CONSOLIDATED FINANCIAL STATEMENTS: WHAT ARE THEY FOR, CALCULATION, EXAMPLE - DUDAS - 2025

The consolidated financial statements are financial statements of a corporation with multiple divisions or subsidiaries. Companies are free to use the word “consolidated” in financial statement reports to refer to the reports of their entire business as a whole.

On the other hand, the Financial Accounting Standards Board points out that the consolidated financial statement reports are the reports of an entity constituted by a parent company and its subsidiaries.

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Normally, to consolidate the financial statements, an organization is required to total and reconcile all its financial operations in order to obtain the consolidated reports, where the overall performance is indicated in the balance sheet, income statement and cash flow statement reports.

The decision to present the financial statements globally including all divisions is made annually. This is done mainly because of the taxes and other benefits they offer.

Consolidation with subsidiaries

The principle for presenting a consolidated financial statement with the different companies is essentially based on the proportion of ownership that the corporation has in each company.

In general terms, if the ownership in another organization is greater than 50%, it classifies it as a subsidiary and gives the corporation a license to include it in a consolidated financial statement.

In certain cases, less than 50% ownership could be accepted if the corporation shows that the subsidiary's management is fairly aligned with the corporation's decision-making process.

What are the consolidated financial statements for?

Consolidated financial statements are used to present the financial statements of a group of companies, which are shown as those of a single economic entity.

These statements are useful for reviewing the financial condition and results of a group of commonly owned businesses, thus providing a comprehensive overview of the operations of a corporation as a whole.

Otherwise, if investors were to review the individual results of each business within the group, they would not have an idea of ​​how well the financial health of the company as a whole is doing.

Corporations usually make the decision to prepare their consolidated financial statements each year in order to include all their companies.

This decision made annually is supported by the tax benefits the corporation can achieve by presenting a consolidated income statement rather than presenting it as unconsolidated for a fiscal year.

As the corporation and its divisions make up a single economic body, investors, government institutions and clients believe that the consolidated financial statements are of great use to assess the general situation of the entire corporate group.

Changes in the consolidated financial statements

Public companies generally choose to create between consolidated or unconsolidated financial statements for a longer period of time. If a public company wants to change its financial statements from consolidated to unconsolidated, it will likely need to submit a change request.

Modifying the reports from consolidated to unconsolidated can cause alarm in investors or confusion in auditors, so presenting consolidated financial statements turns out to be a financial accounting decision that is made for the long term.

However, there are some situations in which a change in the corporate structure may require a change in the consolidated financial statements, such as a dismemberment or an acquisition.

characteristics

The consolidated financial statements report the global result of the different joint reports of companies that are legally separated.

What results from these financial statements will remain the same, in that they will also be made up of the balance sheet, the income statement and the cash flow statement.

Each separate legal entity has its own financial accounting processes and will therefore create its own financial statements.

Subsequently, the corporation will totalize these statements in an integral manner in order to generate the final consolidated reports of the balance sheet, income statement and cash flow statement.

The key ideas used to construct the consolidated financial statements are:

- A group must be made up of a parent company and all its subsidiaries.

- A subsidiary must be a company that is controlled by a parent company.

Therefore, the consolidated financial statements are the joint financial statements of a corporate company and its subsidiaries.

Consolidation criteria

Corporations tend to break down their consolidated statements into divisions or subsidiaries, so that investors can see the performance of each one. However, in many cases this is not imperative, especially if the corporation owns 100% of the subsidiaries.

Corporations that only have a minority stake in a company do not need to consolidate them in their financial statements. For example, if Company ABC owned only 6% of Company Z, it would not have to consolidate Company Z's financial statements with yours.

It is also possible to have consolidated financial statements for only a part of the group of companies, such as a subsidiary company and those other organizations that are owned by that subsidiary.

Private organizations have very few reporting requirements for financial statements, but public companies must report financial statements in accordance with the generally accepted accounting principles of the Financial Accounting Standards Board.

