investors and the shareholders, they would create a consolidated financial statement (containing the financial statements of both of these companies in a single statement). This consolidated statement will help the investors understand the big picture of the company.
- For example, all the expenses incurred for the operations of PPC Company is separate from MNC Company; but in the consolidated statement, all the expenses of both of these companies will be recorded. Similarly, the balance sheet of the consolidated statement will portray both of these companies’ positions in terms of assets, liabilities, and stocks.
In the next section, we will see how we can format a consolidated financial statement so that the investors understand the direction of a company and its subsidiary. We will look at both International Accounting Standards which is applicable worldwide except GAAP which is applicable in the USA.
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Preparing Consolidated Financial Statement under IAS 27
Circumstances when the parent company doesn’t need to present consolidated statements:
First, let’s talk about where it isn’t necessary for the parent company to prepare and present the consolidated statements –
- If the parent company is a fully or partially owned subsidiary, then the presentation of consolidated statements is not required. But that is subject to the fact that if the owners don’t question the parent company for not representing the consolidated statements.
- If the parent company’s stock or debt isn’t traded in any public market, for example, stock exchange, over-the-counter market etc.; then it’s not required for the parent company to present consolidated financial statements.
- If the parent company is on the brink of filing its financial statements with security commission for issuing any type of instruments in public market, then it would not be required for the parent company to present consolidated balance sheet.
- Lastly, if any parent of this parent company presents the consolidated statements according to the mandate of International Financial Reporting Standards (IFRS), then it would not be necessary for this parent to present any consolidated statements for public use.
Checklist for Preparation of Consolidated Financial Statements
Let’s have a look at the procedures of creating consolidated financial statement –
- The consolidated financial statement is created by adding financial statements of the parent and subsidiary companies line by line. The parent company needs to add assets, liabilities, stocks, expenses, and incomes.
- In the consolidated statement, there are a couple of things that wouldn’t take place. First, the parent company’s investment in the subsidiaries would not be included in the consolidated financial statement. Second, whatever portion of equity the parent company has in the subsidiary companies, would not get included in the consolidated balance sheet.
- If there are any intra group transactions, balances or incomes or expenses, they all would be removed from the consolidated financial statement.
- While identifying minority interests, there are couple things that should be taken care of. First, non-controlling interests for the subsidiaries in the profit and loss would be identified. And second, non-controlling interests of each subsidiary should be identified separately from the parent’s ownership in them. Non-controlling interests should be mentioned within the equity of the consolidated balance sheet, but it should be reported separately from the equity stockholders of the parent company.
- While preparing the consolidated statement, it should be taken into account that the date of reporting the financial statements of the parent company and of subsidiary companies is same. If the reporting period of the subsidiary companies is different than the parent company, then the necessary adjustments need to be made by the subsidiary company. The adjustments would be in terms of transactions. And it should also be kept into account that the difference of reporting period between the parent company and subsidiary companies should not be more than three months.
- While preparing the consolidated statement, a uniform accounting policy should be used in similar cases.
Preparing Consolidated Financial Statement under US GAAP
If you are in the USA or follow GAAP, here are the few things you should consider while preparing consolidation financial statement –
- If a company has a majority of voting power in another company (here it is more than 50%), then consolidation of financial statements can be done.
- According to GAAP, if your business holds 20% to 50% in equity; you need to report your financial statements under the equity method. The reasoning behind this that as a company when you have 20%-50% equity in the other company, you can exert your influence.
- According to GAAP, in consolidated statements, equity portions or retained earnings of subsidiary companies should be removed.
- If the subsidiary is not fully owned, then non-controlling interest should be used.
- While producing the consolidated statements, the balance sheets of subsidiary companies should be adjusted to the current fair market value of the assets.
- While preparing the consolidated income statement, if the revenue of the parent company is the expense of the subsidiary; it should be completely removed.
Consolidated Financial Statement Example
Here is the example of Consolidated Financial Statements of Colgate
Colgate Consolidated Statements of Income
source: Colgate SEC Filings
Consolidated Balance Sheet of Colgate
source: Colgate SEC Filings
Consolidated Cash Flow Statement of Colgate
source: Colgate SEC Filings
Usually, there are few limitations that we need to consider if we think from the point of view of the investors –
- First of all, all companies don’t publish consolidated financial statements. In the USA, it’s mandatory to publish consolidated financial statements quarterly as per the mandate of Securities and Exchange Commission. But if you look at a global company, not all publish consolidated statements. For investors, consolidated financial statements are crucial for making a concrete decision.
- Stand-alone financial statements are different than consolidated financial statements. So if a company is not showing its financial statements in a consolidated manner, it would be difficult for an investor to make a right decision. For example, Reliance group has 123 subsidiary companies and 10 associate companies. It’s impossible for an investor to go through each of the financial statement of each company and then make a decision about whether to invest in the company or not. A consolidated financial statement would make things much easier for the investors. In India, companies follow the Security Exchange Board of India (SEBI) Regulations. According to SEBI Regulations 2015, it’s not mandatory to publish consolidated statements. Thus, most of the companies do not publish consolidated statements.
- Usually, investors need to do ratio analysis to understand how a company is doing. But in the case of the consolidated balance sheet, the inventory ratios and receivables ratios don’t seem to matter much in consolidated statements.
Consolidated Financial Statement depicts what a group of companies is heading toward. It gives a clear picture to the existing and potential investors about the company and its future. But consolidated financial statement always doesn’t help, until you take a detailed approach. You need to check mentioned notes in the consolidated financial statement to investigate the transaction and understand why the entry has been recorded. This will help you understand about a company accurately.
This has been a guide to what is Consolidated Financial Statements. Here we discuss how to prepare consolidated financial statements under IAS and US GAAP and its limitations. You can also go through the following advanced accounting articles –