Companies in the complex business landscape expand their operations through acquisitions, subsidiaries, and mergers. As a result, it becomes inevitable to deliver stakeholders with a vivid and precise picture of the financial health and performance of the whole enterprise. That is where consolidated financial statements play their role. Therefore, in this blog post, we will dive into the world of consolidated financial statements, exploring their details.
What Are Consolidated Financial Statements?
These are the financial statements of many entities issued as those of a single economic entity. Consolidated financial statement are used to review the company position. They give a picture of the results of an entire group of commonly owned businesses. Otherwise, checking the results of the separate companies within a group does not show the picture of the financial health of a group as a whole. The major entities as a part of the consolidated financial statements include:
- A parent entity encompasses a group and all of its subsidiaries.
- A subsidiary refers to an entity under a parent company’s control.
Therefore, these statements are the joint financials for the parent company and its subsidiaries. It is also probable to have consolidated financial statements for a part of a group of companies, such as for a division and other entities owned by a subsidiary.
The Goal of the Consolidated Financial Statements
Through consolidated financial statement, a company can get a high-level overview of the company performance of the company. The information they deliver is vital to the shareholders, lenders, management teams, financial journalists, and investors. The auditors also use this information to ensure that the organization observes legislation and regulations.
In a broader sense, accurate and well-timed consolidated financial reporting is much more than the consolidated financial statement required for compliance. Consolidated data on a span of KPIs is critical in ensuring that important business decisions are based on verification rather than guesswork. It provides the leadership teams with a detailed view of the best and the lowest performing products or units and can help them recognize the opportunities and risks.
What Does a Consolidated Financial Statement Cover?
Mostly a consolidated financial statement covers the following:-
- Consolidated statement of income: revealing the income and expenditure.
- Consolidated statement of financial position: indicating the funds, assets, and liabilities.
- Consolidated statement of cash flows: from operating and investing activities.
- Consolidated statement of changes in funds.
Major Components of Consolidated Financial Statements:-
There are many components of consolidated financial statements, each serving a particular purpose:-
- Consolidated Balance Sheet:-
The consolidated balance sheet is a combination of liabilities, assets, and equity of the parent company and its subdivisions. It delivers an overview of the group’s financial position at a particular point in time.
2. Consolidated Income Statement:-
They present the group’s merged expenses, gains, revenues, and losses. It spotlights the overall profitability and performance of the whole enterprise.
3. Consolidated Cash Flow Statement:-
The consolidated cash flow statements trace the inflows and the outflows of cash within the group. It depicts the group’s ability to generate and control the cash, delivering insights into liquidity and operational efficiency.
4. Consolidated Statement of Changes in Equity:-
This statement covers the changes in the parent company’s equity and its divisions during the specified period. It covers transactions such as dividends, investments, and other equity-related activities. Read More.
Importance of Consolidated Financial Statements
They provide various benefits to the businesses and stakeholders:-
- Integrated View:- They deliver a holistic view of the financial health of the group of companies. They allow the stakeholders to evaluate the group’s overall performance, solvency, liquidity, and profitability.
- Transparency: – By uniting the financial information from the subsidiaries, consolidated financial statements can surge transparency and ensure stakeholders can access verified and reliable information. This transparency can build trust among creditors, investors, and regulatory authorities.
- Decision-Making:- These financial statements aid the management in making informed decisions by delivering a whole picture of the group’s financial position. Through these statements, the management can assess the performance of various subsidiaries and spot the areas for improvement.
- Compliance:- Many accounting standards and regulatory bodies, such as International financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles (GAAP), need businesses to prepare consolidated financial statement. Observing these standards makes certain consistency and equivalence across the companies.
How to Prepare Consolidated Financial Statements:-
There are different steps to follow to prepare the consolidated financial statements, such as:
- Pin Down the Subsidiaries:-
The first step is to spot the subsidiaries that must be included in the consolidated financial statement. A subsidiary is an entity in which the parent company has the charge, usually through holding more than 50% of its voting shares.
2. Adjustments for Uniformity:-
Adjustments are made to align accounting policies, cut down intercompany transactions, and remove unrealized profits or losses resulting from transactions to ensure consistency across entities.
3. Consolidation Methods:
There are two key methods for consolidating financial statements: the equity method and the acquisition method. The acquisition method is used when the parent company has held over the subsidiary. The equity method is used when the parent company has a major influence but not complete control over the subsidiary.
4. Preparation and Presentation:
The consolidated financial statements are made once the required adjustments and consolidation methods are applied. These statements should comply with the relevant accounting standards and regulatory requirements.
Conclusion:-
Consolidated financial statements play a key role in delivering stakeholders with an all-inclusive and right view of a bunch of companies’ business performance and positions. By consolidating the financial information from subsidiaries, these statements boost transparency, help decision-making, and observe compliance with the accounting standards.
Businesses should ensure the accurate and well-timed preparation of the consolidated financial statement to meet the needs of creditors, investors, and regulatory authorities. These statements are a core tool for businesses navigating complicated corporate structures.