Informed decision-making is an absolute necessity in corporate finance, which is why consolidated financial statements are crucial. These statements provide a thorough understanding of a company's financial position, including their assets, expenses, and profits. This article answers some questions commonly asked about consolidated financial statements while covering how finance teams can best leverage financial consolidation software.
Consolidated financial statements are financial reports that combine the financial data of a parent company and its subsidiaries to portray them as a single economic entity. These reports consist of consolidated income statements, consolidated balance sheets, and consolidated cash flow statements.
The data used for financial consolidation include a company's total assets, liabilities, equity, income, expenses, and cash flows. These data points are sourced from the company's business units, subsidiaries, acquired entities, investments, joint ventures, and other controlling interests.
The responsibility to prepare and present consolidated financial statements typically falls on companies that are parents at year-end. In other words, companies classified as parent entities at the end of the financial year often need to consolidate their financials. Other companies can also choose to prepare consolidated financials if their owners desire these reports to assess their performance.
There are three main types of consolidation: full consolidation, equity consolidation, and proportionate consolidation.
The full consolidation method is used when a parent company owns a controlling interest (50% or greater) of the subsidiary company. In this case, all the assets, liabilities, account balances, and other financials of the subsidiary entity are combined with those of the parent company on a single financial statement. This effectively portrays the parent company and the subsidiary as a single entity.
Equity consolidation is typically applied when the parent company owns 20-50% of the subsidiary—or less than 20% but with significant influence. The parent company treats its investment in the subsidiary as an asset on its balance sheet. This reflects the value of its ownership stake in the subsidiary.
Proportionate consolidation is used when a parent company jointly owns a venture with other organizations. In this method, the parent company reports only its proportionate share of the joint venture's trial balances.
It is of note, however, that the equity method is now being used by most companies in place of proportionate consolidation.**
Consolidated financial statements must follow certain key principles, including accuracy, transparency, consistency, comparability, and sincerity. Reporting companies observe these principles by following regulatory guidelines like the Generally Accepted Accounting Principles (GAAP), the International Financial Reporting Standards (IFRS), and the Accounting Standards for Private Enterprises (ASPE).
GAAP is used by both public companies and some private entities in the United States. IFRS is used by international companies, while ASPE is used by private SMBs in Canada.
Consolidated financial statements provide a holistic view of the financial results and cash position of a company and its business units rather than that of a single department. This feedback enables stakeholders to make informed decisions, ensuring efforts are directed toward the most critical business areas.
Additional benefits of consolidated financial statements include:
To prepare consolidated financial statements, a company must first gather and map the financials of its business interests to a centralized chart of accounts. This data is then refined through specialized calculations, currency conversions, and intercompany eliminations, among other processes. The compiled financial data is then documented and presented as the consolidated financial statements.
Many companies use spreadsheets to compile consolidated financial statements. But this approach is being replaced with purpose-built financial consolidation software.
The process of financial consolidation using automated software can follow these steps:
Although consolidated financial statements are hugely beneficial for organizations, they're not without their limitations. Here are some of these common challenges faced by finance teams:
Below are some ways finance teams can mitigate challenges associated with consolidated financial statements:
In conclusion, consolidated financial statements can provide an accurate picture of the financial position of an entire business group. Specific types of these statements include consolidated income statements, consolidated cash flow statements, and consolidated balance sheets. With Fluence's financial consolidation software, finance teams can prepare high-quality consolidated statements with ease. Talk to our experts today.
Discover how Fluence can help your organization plan better and close faster with more confidence.