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Consolidated Financial Statements: Process and Tools

So if a subsidiary has $100,000 in profit and the parent owns 30% of the subsidiary, the parent company would increase the value of the investment asset by $30,000 and record the $30,000 in revenue as an increase to retained earnings. Consolidated financial statements are financial statements for a group of separate legal entities that are controlled by one company (the parent company). The consolidated financial statements report the financial results of the entire group’s transactions with people and companies outside of the group. Consolidated purchase discounts returns and allowances statements require considerable effort to construct, since they must exclude the impact of any transactions between the entities being reported on. Thus, if there is a sale of goods between the subsidiaries of a parent company, this intercompany sale must be eliminated from the consolidated financial statements. Another common intercompany elimination is when the parent company pays interest income to the subsidiaries whose cash it is using to make investments; this interest income must be eliminated from the consolidated financial statements.

In fact, for typical entities that are controlled through voting rights, possessing the majority of these rights is sufficient for a parent to ascertain that it controls the investee. A Consolidated Balance Sheet is a financial statement that provides a snapshot of a company’s assets, liabilities, and equity at a specific time. Consolidated financial statements deliver a genuine and fair idea of a company’s economic health across all divisions and subsidiaries. It is usually needed when an entity owns more than 50% of the outstanding common voting stock of another company.

Two large investors hold more than 5% of the voting rights each, with the remaining shares dispersed among unknown individual shareholders. You can also compare the individual member companies with the consolidated statement as shown below. As subsidiaries are legally separate from their parents, the creditors and stockholders of a subsidiary generally have no claim on the parent, and the stockholders of the subsidiary do not share in the profits of the parent.

Thus, consolidated financial statements are the combined financials for a parent company and its subsidiaries. It is also possible to have consolidated financial statements for a portion of a group of companies, such as for a subsidiary and those other entities owned by the subsidiary. To consolidate (consolidation) is to combine assets, liabilities, and other financial items of two or more entities into one.

Purpose of Consolidated Financial Statement

A parent entity, in presenting consolidated financial statements, should allocate the profit or loss and total comprehensive income between the owners of the parent and the non-controlling interests. Non-controlling interests can maintain a negative balance due to cumulative losses attributed to them (IFRS 10.B94), even in the absence of an obligation to invest further to cover these losses (IFRS 10.BCZ160-BCZ167). The allocation of profit or loss and total comprehensive income should solely rely on existing ownership interests, without considering the potential execution or conversion of potential voting rights and other derivatives (IFRS 10.B89-B90). Consolidation procedures are typically executed via specialised software wherein subsidiaries input their data for consolidation. As per IFRS 10.B93, the period between the financial statement dates of the subsidiary and the group should not exceed three months. Consequently, if a subsidiary’s reporting date differs from that of the parent company, it needs to provide additional information to ensure that this time gap does not influence the consolidated financial statements.

Structured entities often engage in restricted activities, have a clear and specific objective, and require subordinate financial support (IFRS 12.B21-B22). In cases where multiple parties have unilateral decision-making rights over different activities, it may be possible that each party controls only certain assets or a ‘ring-fenced’ segment of a larger entity. That portion of an investee should be consolidated as if it were a separate entity or a ‘silo’. If the parent company does not buy 100% of shares of the subsidiary company, there is a proportion of the net assets owned by the external company. This proportion that is related to outside investors is called the non-controlling interest (NCI).

Enable Financial Consolidation

The consolidation was friendly in nature and lessened overall competition in the pharmacy marketplace. A CPA with more than 10 years of varied public and private accounting experience, Ben has led many complex financial projects to successful outcomes. From there, you’ll copy and paste all of the data from the individual subsidiaries into each of those tabs. Once you’ve entered all of the data, double-check that it is correct, as even one wrong number could lead to hours of revising all other impacted calculations. Easily aggregate transactions and activities across your organization with SoftLedger. Overcome complexity by seamlessly consolidating your financials across real estate investments and development projects.

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For simplicity, we will also assume that the value of NCI remained constant after the acquisition date (usually, NCI changes due to dividend payments, profit generated by TC, etc.). When an investor holds decision-making rights but perceives itself as an agent, it should evaluate whether it has significant influence over the investee. Generally, a franchisor does not have power over the franchisee, as the franchisor’s rights aim to protect the franchise brand rather than direct activities significantly impacting the franchisee’s returns. If, after considering all available evidence, it is still unclear whether the investor has power over the investee, the investor should not consolidate the investee (IFRS 12.B46, BC110).

IFRS 3 covers the accounting for business combinations (i.e., gaining control of one or more businesses). Consequently, a protective right can transition to a power-conferring right upon becoming exercisable. This situation commonly arises when evaluating control over entities encountering financial difficulties and entering bankruptcy proceedings. In such cases, creditors often acquire the right to direct the entity’s relevant activities for their benefit (i.e., debt repayment), which could lead to the conclusion that control over the investee has transferred to them. Potential voting rights, which could stem from convertible instruments, options, or other mechanisms, grant the holder the right to obtain voting rights of an investee.

Berkshire Hathaway is a holding company with ownership interests in many different companies. Berkshire Hathaway uses a hybrid consolidated financial statements approach which can be seen from its financials. In its consolidated financial statements it breaks out its businesses by Insurance and Other, and then Railroad, Utilities, and Energy. Its ownership stake in publicly traded company Kraft Heinz (KHC) is accounted for through the equity method. If the subsidiaries deal with multiple foreign currencies, you’ll have to consolidate them manually before creating a consolidated financial statement.

Intercompany Transactions

IFRS 10 provides a comprehensive definition of control, ensuring that no entity controlled by the reporting entity is omitted from its consolidated financial statements. This is particularly crucial when an entity’s operations are not directed through voting rights. The criteria for determining control, as stated above, are elaborated on in the sections that follow.

But they can also be prepared for 6 months or any period as per the company’s requirement. It includes the financial results of all company subsidiaries, which are combined and presented as a single entity. You can view the consolidated balance sheet, profit & loss a/c, stock summary, ratio analysis, trial balance, cash/funds flow and much more. Goodwill is treated as an intangible asset in the consolidated statement of financial position. It arises in cases, where the cost of purchase of shares is not equal to their par value.

It is also known as an income statement, profit and loss statement, or statement of operations. However, if the parent company only owns, say, 25% of the company, you can use the equity method of accounting. This means that the parent company records the investment in the subsidiary on the balance sheet as an asset that is equivalent to the initial investment. You can think of it like a merger that combines all the subsidiaries with the parent company to make one larger entity that issues a single set of financial statements.