If you own a parent company with separate legal entities as subsidiaries, a consolidated financial statement is an efficient way to keep track of your entire business's income and assets.
At its core, a consolidated financial statement functions similarly to any basic business financial statement, which provides an overview of a company's financial position with respect to revenue, expenses, liabilities, and more. In a consolidated statement, however, the financial information for a group of entities is presented together as if they were a single economic enterprise. This presentation allows for a more comprehensive look at the entire business's financials.
How to prepare consolidated financial statements
Preparing consolidated financial statements can be complicated depending on the number of entities involved. Of course, you may also choose to only consolidate some of the financials of a parent company's entities in the statement. For example, if a parent company has subsidiaries A, B, and C, but C's business activities do not have anything to do with A and B, a consolidated financial statement might include only A and B and leave out C.
Another consideration is the types of transactions that should be included. According to general consolidated financial statement requirements, transactions such as sales between subsidiaries whose financials are part of the statement are excluded. Also, interest income paid from the parent company to subsidiaries cannot appear on the consolidated financial statement.
Consolidated financial statements provide a snapshot view of a business entity's assets and income, which means that those items plus equities and liabilities must be included. Some of the most common entries on a consolidated financial statement include the following:
- Current assets (cash, accounts receivable, inventories, receivables, etc.)
- Noncurrent assets (property, plant/factory, equipment, etc.)
- Goodwill arising on acquisition
- Equities (common stock, retained earnings, etc.)
- Liabilities (accounts payable, accrued expenses, deferred tax liability, trade payables, etc.)
Overall, consolidated financial statement rules are similar to those of other financial statements in that you should always be as clear and upfront about the business's financial position as possible. Because shareholders and investors rely on this information to make decisions about where to move their money, your consolidated financial statement should be a fair and accurate representation of your group's holdings.
Benefits of consolidated financial statements
The primary benefit of preparing a consolidated financial statement is that it offers an overview of the overall financial situation of a group of companies that share a common parent. This broader view can be much more informative than the individual financials of one or more of the subsidiaries on their own.
For you as a business owner, a consolidated financial statement can be an efficient way to track your business's income and assets, but to receive its maximum benefit, you must be sure it's compiled correctly and that you're following all of the proper procedures. If you'd like guidance preparing a consolidated financial statement, consider seeking the help of an experienced professional or an online service provider.