What Are Consolidated Financial Statements?

Financial statements of an entity with numerous divisions or subsidiaries are called consolidated financial statements. Companies frequently refer to the aggregated reporting of their entire business collectively when using the term “consolidated” in financial statement reporting. However, the Financial Accounting Standards Board defines consolidated financial statement reporting as the reporting of an entity with a parent company and subsidiaries.

Public companies must report financials in accordance with the Financial Accounting Standards Board’s Generally Accepted Accounting Principles (GAAP), while private companies have very few reporting requirements for financial statements. International Financial Reporting Standards (IFRS), established by the International Accounting Standards Board, must also be followed by companies that report on their financial performance internationally. Companies that choose to report consolidated financial statements with subsidiaries must follow certain specific requirements under both IFRS and GAAP. 

Consolidated Financial Statements: An Overview

In general, financial statement consolidation necessitates a company integrating and combining all of its financial accounting functions in order to produce consolidated financial statements that show results in standard balance sheet, income statement, and cash flow statement reporting. It is typically decided annually whether to file consolidated financial statements with subsidiaries, and this decision is frequently made due to potential tax or other benefits. The percentage of ownership the parent business holds in the subsidiary determines whether or not a consolidated financial statement with subsidiaries is required. A subsidiary is typically defined as a firm with 50% or more of the parent company’s shares, which enables the parent company to include the subsidiary in a consolidated financial statement. In rare circumstances, less than 50% ownership may be permitted if the parent company can show that the subsidiary’s management is closely aligned to the parent firm’s decision-making procedures.

The cost method or the equity method are typically used to account for a company’s ownership of subsidiaries when it opts not to include the subsidiary in complex consolidated financial statement reporting.

Private businesses typically choose whether to annually produce consolidated financial statements that include their subsidiaries. The tax advantages a company may receive from filing a consolidated versus an unconsolidated income statement for a tax year typically have an impact on this annual decision. Financial statements for a longer period of time are typically created either consolidated or unconsolidated by public companies. A public company may need to submit a change request if it wants to switch from consolidated to unconsolidated. Filing consolidated subsidiary financial statements is typically a long-term financial accounting decision because switching from consolidated to unconsolidated may also cause issues with auditors or investor concerns. However, there are some circumstances, such as a spinoff or acquisition, where a change in corporate structure may necessitate a change in the consolidated financials.

Reporting Requirements

Public companies must report financials in accordance with the Financial Accounting Standards Board’s Generally Accepted Accounting Principles (GAAP), whereas private companies have very few reporting requirements for financial statements. A company that reports financial information on a global scale must also follow the International Financial Reporting Standards (IFRS) established by the International Accounting Standards Board. For entities that choose to report consolidated financial statements with subsidiaries, both GAAP and IFRS have some specific guidelines.

A parent company and its subsidiaries will typically prepare separate and consolidated financial accounting systems. Due to the accounting integrations required to produce final consolidated financial reports, businesses that wish to produce consolidated financial statements with subsidiaries must make a large investment in financial accounting infrastructure. 

Companies adopting consolidated subsidiary financial statements must adhere ti a few important temporary requirements. The primary one prohibits the parent firm or any of its subsidiaries from transferring money, revenue, assets, or liabilities between businesses to unfairly enhance performance or reduce taxes due. Standards for the level of ownership necessary to include a company in consolidated subsidiary financial statements may vary depending on the accounting principles used. 

The aggregate reporting results of distinct legal entities are reported in consolidated financial statements. The balance sheet, income statement, and cash flow statement are the final financial reporting statements that are unchanged. Each distinct legal entity develops its own financial accounting procedures. The parent business then thoroughly combines these figures to create the final consolidated reports of the cash flow statement, income statement, and balance sheet. Consolidated financial statements are useful to investors, regulators, and consumers in assessing the overall situation of the entire entity because the main company and its subsidiaries constitute one economic entity. 

Cost and equity methods for ownership accounting 

To report ownership interest between corporations, there are essentially three options. Consolidating subsidiary financial statements is the first option. Companies may also account for an ownership interest in their financial reporting using the cost and equity approaches. Generally speaking, ownership is determined by the total quantity held. A corporation would often adopt the cost method of financial reporting if it owns less than 20% of the stock of another company. A corporation will often employ the equity method if it owns more than 20% but less than 50%. 

Company Example 

Coca-Cola (KO) and Berkshire Hathaway Inc. (BRK.A, BRK.B) are two instances of corporations. Berkshire Hathaway, a holding firm, has ownership stakes in numerous businesses. The financials of Berkshire Hathaway show that the company employs hybrid consolidated financial statements. The company segments its businesses into Railroad, Utilities, and Energy, followed by Insurance and Other. It accounts for its ownership interest in publicly traded firm Kraft Heinz (KHC) using the equity method. 

A multinational corporation with numerous subsidiaries, Coca-Cola. It supports its global presence in a variety of ways thanks to its subsidiaries spread out over the globe. With subsidiaries in the fields of bottling, beverages, brands, and more, each of its companies helps it achieve its aims for food retail.

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