As we know, financial statements have a crucial essence for the company. In addition to functioning as a benchmark for performance evaluation, financial reports are also needed by investors to assess the credibility of the company. Therefore, financial statements are one of the requirements in applying for funding.
Uniquely, there are companies that have several ‘children’. The question is, can the financial statements of the parent company and subsidiaries be compiled into one entity at the same time?
Consolidated Financial Statements
Companies that have subsidiaries—either only one ‘subsidiary’ or several subsidiaries—usually present financial statements in the form of consolidated financial statements. This type of financial report is often used to compile the financial statements of parent companies into one financial statement entity.
Requirements for Preparing Consolidated Financial Statements
However, not all companies have the right to prepare these types of consolidated financial statements. There are several criteria for companies that are considered to be allowed to prepare this type of financial report.
The first—based on the definition of consolidated financial statements previously described—companies that are entitled to prepare this type of report, of course, include the parent company that has subsidiaries and is evidenced by share ownership.
Second, the parent company must have a share ownership of more than 50% of the subsidiary.
Third, if the parent company’s share ownership in its subsidiaries is below 50%, the company still has the right to prepare consolidated financial statements on the condition that the parent company has full control over its subsidiaries.
Judging from the requirements above, if your company has not fulfilled all three, then each company is enough to make independent financial reports.
Functions of Consolidated Financial Statements
Financial statements in general do function to evaluate the company’s performance as well as a reference for investors to assess the credibility of the company. However, in the consolidated financial statements there are several other functions or benefits that distinguish it from independent financial statements.
One of them, consolidated financial statements are useful for knowing the effect of subsidiaries on the development of the parent company in the long term (long term).
What’s more, consolidated financial statements are also considered more efficient for companies that have ‘children’, because the results of this type of financial report tend to make it easier for companies to read and review overall business performance.
How to Make Consolidated Financial Statements
Basically, the elements of consolidated financial statements are the same as independent financial statements in general which consist of balance sheets, income statements, statements of changes in equity (statement of change in equity), and cash flow statements ( cash flow statements). However, the designation for each element in the consolidated report is slightly different—added ‘consolidation’ after the name of each element.
Accordingly, the consolidated financial statements consist of a consolidated balance sheet, consolidated income statement, consolidated statement of retained earnings, and consolidated statement of cash flows.
Structured Steps in Preparing Consolidated Reports
You can prepare consolidated financial statements by using Microsoft Office Excel software or other accounting applications with the following steps:
First of all, examine the financial statements of both the parent and subsidiary companies as a whole. At this stage, you must be extra careful in order to identify errors or omissions in recording. This identification is useful so that corrections and adjustments can be accelerated as well.
Next, you must adjust each report to eliminate the profit and loss for each company.
Eliminate the income and dividends from the subsidiary and return the balance of the subsidiary’s investment account to the balance at the beginning of the period.
Make adjustments to make a note of the non-controlling interest in the profits and dividends of subsidiaries.
In the subsidiary’s report, also eliminate the reciprocal investment balance that was previously reported in the parent’s financial statements. On the other hand, it also eliminates equity that was previously reported in the subsidiary’s finances.
If there are differences in fair value, do the allocation and amortization. Eliminate other reciprocal balances (such as accounts payable, income and expenses, etc.)
Consolidated financial statements are very useful for companies that have ‘children’. However, the preparation of consolidated financial statements seems to make you dizzy a little because there are several corporate entities in one financial statement. However, don’t worry. Because, with the help of professional consultants, you no longer need to be alone when compiling consolidated financial statements!
To learn more about debt consolidation you can read here.