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Meaning
Consolidated financial statements (or usually abbreviated as CFSs) are defined as the financial statements in which the company’s financial statements, as well as financial statements for all of its subsidiaries, divisions, or sub-organizations, are combined and presented as being those of a sole business entity.
What is the purpose of consolidated financial statements?
Consolidated financial statements play an integral part in the accounting process and help in reviewing the overall financial position of the entire group altogether. It is of utmost significance from the viewpoint of creditors and shareholders of the parent company. It is always presumed that consolidated statements represent the result of operations and the financial position in a much meaningful manner as compared to separate individual statements. It is also obligatory for a fair representation when one of the business entities in the group has a pecuniary interest in the other business entities.
Example
Coca-Cola is a company having its operations globally and thus operates with many subsidiaries. Its worldwide subsidiaries help it to support its global presence in numerous ways. Each of its subsidiaries helps in contributing towards its food retail chain goals with subsidiaries in the areas of packaging, beverages, products, and more.
How do Consolidated Financial Statements work?
Let’s consider an example; Company ABC is a holding company that owns three other companies: Company X, Company Y, and Company Z. Each of the three companies pays a certain amount of royalties and other fees to Company ABC.
At the end of the financial year, the income statement of Company ABC is reflecting a large amount of royalties and fees with hardly any expenses – mainly because of the fact that they are being recorded on the income statements of subsidiary companies. In this case, an investor who is looking solely at financial statements of the holding company (Company ABC) possibly will easily get a misleading interpretation of the performance of the business entity.
However, if Company ABC goes with consolidating its financial statements — “adding” the financial statements of the group ( that is holding companies and its subsidiaries all together) mainly involving income statements, balance sheets, and cash flow statements — the outcomes would give a more comprehensive representation of the whole Company ABC enterprise.
In Figure 1 below, the assets of Company ABC are only $2 million, but the consolidated number shows that the entity as a whole controls $422 million in assets.
Figure 1
| Company ABC | Company A | Company B | Company C | Consolidated | |
| Revenue | $20,000,000 | $200,000 | $10,000,000 | $100,000 | $30,300,000 |
| Assets | $2,000,000 | $10,000,000 | $400,000,000 | $10,000,000 | $422,000,000 |
Who should prepare consolidated financial statements?
When an investing company acquires less than 20 percent outstanding common stock of another company, then the fair value method is used by that company to show its investment while the company would use equity method if ownership interest in another company is in the range of 20-50%.
The investing company will be mandatorily required to prepare consolidated financial statements if ownership interest in another company is 50 percent or more. When a company is having more than 50 percent ownership interested, then that company enjoys the privilege of controlling the business and does take part in the company’s financial decisions. CFSs are generally prepared as per the Single economic entity concept which suggests that companies having an association with each other through the virtue of common control should operate as a single economic unit and represent their financial statements accordingly in the form of consolidated financial statements.
The accounting procedures that should be adopted for preparing the consolidated financial statements depend upon several factors. These factors are:
The extent of ownership: whether the subsidiary is wholly owned or not. Here, a wholly-owned subsidiary is one where the parent owns 100 percent of the subsidiary’s voting rights;
The amount of purchase consideration paid i.e. the amount transferred to subsidiary against the stock acquired. In other words, whether any goodwill arises or not;
The structure of the group: the number of subsidiaries and whether the subsidiary has further a sub-subsidiary or not;
How do you prepare a consolidated financial statement?
There are certain steps that must be followed for preparing a consolidated financial statement. These steps are as follows:
At AJSH & Co, we understand the importance of adhering to the statutory compliance regime, failing which, businesses could face serious ramifications that may impact their reputation and operations and of their stakeholders. In this regard, we do provide certain services to our clients in preparing financial statements. To know more about our services and offerings, you can write to us info@ajsh.in or you can visit our website: www.ajsh.in
