If you do not work in the business or tax world, you may never have heard the term "consolidated financial statements". However, many groups of companies prepare such financial statements each year to meet the requirements of tax authorities or internal needs.
In this article, you will learn what consolidated financial statements are and how they can contribute to a company's success.
Parent companies produce the majority of consolidated financial statements
In most cases, consolidated financial statements will be produced by groups of companies composed of a parent company and subsidiaries. In such groups, the parent company has direct or indirect control, often through voting rights, over the other companies in the group. This means that it has a major influence on the financial policies of its subsidiaries.
It is therefore appropriate for parent companies to ask their corporate accountant to produce financial statements that reflect the financial situation of the group as a whole. The accountant will act as if the parent company and its subsidiaries represented only one entity. This will enable him to prepare a consolidated balance sheet, a consolidated statement of income and a consolidated statement of changes in financial position.
The full consolidation of one or more subsidiaries into consolidated financial statements
When a parent company owns more than 50% of a company, it can consolidate its financial statements with its own statements using a process called "global integration".
Cash, accounts receivable, inventories and all other current and non-current assets of subsidiaries are therefore included in the parent company's balance sheet. Similarly, taxes payable, debts (except intra-group debts) and bank loans will also be included in the parent company's liabilities.
Moreover, debts, receivables and income incurred within the group must be eliminated in order to produce the consolidated financial statements, since a company cannot owe money to itself. Trade between companies in the same group must therefore be largely neutralized.
Finally, the accountant will also have to report the parent company's dividends under the item "dividends payable" and include only the portion of the subsidiary's net assets held by shareholders not belonging to the group of companies under the item "non-controlling interests".
Some advantages of consolidated financial statements
There are many advantages for a group of companies to produce consolidated financial statements.
They provide them with an accurate view of the tax, business, results, assets, liabilities and cash flows of the entire group. In addition, consolidated financial statements can also contribute to the consistency of accounting practices within the group of companies.
Consolidated financial statements should be prepared by professional accountants
In conclusion, whether produced for legal reasons or to provide shareholders with a fair representation of the group's accounts, the complexity of the consolidated financial statements should always be entrusted to experienced accountants.
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