What are consolidated financial statements? | AccountsIQ (2024)

In a broad sense, consolidation is defined as the action or process of combining things into a more effective or coherent whole. In accounting, the definition of financial consolidation can be summarised as:

“Combining the assets, liabilities and other financial items of two or more entities into one consolidated entity.”

That involves the consolidation of financial statements, where all subsidiaries report under the umbrella of the parent company.

Even if the subsidiaries are separate legal entities to the parent company, and therefore record their own financial statements, they are still included in the consolidated group financial statement. It is also possible to have consolidated financial statements for a portion of a group of companies. For example, some groups may produce consolidated financial statements for one of their subsidiaries and those other entities owned by that particular subsidiary.

Watch this 2-minute Financial Consolidation overview video from AccountsIQ's AIQ Academy.

Their importance to businesses

Consolidated financial statements give a high-level overview of the company’s financial performance. This is essential information for management teams, shareholders, investors, lenders and financial journalists. Auditors also use these statements to ensure the organisation is complying with legislation and regulations.

In a wider sense, accurate and timely consolidated financial reporting is about much more than the consolidated financial statements needed for compliance. Consolidated data on a range of KPIs plays a crucial role in ensuring important business decisions are based on evidence rather than gut feel or guesswork. It gives leadership teams a detailed view of, for example, the best and worst-performing business units or products, and can help them to identify risks and opportunities.

Consolidation reporting requirements

Consolidated financial statements are prepared by the parent company but include the records of its subsidairies.The specific accounting rules for consolidationare based around the type of business and amount of ownership they have over other firms. Typically, if a parent company has more than 50% ownership of a subsidiary, it must be included in consolidated financial statements.

What is included in a consolidated financial statement?

Consolidated financial statements include reports of all the financial activity and positioning of a group of commonly-owned businesses. Typically this includes statements of: income, financial position, cash flow and funds.

Typically, a consolidated financial statement would include:

  • Consolidated statement of income: showing income and expenditure
  • Consolidated statement of financial position: showing assets, funds, and liabilities
  • Consolidated statement of cash flows: from operating and investing activities
  • Consolidated statement of changes in funds.

Cost and Equity Methods

Financial statements for the subsidiary are prepared in the same way as for the parent company and included in the consolidated accounts. There can be some exceptions to this. For example when:

  • The parent company does not have a controlling stake in the subsidiary
  • The subsidiary is privately held.

If you’re unsure about the compliance and reporting requirements for your group or for specific subsidiaries, you should seek professional advice.

If a company has ownership in subsidiaries but chooses to exclude them from their consolidated financial statements, then they will usually account for their ownership of the subsidiary using the cost or equity method.

Read more about: ‘How to consolidate subsidiary accounts

Can companies choose between consolidated and unconsolidated financial statements?

Reporting requirements vary between public and privately held companies and across different international jurisdictions. However, in most circumstances, private companies can make the decision to produce unconsolidated or consolidated financial statements on an annual basis.

Public companies normally make this decision on a longer-term basis, as changing from filing consolidated to unconsolidated financial statements may raise concerns with investors or cause complications with auditors. They may also need to file a change request. In some circumstances, such as a spinoff or new acquisition, the parent company may call for a change in consolidated statements.

What are the benefits of consolidated financial statements?

The main purpose of consolidated financial statements is to portray an accurate picture of the group’s financial position, including assets, expenses, profits and equity. Some of the benefits of this are:

  • Potential investors can judge the financial health of the group and its subsidiaries
  • It reduces the burden of preparing separate financial statements for all subsidiaries
  • Inter-company transactions can be properly accounted for.

Financial consolidation software helps you create consolidated financial management reports. This data is essential to make informed business decisions and can help in producing consolidated financial statements.

What are consolidated financial statements? | AccountsIQ (2024)

FAQs

What are consolidated financial statements? | AccountsIQ? ›

Consolidated financial statements give a high-level overview of the company's financial performance. This is essential information for management teams, shareholders, investors, lenders and financial journalists.

What is meant by consolidated financial statements? ›

Definition of Consolidated Financial Statement:

A consolidated financial statement is a combination of a financial statement of a parent company and its branches. This statement is important to review the financial situation of the group of companies owned by one business.

What is the difference between consolidated and separate financial statements? ›

A consolidated balance sheet includes the financial information of all the entities under the control of a parent company, while a standalone balance sheet only includes the financial information of a single entity.

What is an example of consolidation of financial statements? ›

Example of Consolidation of financial statements

Suppose Company A owns 100% of Company B, which in turn owns 80% of Company C. Company A would need to consolidate the financial statements of all three companies to present a complete picture of the financial performance and position of the group.

