The Definition of a Consolidated Financial Statement
A consolidated financial statement typically combines a company's operating activities with data from its subsidiaries. A consolidated financial statement helps an investor, a regulator or a corporation's top management evaluate the true financial standing of the corporation. A consolidated financial statement also may indicate an entity's financial position or cash flows during a period.
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What is Financial Statement Consolidation?
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Financial statement consolidation is an accounting procedure that allows a corporation to combine its financial data with information from subsidiaries. A consolidation accountant combines all balances based on percentage of ownership. Let's say Company A owns 100 percent of Company B. Company A has sales revenues of $100 million and $50 million in expenses during the month of May. Company B has $20 million sales revenues and $10 million in expenses. A consolidated financial statement for Company A will show $120 million total sales and $60 million total expenses.
Function
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A consolidated financial statement allows top management to gauge a corporation's true financial standing, profit levels and cash flow activities. A consolidated financial statement also may provide an investor or a regulator with useful information to understand the scope of a corporation's activities. As an illustration, a regulator may review our sample company's (Company A) consolidated operations and may note that the company operates in 23 countries and five continents.
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Significance
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A consolidated financial statement significantly affects how accounting data is processed and reported. Without financial statement consolidation, companies that are owned by the same investor may report financial statements separately and under different rules. A consolidated financial statement also helps a regulator ensure that a corporation complies with requirements applicable in industries in which it operates. For example, Company A has 23 subsidiaries located on five continents. Without financial statement consolidation, all subsidiaries may prepare 23 different financial statements in accordance with local accounting rules.
Control Concept
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The control concept in financial statement consolidation procedures requires a company to prepare consolidated financial statements if it owns more than 50 percent of another company. Consolidated financial statements include a balance sheet, a statement of profit and loss, a statement of cash flows and a statement of retained earnings. The control concept also requires a company to consolidate financial statements if it owns less than 50 percent but has significant control over a subsidiary. For example, Company A owns 20 percent in Company D but is the largest shareholder.
Economic Entity Concept
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The economic entity concept requires a company that owns a majority share in another company (i.e., more than 50 percent) to consolidate financial statements because both companies are, in fact, part of the same entity. Going back to our sample company, if Company A has control over 23 subsidiaries and approves all major decisions, then these subsidiaries represent a single entity controlled by Company A.
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References
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