Consolidated Financial Statements - Definition, Types

Consolidated Financial Statements: Companies typically use the phrase “consolidated” when issuing financial results to signify the group report of the full business. These are important for examining the financial status of a group of firms. Otherwise, it does not offer an idea of the company’s financial health in general when looking at the group's entire performance.

Definition of Consolidated Financial Statements

Consolidated financial statements are complete financial reports offering a consolidated perspective of a group of firms' financial performance and condition as if they were one organization. These statements are often generated by a parent business that owns or controls one or more subsidiary enterprises.

In simpler words, think of a parent business as the "big boss" and subsidiary enterprises as its "children." Consolidated financial statements represent all these firms as a single family, reflecting their financial activity and resources as a whole, rather than separately.

Methods in Consolidation of Financial Statements

Full Consolidation: This sort of consolidated financial statement is the most accurate. It includes the financial data of the parent business and all its subsidiary firms into a single set of statements. Full consolidation is utilized when the parent firm has extensive influence over its subsidiaries, generally controlling over 50% of its shares.

Partial Consolidation (Equity technique):

When a parent business has a large but not majority share in a subsidiary (typically between 20% and 50% ownership), it generally adopts the equity technique. This technique includes the parent's portion of the subsidiary's revenue, assets, and liabilities in the consolidated accounts.

Proportional Consolidation:

In some cases, proportional consolidation is used when a parent company has joint control over a subsidiary with another party. This method combines only the parent's share of assets, liabilities, revenue, and expenses, reflecting the proportional ownership arrangement.

Consolidation of Variable Interest Entities (VIEs):

Sometimes, companies form special entities where ownership and control are not based on traditional ownership percentages. A parent company consolidates a Variable Interest Entity, which typically means it significantly influences the entity's operations, even without majority ownership.

Combined Financial Statements:

When a parent company has subsidiaries with different fiscal year-ends or operates in diverse industries, combined financial statements may be used instead of full consolidation. These statements show the parent and subsidiary results separately but present them together for clarity.

Summarized Financial Statements:

For the sake of brevity or simplicity, a parent company may choose to issue summarized consolidated financial statements. These provide a condensed view of the financial information, offering key data without the level of detail found in full statements.

Types of Consolidated Financial Statements

Consolidated financial statements are of various types, each serving a specific purpose. Here are the primary types:

Consolidated Balance Sheet: This type of statement shows the combined assets, liabilities, and equity of the parent company and its subsidiaries as of a specific date. It provides a snapshot of their financial position at a particular moment.

Consolidated Income Statement: This statement presents the collective revenues, expenses, and profits (or losses) of the parent company and its subsidiaries over a defined period, typically a year. It reveals how much money the group made and spent.

Consolidated Cash Flow Statement outlines the group's cash inflows and outflows during a specified period. It's crucial to understand how the group manages its cash, including where it comes from and where it goes.

Consolidated Financial Statements Examples

Tata Sons Limited Consolidated Financial Statements:

Tata Sons Limited, the parent company of the Tata Group, provides consolidated financial statements that incorporate the financial performance and condition of its subsidiaries including Tata Motors, Tata Steel, and Tata Consultancy Services (TCS). These statements show the Tata Group’s overall finances, exhibiting total income, total spending, total assets, and total liabilities.

Aditya Birla Group Consolidated Financial Statements:

The Aditya Birla Group, with its diverse businesses spanning sectors like cement, metals, textiles, and telecommunications, releases consolidated financial statements in Indian Rupees (₹). These statements amalgamate the financial figures of the parent company, Aditya Birla Capital, with those of subsidiaries like UltraTech Cement and Hindalco Industries.

Consolidated Financial Statement Preparation Procedure

This statement must be presented in the following manner:

• When preparing the statement, it is necessary to mix and match all the components from the parent business and its subsidiary to reach the total. The parent business should contribute liabilities, assets, expenses, shares, and revenue.
• The parent company's investment in its subsidiaries and the parent's ownership position in its subsidiaries should be eliminated.
• The extra cost spent by the parent company to the subsidiary and the investment in equity shares on the date of financing in such a subsidiary should be recognized as goodwill.
• When the price of the parent company's investment in the subsidiary is less than the parent company's equity share, the investment date should be marked as the capital reserve.
• A modest amount of the consolidated subsidiary's net profits for the reporting period must be acknowledged and regulated against the group's earnings and credited to the owner or parent business.
• A minor percentage of the consolidated subsidiary's involvement in net profits for the reporting period must be recognized and reflected in the consolidated balance sheet.