What are consolidated financial statements typically? ›

Typically, these include a balance sheet, income statement, and cash flow statement. Consolidated financial statements are accounting documents that reflect data for all the entities within a business. Each unit within a business has its own independent accounting and financial statements.

How do you know if financial statements are consolidated? ›

Whereas a combined financial statement includes each subsidiary separately, a consolidated financial statement takes the financial results of the subsidiaries and includes them in a single financial statement for the parent company, as though the parent and subsidiaries are one entity.

Who is required to prepare consolidated financial statements? ›

Consolidated financial statements are presented by a parent (also known as holding enterprise) to provide financial information about the economic activities of its group.

Why do companies consolidate financial statements? ›

It reduces the burden of preparing separate financial statements for all subsidiaries. Inter-company transactions can be properly accounted for.

Which is better standalone or consolidated financial statements? ›

Conclusion. All in all, consolidated financial statements offer a panoramic view of a conglomerate's diversified operations and help investors gauge the overall health of the group. While, the standalone statements unravel the financial intricacies of individual companies.

What are the advantages and disadvantages of consolidated financial statements? ›

Advantages & Disadvantages
AdvantagesDisadvantages
It provides valuable information for making an investment, credit, and other financial decisions related to the group.The statements may distort the group's financial performance due to differences in accounting policies or practices between subsidiaries.
3 more rows
Jul 3, 2023

What is the best way to consolidate financial statements? ›

7 Steps: Preparing Consolidated Financial Statements
  1. Step 1: Understand the Purpose and Scope. ...
  2. Step 2: Identify Reporting Entities. ...
  3. Step 3: Gather Financial Information. ...
  4. Step 4: Eliminate Intra-Group Transactions. ...
  5. Step 5: Adjust for Unrealized Gains or Losses. ...
  6. Step 6: Combine Financial Statements.

Which companies require consolidated financial statements? ›

If a parent company has 50% or more ownership in another company, that other company is considered a subsidiary and should be included in the consolidated financial statement. This also applies if the parent company has less than 50% ownership but still has a controlling interest in that company.

How does financial consolidation work? ›

To consolidate (consolidation) is to combine assets, liabilities, and other financial items of two or more entities into one. In financial accounting, the term consolidate often refers to the consolidation of financial statements wherein all subsidiaries report under the umbrella of a parent company.

What is not included in consolidated financial statements? ›

As consolidated statements are based on the assumption that they represent the financial position and operating results of a single business enterprise, such statements should not include gain or loss on transactions among the companies in the group.

What goes in consolidated financial statements? ›

Consolidated financial statements centralize financial information of a parent company and its subsidiaries. They include three main components: balance sheets, income statements and cash flow statements.

What is the structure of consolidated financial statements? ›

The Consolidated Statement of Financial Position is presented in two sections, showing assets on one side and liabilities and equity on the other. Assets and liabilities are in turn shown in the consolidated financial statements on the basis of their classification as current or non-current.

What is the difference between a consolidated financial statement and a balance sheet? ›

A Balance Sheet is a document of the financial situation of a company, while a Consolidated Balance Sheet is a statement showing the financial status of more than one company in the same group taken together.

Why is it important to provide consolidated financial statements? ›

Consolidated financial statements provide important information by summarising: The total assets and liabilities under the control of the parent. The results arising from this control.

What does it mean for a balance sheet to be consolidated? ›

A consolidated balance sheet is a document that shows the entire financial situation of a parent company, along with all its subsidiaries within a single sheet, without separating the companies.

What is the difference between standalone and consolidated? ›

A standalone statement is typically simpler to prepare since it involves only one company's financial data while a consolidated statement is more complex & detailed. It requires elimination of duplications, inclusion of inter-company transactions and presents a unified view of the group's financials.

Top Articles
Latest Posts
Recommended Articles
Article information

Author: Duncan Muller

Last Updated:

Views: 6287

Rating: 4.9 / 5 (59 voted)

Reviews: 82% of readers found this page helpful

Author information

Name: Duncan Muller

Birthday: 1997-01-13

Address: Apt. 505 914 Phillip Crossroad, O'Konborough, NV 62411

Phone: +8555305800947

Job: Construction Agent

Hobby: Shopping, Table tennis, Snowboarding, Rafting, Motor sports, Homebrewing, Taxidermy

Introduction: My name is Duncan Muller, I am a enchanting, good, gentle, modern, tasty, nice, elegant person who loves writing and wants to share my knowledge and understanding with you.