Consolidated financial statements are the " financial statements of a group in which the assets, liabilities, equity, income, expenses and

cash flows A cash flow is a real or virtual movement of money: *a cash flow in its narrow sense is a payment (in a currency), especially from one central bank account to another; the term 'cash flow' is mostly used to describe payments that are expected ...

of the parent company and its

subsidiaries A subsidiary, subsidiary company or daughter company is a company owned or controlled by another company, which is called the parent company or holding company. Two or more subsidiaries that either belong to the same parent company or having a sa ...

are presented as those of a single economic entity", according to International Accounting Standard 27 "Consolidated and separate financial statements", and International Financial Reporting Standard 10 "Consolidated financial statements".

Consolidated statement of financial position

While preparing a consolidated financial statement, there are two basic procedures that need to be followed: first, cancel out all the items that are accounted as an asset in one company and a liability in another, and then add together all uncancelled items. There are two main type of items that cancel each other out from the consolidated statement of financial position. * "Investment in

subsidiary A subsidiary, subsidiary company or daughter company is a company owned or controlled by another company, which is called the parent company or holding company. Two or more subsidiaries that either belong to the same parent company or having a ...

companies" which is treated as an asset in the parent company will be cancelled out by "share capital" account in subsidiary's statement. Only the parent company's "share capital" account will be included in the consolidated statement. * If trading between different companies in one group happen, then the payables of one company will be cancelled by the receivables of another company.

Goodwill arising on consolidation

Goodwill is treated as an intangible asset in the consolidated statement of financial position. It arises in cases, where the cost of purchase of shares is not equal to their par value. For example, if a company buys shares of another company worth $40,000 for $60,000, we conclude that there is a goodwill worth or $20,000. Proforma for calculating goodwill is as follows: ''Goodwill'' Fair value of consideration transferred Plus fair value of non-controlled interest at acquisition Less ordinary share capital of subsidiary company Less share premium of subsidiary company Less retained earnings of subsidiary company at acquisition date Less fair value adjustments at acquisition date

Non-controlled interest

If the parent company does not buy 100% of shares of the subsidiary company, there is a proportion of the net assets owned by the external company. This proportion that is related to outside investors is called the non-controlling interest (NCI). The proforma for calculating the NCI is as follows: ''Non-controlling interest'' Fair value of NCI at acquisition date Plus NCI's share of post-acquisition retained earnings or other reserves

NCI at the reporting date

Intra-group trading

In a group of companies, they can have trade relations with each other. For example, company A buys goods for one price and sells them to another company inside the group for another price. Thus, company A has earned some revenue from selling, but the group as a whole didn't make any profit out of that transaction. Until those goods are sold to an outsider company, the group has unrealised profit.

Consolidated statement of financial position

Goodwill arising on consolidation

Non-controlled interest

NCI at the reporting date

Intra-group trading

See also

References

Further reading