What is the Consolidated Financial Statement?
Consolidated Financial Statements is the financial statements of the overall group which represents the sum total of its parents and all of its subsidiaries and includes all three key financial statements – income statement, cash flow statement and balance sheet.
A parent company, when it owns a significant stake in another company, the latter is called a subsidiary. Even if both have separate legal entities and both record their financial statements, they need to prepare a consolidated financial statement to help the investors get a better understanding.
Let’s take an 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 shareholdersThe Investors And The ShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares., 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 are separate from MNC Company. Still, 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.
Consolidated Financial Statement Example
Here is the example 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
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 are applicable worldwide except GAAP, which is applicable in the USA.
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 the parent companyParent CompanyA holding company is a company that owns the majority voting shares of another company (subsidiary company). This company also generally controls the management of that company, as well as directs the subsidiary's directions and policies. doesn’t need 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 a security commission for issuing any type of instruments in the public market, then it would not be required for the parent company to present a 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
- It 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 intragroup transactions, balances, or incomes or expenses, they all would be removed from the consolidated financial statement.
- While identifying minority interestsMinority InterestsMinority interest is the investors' stakeholding that is less than 50% of the existing shares or the voting rights in the company. The minority shareholders do not have control over the company through their voting rights, thereby having a meagre role in the corporate decision-making., there are a couple of things that should be taken care of. First, non-controlling interestsNon-controlling InterestsIt generally projects curves on the data sets. For example, to forecast population growth, forming a non-linear relationship between time and growth. for the subsidiaries in the profit and loss would be identified. And second, the 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 stockholdersStockholdersA stockholder is a person, company, or institution who owns one or more shares of a company. They are the company's owners, but their liability is limited to the value of their shares. of the parent company.
- While preparing the consolidated statement, it should take into account that the date of reporting the financial statements of the parent company and subsidiary companies is the 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 companySubsidiary CompanyA subsidiary company is controlled by another company, better known as a parent or holding company. The control is exerted through ownership of more than 50% of the voting stock of the subsidiary. Subsidiaries are either set up or acquired by the controlling company.. The adjustments would be in terms of transactions. And it should also be kept into account that the difference in the reporting periodReporting PeriodA reporting period is a month, quarter, or year during which an organization's financial statements are prepared for external use uniformly across a period of time in order for the general public and users to interpret and evaluate the financial statements. between the parent company and subsidiary companies should not be more than three months.
- While preparing the consolidated statement, a uniform accounting policyAccounting PolicyAccounting policies refer to the framework or procedure followed by the management for bookkeeping and preparation of the financial statements. It involves accounting methods and practices determined at the corporate level. is 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 earningsRetained EarningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company. 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 removed entirely.
Usually, there are few limitations that we need to consider if we think from the investor’s view –
- First of all, all companies don’t publish consolidated statements. In the USA, it’s mandatory to publish consolidated financial statements quarterly as per the mandate of the Securities and Exchange Commission. But if you look at a global company, not all publish consolidated statements. For investors, these 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 the right decision. For example, the Reliance group has 123 subsidiary companies and ten associate companies. It’s impossible for an investor to go through each of the financial statements of each company and then make a decision about whether to invest in the company or not. These statements would make things much easier for 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 a ratio analysisRatio AnalysisRatio analysis is the quantitative interpretation of the company's financial performance. It provides valuable information about the organization's profitability, solvency, operational efficiency and liquidity positions as represented by the financial statements. to understand how a company is doing. But in the case of the consolidated balance sheet, the inventory ratios and receivables turnover 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 of the existing and potential investors about the company and its future. But they always don’t help, until you take a detailed approach. You need to check the mentioned notes in the financial statementFinancial StatementFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels. to investigate the transaction and understand why the entry has been recorded. This will help you know a company accurately.
Consolidated Financial Statement Video
This has been a guide to what is Consolidated Financial Statements and its meaning. Here we discuss how to prepare consolidated financial statements under IAS and US GAAP along with examples and its limitations. You can also go through the following advanced accounting articles –