Understanding Consolidated Financial Statements, Principles and How to Prepare them

Rancakmedia.com – Below we will explain consolidated financial reports, for those of you who don't know yet, read the article below carefully so that you get complete information.

Financial reports are important records that summarize the financial activities of a business. Businesses use these reports to monitor their income and expenses, as well as make projections about their financial future.

Businesses with multiple divisions or subsidiaries can use reports finance consolidation to track their overall financial performance without having to read countless reports.

How to create financial reports and examples are all covered in this post. You will also learn about the differences between financial statements and examples in this article.

Understanding Consolidated Financial Statements

Financial statements consolidation are records that summarize the financial activities of a business with subsidiaries or holding companies. A holding company is a business that manages the activities of another company and usually has an ownership share of that business.

To make their products stand out, some food businesses use multiple companies with the same name. The accounts of multiple companies owned or controlled by the same individual or entity are consolidated to provide a picture of the overall financial health of the group.

Because transactions between reporting businesses must be excluded from these reports, it takes a lot of time and effort to include them. So, if a subsidiary and a parent company sell each other's products, these “intercompany transactions” must be excluded from the consolidated financial statements.

For example, when a parent company remits interest income to an investment subsidiary, the interest income should be deducted from the consolidated financial statements because it is used to fund the investment.

Principles of Consolidated Finance

Consolidated finance is based on several principles, namely:

Acquisition Date

Most purchases occur throughout the year, not at the end. This means we need to calculate the fair value of the subsidiary's net assets at the date of purchase and consolidate them to this date.

At the end of the year, we only analyze the subsidiary's income statement for the period after the acquisition date. The profit shown on the balance sheet at the time of purchase is known as capital gain (pre-acquisition profit).

The results for the period after the date of purchase (post-acquisition profit) are known as profit or loss, which must be shown on the consolidated income statement.

Write-off of Balances and Inter-Company Transactions

Usually entities in the same group do business with each other. As a result, there are two different eradication methods. They must cancel the balance between related parties on the balance sheet because Company A's receivables will be paid to Company B.

The same goes for income and expenses for now, you need to reduce the amount so the business doesn't inflate the profit and loss statement.

Investment Write-Off

The parent company shows its investment in equity shares on the assets side of the balance sheet under Investments. Under Share Capital in the subsidiary equity side of the balance sheet, the same can be observed. Both amounts are equivalent if we buy the investment at its face value and we remove it from the balance sheet for consolidation.

Goodwill

In reality, the purchased subsidiary may have made a profit or loss at the time of purchase, and the parent company usually purchases shares at a premium or discount.

Whenever the cost of an investment exceeds its face value, we record an intangible asset called goodwill. On the other hand, if we buy shares at a cheap price, we realize capital reserves.

Non-Controlling Interests or Non-Controlling Interests (KNP)

If you own part of a subsidiary, the remaining shares owned by other parties are non-controlling interests.

Also known as “minority interest,” it represents the fraction of a subsidiary's net assets that is affiliated with outside investors. NCI is shown as a different line item under Equity on our consolidated balance sheet.

Tips for Making Consolidated Financial Reports

Here are some tips for creating consolidated financial reports:

Keep Accurate Records

One of the most important things in financial reports is the truth of the information. This requires providers to keep accurate financial records so that no data is lost.

Use an Accountant

Many companies employ professional accountants to help monitor financial activities. A professional accountant can help monitor and record financial data and offer reports or papers, such as consolidated financial statements.

Use other Reports for Reference

You can search the internet and find hundreds of samples of consolidated financial statements to give you a better idea of what the document should look like.

Differences between Consolidated Financial Statements and Combined Financial Statements

There are two main ways to produce a uniform business statement when dealing with subsidiaries: they can merge or consolidate. Consolidated financial statements summarize the operations of a group of companies.

Even though they are combined, each organization's financial reports are displayed separately, each subsidiary or group has its own tab. People who read the statement will be able to get an overall picture of the organization's success while also getting a sense of what each person has contributed.

Consolidated financial statements, on the other hand, include the number of parent companies and subsidiaries under that parent company. It offers an overall view of how the organization as a whole functions. A subsidiary's business operations are part of the parent company's financial statements.

Manual Way to Create Consolidated Financial Reports

Several manual ways to create consolidated financial reports, namely:

Separate Parent Entities and Subsidiaries

Find out which companies are subsidiaries of the parent. This includes any business in which the parent company controls a majority of the shares.

The parent company has a controlling interest in the subsidiary if it can fire or replace board members or run the subsidiary. Once you know which entity to look at, you need to get all of their financial reports.

Check the Fiscal Period

While this often occurs after an acquisition, it is always a good idea to adjust the entity's schedule to match that of the parent company.

Use Microsoft Excel

To create your report, open Microsoft Excel, and create a tab for each page, one for the balance sheet, another for the income statement, and so on. Copy and paste the totals from each entity and label the rows to help organize each section, such as cash, inventory, etc.

Be sure to add a line to combine debit or credit transactions. Before combining these numbers into your consolidated financial statements, do one final check to ensure they are correct. Otherwise, it will be difficult and time-consuming to track down inaccuracies again.

Create a Consolidated Balance Sheet

Create a consolidated balance sheet that reflects predetermined amounts. Intercompany write-offs now occur for all entities involved in cross-border transactions. Prepare consolidated income and cash flow statements using this information.

Perform a final check of all documents to ensure that no assets or liabilities, or money transferred between entities, have been duplicated. Things you need to pay attention to before making a consolidated financial report:

1. Pay attention to each of your accounts.
2. The financial statements of the parent company and subsidiaries are added line by line to create this report. A balance sheet of assets and liabilities is required for a holding company.
3. Always differentiate between parent company and subsidiary company investments and equity.
   In the consolidated financial statements, there are various things that should not happen. To start, investments made by a parent company in its subsidiaries are excluded from the financial statements
4. Second consolidation, whatever number of shares the parent company owns in the subsidiary will not be reflected in the consolidated balance sheet.

Internal transactions, balances, revenues, and expense items are not included in consolidated financial statements if they exist within one organization. There are various considerations to keep in mind when trying to demonstrate a minority viewpoint.

1. The subsidiary's non-controlling shares in profit or loss are the first thing to determine.
2. Non-controlling shares in each subsidiary and ownership in the parent company must be recorded separately.
3. Noncontrolling interests must be shown in the equity of the consolidated balance sheet but must be disclosed separately from the stockholders' equity of the parent company.
4. Make sure the reporting date is the same.
   When preparing consolidated reports, it must be remembered that the reporting dates for the financial statements of the parent company and subsidiaries are the same. If the subsidiary's reporting period is different from that of the parent company, the subsidiary must make the necessary changes. Transactional changes will be made.
5. Also, when compiling financial information, the difference between the reporting periods of the parent company and the subsidiary company should not be more than three months.
6. While preparing consolidated reports, uniform accounting policies are used in preparing these reports.

FAQs

Below we have summarized several frequently asked questions about consolidated financial statements, as follows:

Do All Companies Use Consolidated Financial Statements?

Not all companies require this financial report. Companies that require this report have requirements such as having one or more proven subsidiaries with share ownership.

Conclusion

Financial statements Consolidation is a record that summarizes the financial activities of a business with a subsidiary or parent company. The accounts of multiple companies owned or controlled by the same individual or entity are consolidated to provide a picture of the overall financial health of the group. Consolidated financial statements include the number of parent companies and subsidiaries under the parent company.