Consolidated financial statements are the "
financial statements of a group in which the
assets,
liabilities, equity,
income,
expenses and
cash flows of the
parent company
A holding company is a company whose primary business is holding a controlling interest in the securities of other companies. A holding company usually does not produce goods or services itself. Its purpose is to own shares of other companies ...
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
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fina ...
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 s ...
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.
See also
*
Associate company
*
Business valuation Business valuation is a process and a set of procedures used to estimate the economic value of an owner's interest in a business. Here various valuation techniques are used by financial market participants to determine the price they are willing t ...
*
Consolidation (business)
In business, consolidation or amalgamation is the merger and acquisition of many smaller companies into a few much larger ones. In the context of financial accounting, ''consolidation'' refers to the aggregation of financial statements of a gro ...
*
Enterprise value
*
Minority interest
References
Further reading
* Alexander, D., Britton, A., Jorissen, A., "International Financial Reporting and Analysis", Second Edition, 2005, ,
{{Authority control
Financial statements