What are consolidated financial statements?
Financial statements that are presented as belonging to a single economic unit are known as consolidated financial statements.
Reviewing the financial situation and outcomes of a vast array of jointly owned firms is made possible by these disclosures. Otherwise, analyzing the performance of individual firms within the group does not provide a picture of the group's overall financial situation.
The following are the main entities that went into creating the consolidated statements:
· A group consists of a parent company and all of its subsidiaries.
· A subsidiary is a business that is under the supervision of its parent firm.
Consolidated financial statements, then, represent the parent company's and its subsidiaries combined financials.
Additionally, consolidated financial statements may exist for a subset of a group of businesses, such as a subsidiary and any other companies that the subsidiary owns.
Consolidated Financial Statements: An Overview
In
order to construct consolidated financial statements that display results in
the typical balance sheets, income statements, and cash flow statement
reporting, a company must generally integrate and combine all of its financial
accounting operations.
The choice to file consolidated financial statements with subsidiaries is typically taken annually and is frequently made due to tax or other benefits that may be present. The percentage of ownership the parent business holds in the subsidiary determines whether or not a consolidated financial statement with subsidiaries is required. The standard definition of a subsidiary is when a firm has 50% or more of another company's stock, which enables the parent company to include the subsidiary in a consolidated financial statement. In rare circumstances, less than 50% ownership may be permitted provided the parent business can demonstrate that the subsidiary's management is closely linked to the parent firm's decision-making procedures.
A Consolidated Financial Statement Contains What?
A consolidated financial statement typically consists of:
· Consolidated statement of income: displaying revenue and expenses
· Consolidated statement of financial position: displaying resources, cash, and obligations
· Statement of cash flows from operating and investing activities, combined
· Statement of Changes in Funds, Consolidated.
Liabilities And Assets
The
assets and liabilities of the parent and the subsidiary are put together and
then subject to consolidation adjustments when creating a consolidated
statement of financial position.
For
instance, it is necessary to eliminate the balances on any intra-group current
accounts because the exercise's goal is to prepare the consolidated statement
of financial position as if the group were a single entity and the group should
only be disclosing assets and liabilities that are external to the group.
It is also necessary to replace the parent's investment in the subsidiary with the goodwill that results from consolidation in addition to recognizing any fair value (FV) adjustments that will have occurred on the subsidiary's net assets at the date of purchase.
Equity
The
parent's only share capital and share premium will be included in the equity
part of the consolidated statement of financial status.
Share premium may be included as one of the equity's "Other Components." The correct balance of the retained earnings may also need to be ascertained. Included in this are the parent's retained earnings and the group's portion of the subsidiary's post-acquisition profits. The parent (in the group retained earnings) and non-controlling interest (NCI) will split the post-acquisition profits of the subsidiary in the same proportion that they split profits and losses.
Requirements for Reporting
A specific protocol must be followed when reporting a consolidated financial statement. When one entity controls one or more other entities, the requirements for the production and presentation of consolidated financial statements are outlined in IFRS 10 - Consolidated Financial Statements.
The rule IFRS 10:
· Demands that a parent company, which controls one or more subsidiaries, present consolidated financial accounts.
· Establishes control as the cornerstone of consolidation and defines the concept of control.
· Describes how to use the principle of control to determine if an investor controls an investee and, if so, whether the investee must be consolidated.
· Specifies the accounting standards to be followed in preparing consolidated financial statements.
· Establishes an exception to the consolidation of specific subsidiaries of an investment entity and defines an investment entity.
What Advantages Do Consolidated Financial Statements Offer?
Consolidated financial statements' primary goal is to accurately reflect the group's financial situation. Some advantages of this include:
· Potential investors can assess the group's and its subsidiaries financial standing.
· It lessens the workload associated with creating separate financial statements for each subsidiary.
·
Inter-company
transactions may be accurately recorded.