Consolidated financial statements: Definitions and examples | Prophix (2024)

ProphixJun 12, 2024, 8:00:00 AM

Consolidated financial statements allow organizations to create a more accurate picture of their financial position by accounting for subsidiaries. But when should you produce these statements? How are they created? And what regulatory bodies oversee how it’s done?

You’ll find this and more in this full guide to consolidated financial statements.

What are consolidated financial statements?

A consolidated financial statement is a document that represents the assets and liabilities of multiple entities in a single statement. A parent company produces it to represent its subsidiaries as part of its own financial position. The way all this financial information is consolidated will depend on whether the parent company owns a majority stake in the subsidiaries or not.

How do consolidated financial statements work?

Broadly speaking, consolidated financial statements are read similarly to unconsolidated statements. Depending on the type of statement, it might list assets, liabilities, or income on individual lines. For fully consolidated statements—where all a subsidiary’s assets and liabilities are rolled into the parent’s statement—there won’t be separate line items showing subsidiaries. For statements that use other methods, you may see line items with names like “equity investments” to represent subsidiaries.

What are the requirements for a consolidated financial statement?

To include a subsidiary in a fully consolidated financial statement, one of these two requirements must be true:

• The parent company owns a majority of the subsidiary: When a parent company owns at least 51% of a subsidiary, it can consolidate the financials of both entities into a single statement.

• The leadership of both entities is aligned: If the parent company doesn’t own a majority stake in its subsidiary, it can still create consolidated financial statements if it can show significant alignment between its leadership team and that of the subsidiary. This means the parent has considerable influence and involvement in the day-to-day operations of the subsidiary.
  

Parent companies can also represent subsidiaries that don’t meet these requirements in consolidated financial statements through the cost or equity method of consolidation, which will represent the owned portion of the subsidiary on the final statement.

Why are consolidated financial statements important?

For some companies, consolidated financial statements are mandatory. This is especially true of public companies and private companies that issue financial instruments in a public market—though this depends on the jurisdiction the company operates in. In these situations, producing financial statements is important for remaining compliant with regulatory requirements.

Companies that don’t have to produce consolidated financial statements may still choose to do so. Usually, this is for certain tax advantages or to provide a better picture of the entity’s overall financial position to investors.

Consolidated financial statements vs. separate (unconsolidated) financial statements

In practice, while consolidated financial statements share the structural framework with their unconsolidated (separate) counterparts, they serve distinct purposes and provide different levels of detail.

A consolidated balance sheet, for example, looks like a normal balance sheet. If it’s fully consolidated—meaning all a parent’s subsidiaries have their assets and liabilities completely folded into the parent’s numbers—then you’ll need to dig into disclosures to see the methodology and impacts of the consolidation. But if any subsidiaries are consolidated with the cost or equity methods, it’ll be easier to spot their contributions to the final balance sheet.

Consolidated financial statements generally have more disclosures than unconsolidated statements to cover intercompany transactions, consolidation methodology, and other relevant details that explain how the consolidated figures were derived, providing a transparent overview of the financial relationships within the group.

Consolidated income statement (consolidated statement of operations and comprehensive income)

A consolidated income statement, also known as the consolidated statement of operations and comprehensive income, aggregates the income of a parent company along with its subsidiaries. When a parent company owns at least 51% of a subsidiary, all the subsidiary’s revenue, expenses, and income are rolled into the parent’s consolidated income statement.

For situations where the parent does not have a controlling interest (usually less than 50% ownership), the parent may account for its share of the subsidiary's earnings using the equity method, which involves reporting its proportionate share of the subsidiary's earnings, not just the dividends received. This approach provides a more comprehensive view of the parent company’s financial performance, reflecting its interest in the profits generated by its subsidiaries, regardless of whether those profits are distributed as dividends.

Example

This example of a consolidated income statement from the SEC’s archives shows how income from a subsidiary is represented when only a minority share is owned by the reporting entity. Look at the minority interests line:

Consolidated balance sheet (consolidated statement of financial position)

A consolidated balance sheet, also known as a consolidated statement of financial position, combines the assets, liabilities, and shareholders' equity of a parent company and its subsidiaries in a single document. For fully consolidated subsidiaries, their numbers are absorbed by the parent, making them part of the parent's overall financials. On the other hand, investments in subsidiaries that are not fully consolidated, usually due to the parent company not having full control or a majority interest, are shown as distinct line items, reflecting either earnings or equity in the final consolidated balance sheet.

Example

This balance sheet from Microsoft’s Q4 2022 disclosure shows consolidated cash and cash equivalents.

