Consolidation of financial statements

consolidation of financial statements
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Consolidated Financial Statements 

Financial Statements which contains the information relating to assets, liabilities, equity, income, expenses and cash flows of the parent undertaking as well as its subsidiaries as a single entity. It is governed by AS 27  “Consolidated and separate financial statements”, and IFRS 10 “Consolidated financial statements”.

Consolidated Statement of Income 

Statements that include the income, revenues, and expenses of the subsidiary company and their parent company. It brings out the aggregated picture of the whole corporation and not it is individual part. It eliminates any funds owed to or due to the firms within the same group.

Consolidated Balance Sheet

This is a statement of financial position, which shows the total assets and liabilities of both the parent as well as its subsidiary companies. There is no distinction on which item belongs to which company. All are under one umbrella.

Difference between Balance Sheet & Consolidated Balance Sheet

Balance Sheet

  1. It shows the company’s financial position on a specific date by listing its assets, liabilities, and capital.
  2. It denotes the ownership and owing of a company.
  3. It can be prepared by every company.
  4. It is comparatively easy to prepare a balance sheet, as it has to deal with a single entity.

 Consolidated Balance Sheet

  1. It shows the financial position of both the parent as well as the subsidiary company one.
  2. It does not discriminate its assets and liabilities.
  3. The holding/parent company has to prepare it ( the one which has a subsidiary)
  4. It is comparatively difficult to prepare as it includes a lot of information from both parent and its subsidiary company.

Why are Consolidated Statements prepared?

  • To allow investors and shareholders to get a complete overview of the financial position of the company as a whole.
  • For fair presentation when one of the companies in the group directly or indirectly has the controlling financial interest in the other company.
  • It eliminates the transaction did internally, which gives a better/true understanding of the income/expenditure and financial position of the group as a single entity.
    • For eg., Investment made in the subsidiary by the holding company will be included in the balance sheet as an asset of the holding company and as a  “share capital” account in the subsidiary’s balance sheet.  Both of these will be canceled/ eliminated.  It would only reflect in the holding company’s “share capital” account as “minorities interest” in the consolidated statement.
  • It is an impossible/difficult task for any user to study multiple financial statements, to take an investment decision.

Principles to prepare consolidated statements

  • It should essentially provide a true and fair picture of the financial conditions and operations of the business.
  • It must be prepared on the basis of the legal entity-based financial statements of the parent company and its subsidiaries.
  • It must be prepared in accordance with Accounting Standards, IFRS, and GAAP.
  • The policies and procedures of the consolidated statements need to be applied ad infinitum and should not be changed without any reason.

Checklist for preparing  consolidated statements 

  • To estimate goodwill arising on the acquisition.
  • To estimate Group holdings.
  • To ascertain the fair value of the acquired assets and to calculate the net assets of the subsidiary.
  • For adjustments in any intra-group activity.
  • Estimating the balance carried forward on the consolidated retained earnings and reserves.

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