Definition of Consolidated Financial Statement
Consolidated Financial statement is the preparation of Accounts by a parent company where the records of its subsidiaries are also mentioned. The main Financial Statements are Balance Sheet, Profit and loss Statement and Cash Flow Statement. When a parent company combines the data of its subsidiary company and prepares clubbed financial statements, then the financial statements show the entire structure of the conglomerate.
Public companies need to disclose their financial statements at regular intervals. The statements should be based on generally accepted accounting principles. If any company has got more than one business, then they prefer to spin-off the business line with separate management. Consolidated Financial Statement is a practice followed by the parent company, where the financial statements of the subsidiaries are clubbed with parent’s and shows the result.
Purpose of Consolidated Financial Statement
Consolidated Financial Statement helps to portray the financial position of a company. It is really important for stakeholders of a company to know the actual financial position of a company. Consolidated Financial Statement help stakeholders to know the exact asset and liabilities of a company. In standalone Financial Statement only the investment amount in subsidiary is shown. Consolidated portrays the total asset a company holds, which includes the asset of the parent and the subsidiary. So its purpose is to portray a better picture for decision making process.
Example of Consolidated Financial Statement
ABC ltd has 60% stake in Sun Corp. ABC being the parent company is planning to make a consolidated Income statement. Details mentioned below
Sales:
- ABC LTD – 500M
- Sun Corp – 50M
Variable Cost:
- ABC LTD – 40M
- Sun Corp – 10M
Fixed Cost:
- ABC LTD – 100M
- Sun Corp – 15M
Interest Payment:
- ABC LTD – 50M
- Sun Corp – 3M
Tax:
- 30%
Solution: Done in excel. In the solution provided the non-controlling portion was subtracted from the net profit. As the company, ABC was holding only 60% and the Income statement showed consolidation for 100% of Sun Corp, so the extra 40% was deducted later.
Who is Responsible for Preparation of Consolidated Financial Statement?
The management of the company is responsible for the preparation and disclosure of the financial statements to the stakeholders. In a public company, the management is an agent and the actual owner/principal is the shareholders. So it is the responsibility of the management to report the performance of the company.
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Checklist for the Preparation of Consolidated Financial Statement
- Correct estimation of the fair value of the assets for both parent company and subsidiary company.
- Proper projection of sales, expense and other relevant data for consolidated statement preparation.
- Sales between parents and subsidiary should be adjusted as subsidiary will show profit on sale, but it was paid by parent.
Consolidating Financial Statements vs Combining Financial Statements
In combining Financial Statement the financials of both the parent and subsidiary are prepared and shown separately, but are done in a single document. So unlike Consolidated Financial Statement where the statement is prepared by mixing the subsidiary’s result with the parent, combining shows them in a single document.
Advantages
Some of the advantages are:
- The financial health of the company can be judged with one glance. It portrays the entire asset and liability of a company, which helps in decision making by potential investors.
- It reduces burden of preparing separate financial statements for all subsidiaries and also reduces carbon emission. Preparing separate balance sheets and presenting hard copies of them require lot of papers
- It helps to promote transparency. In standalone financial statements, it gets difficult to judge the health of subsidiaries of a parent. In consolidated balance sheet it is all available in one statement.
- Cross sale effects are correctly accounted. It is a general mistake that subsidiary records profit on sales for sales made to parent companies. This is not correct.
Disadvantages
Some of the disadvantages are:
- The poor performance of the parent company can be overshadowed by the excellent performance of the subsidiary. Hence the true picture is sugar coated and presented to fool the audience.
- If too much cross transactions have happened between parent and subsidiary and proper accounting is not followed, then it will present an elevated sales, which is actually not true.
- As everything is combined, so proper analysis based on ratios is tough. Ratios are helpful in comparison with peer companies. In consolidated statements, there are no sector specific financials. As everything is combined, sector specific analysis is difficult.
Conclusion
Consolidated Financial statement is prepared by parent companies that hold subsidiary companies. Consolidated presentations help auditors, investors, and other stakeholders to draw a proper picture of the company. The statement that is prepared should be true and validated by auditors.
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