Consolidated statement of changes in shareholders' equity

The consolidated statement of changes in shareholders' equity is commonly required as part of the financial disclosures an entity produces, either quarterly or annually. It outlines the changes in the entity's equity over the reporting period, including net income, dividends, issuance or repurchase of shares, and other equity adjustments. This document communicates how the equity components of the entity have changed, providing insight into the financial dynamics affecting shareholder value.

Example

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Consolidated statement of cash flow (consolidated statement of changes in funds)

The consolidated statement of cash flows (consolidated statement of changes in funds) shows cash inflows and outflows for an entity and its subsidiaries. It includes cash activities from operations, investments, and financing. For majority-owned subsidiaries (over 50% ownership), their cash flows are fully consolidated into the parent’s statement. For minority interests (less than 50% ownership), dividends are reflected in the cash flows of the investing activities section of the parent company’s cash flow statement, demonstrating the financial benefits received from such investments.

Example

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How to create consolidated financial statements

The steps needed to create a consolidated financial statement will vary slightly depending on the exact type of statement you’re producing. That said, here are the general steps you’ll follow for most statements:

Step 1: Identify the entities you need to consolidate

Before you can create a consolidated financial statement, you need to know which entities need to be consolidated. This involves assessing the degree of control or influence a parent company holds over its subsidiaries or associates, determining whether full consolidation or another method, like the equity method, is appropriate.

Step 2: Combine statements of parent companies and subsidiaries

The most time-intensive part of the consolidation process is gathering and harmonizing all the data from the parent company and its subsidiaries. Multiple teams need to be involved and data must be collected from several platforms. This ensures uniform accounting practices and policies across all entities, streamlining the consolidation process.

Step 3: Eliminate intercompany transactions

A crucial part of any consolidation, eliminating transactions between entities represented in the same statement, creates a more accurate view of the parent company’s financial position. If, for example, the parent company sells $100,000 worth of products to a subsidiary, this internal sale is removed in the consolidation to avoid inflating revenues and expenses.

Step 4: Adjust for Unrealized Gains or Losses

Unrealized gains or losses can make consolidated financial statements inaccurate, especially if they result from intercompany transactions. These adjustments ensure that the financial statements reflect only realized gains and losses from external transactions.

Step 5: Prepare disclosures

The number of disclosures necessary for a financial statement will depend on the exact statement being produced and the jurisdiction each entity operates under. These disclosures will have to explain the consolidation method used and confirm the elimination of intercompany transactions.

These steps are applicable to most types of financial statements, but there are a few more that are only used in some:

• Allocate parent company investments: When preparing a consolidated balance sheet, a parent company must list the shareholder equity of subsidiaries based on how much of that subsidiary it owns.

• Adjust non-controlling interests: For some statements, it’s important to show the equity and earnings attributable to non-controlling interests as a separate line item, highlighting the portion of the subsidiary not owned by the parent company.

Best practices

While creating consolidated financial statements can be a time-consuming, labor-intensive process, there are some things you can do to streamline your work and eliminate the risk of costly errors.

• Start early: Too many finance teams start consolidating their statements at the last minute. This means a minor issue has the potential of becoming a major roadblock if you don’t have the time you need to solve it.

• Look for opportunities to use automation: Using manual processes and legacy systems might allow you to save some of your budget, but it’s introducing risk and slowing you down. A consolidation solution like Prophix Onecan help you centralize your data, streamline your work, and audit your statements quickly.

• Iterate on your process: Your consolidation shouldn’t stay static year-to-year. When you finish preparing your consolidated statements, run a retrospective to see what worked well and what didn’t. That way you can improve on your process next year.

• Increase the frequency of data exports: Many organizations export the data they need for consolidation too infrequently. This creates massive exports that need to be reviewed extensively, slowing down the entire consolidation process.

Cost and equity methods

When a parent company has a controlling interest (usually considered to be at least 51% ownership) of a subsidiary, it uses the full consolidation method, which means all the subsidiary’s assets, liabilities, income, and expenses are added to the final consolidated statement of the parent company. However, when the parent has a non-majority ownership stake in the subsidiary, or cannot exert significant influence over its operations, then it uses other consolidation methods like the cost and equity methods.

The cost method of consolidation is only used when a parent company cannot exercise considerable influence over the subsidiary (often implied by an ownership of 20% or less), the investment is recorded at its acquisition cost on the balance sheet. Dividends received from the subsidiary are recognized as income in the parent company's income statement, rather than reducing the carrying amount of the investment. The subsidiary’s own assets and liabilities wouldn’t show up on any consolidated statements released by the parent company.