How are they calculated?

In general, both a corporation and its divisions will adopt similar accounting structures to develop their financial statements individually, as well as the consolidated ones.

Organizations that prefer to manage consolidated financial statements need to allocate a lot of money in the accounting infrastructure, as a result of the accounting unifications essential to be able to present these final consolidated financial reports.

Consolidated financial statements require considerable perseverance to prepare. This is because it is required to eliminate the impact of any commercial transaction between the companies that is being reported.

There are certain fundamental standards that organizations using consolidated financial statements must adhere to.

The main one requires that the parent company or any of its subsidiaries cannot transfer cash, sales, assets or liabilities between them to arbitrarily improve results or reduce taxes owed.

According to the accounting provisions that are being used, the standards that determine the proportion of ownership necessary to be able to include a subsidiary in the consolidated financial statements may be different.

Basic procedure

When preparing a consolidated financial statement, follow this basic procedure. First, remove all the items that are counted as an asset in one company and a liability in another, and then add up all the items that have not been removed.

Therefore, if there is a sale of products between the subsidiaries of a parent company, this intercompany sale should be eliminated from the consolidated financial statements.

If a negotiation takes place between different group companies, the accounts receivable of one company will cancel the accounts payable of the other company.

Another typical write-off between companies is when the corporation pays interest to affiliate companies on the money borrowed from them to be used for investments. Interest income should be eliminated from the consolidated financial statements.

The social capital account in the financial statement of the subsidiary company will cancel the account "investment in subsidiaries". Instead, it will be treated as an asset in the corporation. Only the corporation's capital stock account will be included in the consolidated statement.

Examples

HSC Corp

Suppose the international company HSC Corp has $ 4,000,000 of revenue and $ 2,000,000 of assets that appear on its own financial statements.

However, HSC also controls five subsidiaries, which in turn have revenues of $ 49,000,000 and assets of $ 80,000,000.

As can be seen, it would be extremely taxing to present only the individual financial statements of the parent company, when its consolidated results show that it is truly a company with revenues of $ 53 million, which controls $ 82 million of assets.

XYZ Company

Let's consider XYZ to be a corporation that owns four organizations: Company A, Company B, Company C, and Company D. Each of these organizations pays royalties and fees to Company XYZ.

At the end of the year, the financial statement of the XYZ company shows a large amount of income from all the remuneration received, with very little expenses. This is because the expenses are recorded in the income statements of the subsidiaries.

Any investor looking solely at the financial statements of corporate company XYZ could easily get a compelling assessment of XYZ's performance.

However, if Company XYZ consolidates its financial statements, "aggregating" XYZ's income statements, balance sheets, and cash flow statements with the four subsidiaries, the results will give a more complete picture of Company XYZ as a whole.

In the following table it can be seen that the assets of Company XYZ are only $ 1 million. On the other hand, the consolidated number shows that the entity as a whole actually controls $ 213 million in assets.

Berkshire Hathaway

It is a parent company willing to own a large number of different organizations. Produces hybrid consolidated financial statements, which can be seen in your financial reports.

In its consolidated financial statements, it breaks down its businesses by Insurance, then Railways, Public Services and Energy.

Coca Cola

It is a global company with many subsidiaries. It has subsidiaries around the world, which help it in many ways to support its global presence.

Each of its affiliates contributes to your food retail goals with affiliates in the areas of bottling, beverages, brands and more.

References

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2. Steven Bragg (2019). Consolidated financial statements. Accounting Tools. Taken from: accountingtools.com.
3. Wikipedia, the free encyclopedia (2019). Consolidated financial statement. Taken from: en.wikipedia.org.
4. Investing Answers (2019). Consolidated Financial Statements. Taken from: investinganswers.com.
5. My Accounting Course (2019). What are Consolidated Financial Statements? Taken from: myaccountingcourse.com.
6. Harold Averkamp (2019). What are consolidated financial statements? Accounting Coach. Taken from: accountingcoach.com.