Consolidated financial statements definition
/What are Consolidated Financial Statements?
Consolidated financial statements are the financial statements of a group of entities that are presented as being those of a single economic entity. These statements are useful for reviewing the financial position and results of an entire group of commonly-owned businesses. Otherwise, reviewing the results of individual businesses within the group does not give an indication of the financial health of the group as a whole. The key entities used in the construction of consolidated statements are:
A group is a parent entity and all of its subsidiaries
A subsidiary is an entity that is controlled by a parent company
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.
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The Decision to Consolidate
A parent company may have investments in many other entities, not all of which will be included in its consolidated statements. The main decision point when deciding whether to include a subsidiary’s financial statements is whether the parent has more than a 50% ownership interest in the subsidiary. If so, then its results are included in the consolidated statements. Also, if the parent company has decision-making influence over another business, despite owning a smaller share of the business, then it may also choose to consolidate. When a parent has no decision-making influence and owns less than a 50% interest in another business, then it will not consolidate; instead, it will use either the cost method or the equity method to record its ownership interest.
Intercompany Transactions
Consolidated 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.
Best Practices for Consolidated Financial Statements
To reduce the time requirements and errors associated with the production of consolidated financial statements, put all subsidiaries on the same centralized accounting system. Once this system is installed, flag all inter-company transactions within it, so that the system can automatically remove them when creating consolidated financial statements. Another best practice is to mandate the use of a consistently-applied set of accounting policies and procedures across all reporting entities, so that accounting transactions are dealt with in a consistent manner in all locations.
Example of Consolidated Financial Statements
ABC International has $5,000,000 of revenues and $3,000,000 of assets appearing in its own financial statements. However, ABC also controls five subsidiaries, which in turn have revenues of $50,000,000 and assets of $82,000,000. Clearly, it would be extremely misleading to show the financial statements of just the parent company, when its consolidated results reveal that it is really a $55 million company that controls $85 million of assets.