The equity method of consolidation is used when a parent has considerable influence over a subsidiary, typically assumed with ownership between 20% and 50%. The investment in the subsidiary is initially recorded at cost and is then adjusted to reflect the parent's share of the subsidiary's post-acquisition profits or losses. These adjustments affect both the carrying value of the investment on the balance sheet and the parent company's net income. So, if Company A owns 35% of Company B, and Company B brought in $100,000,000, Company A would report $35,000,000 as income, affecting both its income statement and the carrying value of the investment on its balance sheet. Dividends received from the subsidiary reduce the carrying amount of the investment, reflecting the payout of assets, but are not recognized as revenue in the parent's income statement.

What are the reporting requirements of consolidated financial statements?

FASB's GAAP requirements

The Generally Accepted Accounting Principles (GAAP), managed by the Financial Accounting Standards Board (FASB), apply to publicly traded companies in the United States. ASC 810 is the specific standard that covers financial consolidation and how to create consolidated statements. This standard:

• Clarifies which companies need to produce consolidated financial statements and which ones can choose to do so.
• When full consolidation is required, despite percentage ownership below 51%.
• How different voting models affect consolidation.

IFRS requirements

International Financial Reporting Standards (IFRS) apply to entities that operate outside the United States. IFRS 10, a standard specific to consolidation, outlines:

• Exceptions for companies that don’t need to produce consolidated statements.
• Consistent standards for financial reporting across consolidated entities.
• Accounting frameworks for consolidation.

Challenges of creating consolidated financial statements

It’s a resource-intensive process

Many processes owned by the Office of the CFO are time-consuming and labor-intensive. Creating consolidated financial statements is no different. Many organizations still rely on manual processes and legacy systems to get this done, which can lead to long nights of dealing with outdated data and the potential for human error.

Data collection is lengthy and complicated

The amount of data required to produce a financial statement for a single entity is already massive. Imagine how much more is needed for a consolidated statement. Not only that, but multiple finance teams must coordinate to get all the necessary data in the right place in an efficient, timely manner.

Accounting systems are often incompatible

While parent companies might have some level of control over the subsidiaries they include in their consolidated financial statements, they rarely get to dictate which accounting system every entity will use. If these systems don’t have native integrations, finance teams might be stuck manually exporting data to a common platform—like a spreadsheet.

The best choices for consolidated financial statements software

1. Prophix One™

Prophix One is an all-in-one Financial Performance Platform for every process that goes through the Office of the CFO. It puts all your financial data at your fingertips so you can create consolidated financial statements with ease.

Best for: Agile companies that want a flexible consolidation solution that scales with them.

Features: Budgeting and planning, reporting and analytics, financial consolidation, account reconciliation, disclosure management, integrated business planning, and intercompany management.

Pros: A powerful suite of consolidation tools that’s easy to use.

Cons: Since Prophix One is a robust platform, it can have a bit of a learning curve.

Integrations: Built-in Power BI and MS365 integrations, and data integration tools for connecting to other data sources.

Pricing:

2. Fluence Technologies

This platform helps finance teams produce consolidated financial statements no matter how complex their organizational structure is.

Best for: Streamlining financial close, consolidation, and reporting.

Features: Financial consolidation, finance-led reporting, reconciliation, close management, and disclosure management.

Pros: No-code, finance-owned platform reduces IT involvement in deployment, training, and troubleshooting.

Cons: Not as specialized as other financial consolidation tools.

Integrations: With Datablend, you can aggregate data from disparate sources yourself.

Pricing: Contact their sales team for a quote.

Fluence Technologies vs. Prophix

It’s easier to get started with Fluence, but your teams might find themselves limited by the functionality. With Prophix, you can get a solution that fits your needs exactly.

3. NetSuite

Oracle’s NetSuite platform is an accounting, ERP, CRM, and e-commerce platform all rolled into one. That makes it a great option for consolidation if you’re already using it for other tasks.

Best for: Enterprises that want a single platform that can manage almost any use case.

Features: Accounting tools, customer relationship management, activity tracking, reporting, and audit management.

Pros: A solid all-in-one platform that can replace dozens of tools.

Cons: Not suited to small or mid-sized businesses.

Integrations: You can connect your own data sources with NetSuite Connector.

Pricing: Since prices aren’t available on their website, you’ll need to get a quote from their sales team.

NetSuite vs. Prophix

An all-in-one tool like NetSuite can get pricey quickly, and if you’re just looking for a financial consolidation platform, you’ll get more than you bargained for. Prophix has a deeper focus on tools for the Office of the CFO.

Create consolidated financial statements at light speed with Prophix

Creating consolidated financial statements can be time-consuming, especially when the Office of the CFO relies on legacy systems and manual processes. But it doesn’t have to be that way.

With Prophix One, you can aggregate data automatically and build consolidated financial statements in less time and with no errors.

Curious to see how it works? Check out our demo.

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