If you’re running a parent company with multiple subsidiaries, you need to be able to understand (and explain) the financial statements from all of those subsidiaries and ventures. The next step? Consolidate them. It’s not always easy, but we’re going to show you how to handle it step by step, wrapping it all up with a final consolidated financial statement for the parent company.
Understanding consolidated financial statements
What exactly does the term "consolidated financial statement" mean for you and your parent company?
You can think of consolidated financial statements as a financial assessment for your entire business. You’re taking all of those separate financial statements from your subsidiaries, joint ventures, and other entities, and bringing them together. It’s the final word in how your business is performing as a whole.
With a consolidated financial statement, you can see the big picture—how all those parts come together to tell the story of your entire organization. This allows investors, regulators, and possibly even auditors to see exactly how all of the parts of your business are performing.
But it's not as simple as just adding up the numbers. Consolidating financial statements involves some serious accounting work to eliminate any double-counting and ensure everything is reported accurately.
When you need to consolidate financial statements
Now that we've got a handle on what consolidated financial statements are, the next question is: What entities “count” as ones that need to be consolidated?
That depends on a few different factors:
Ownership control
How much control does your parent company have over your subsidiaries and other entities? If a parent company has more than 50% of another entity’s voting shares, or if it has significant influence over the entity’s operations, that’s the tipping point. Consider that an indicator that you must consolidate their financial statements with those of your parent company.
This means that by definition, your subsidiaries fall under this category. Subsidiaries are companies that belong to a parent company.
It’s also possible to be significantly involved with another entity without actually owning more than 50% of its voting shares. This is called a variable interest entity (VIE), and in these cases, controlling interest is based not on shares, but on the power to direct activities that directly impact financial performance. It can also be related to the obligation to absorb losses, or the right to receive benefits from the entity.
If your parent company has a controlling financial interest in another company, be sure to consolidate the VIE’s financial statements with those of your parent company.
Consolidated reporting requirements
Still not sure if you should consolidate? The Generally Accepted Accounting Principles (GAAP) govern when and how companies should consolidate their financial statements—so they are the right place to check whenever you’re unsure about what the right move would be.
Investor expectations
There are some situations where you may not be legally required to create a consolidated financial statement—but you might want to do so anyway. Investors and stakeholders may want to see a consolidated financial statement for complete transparency and full understanding of your overall financial health and trajectory. Providing these statements can help increase investor trust and confidence.
In addition, your employees may benefit from seeing a consolidated financial statement in order to give them greater insight into the direction of the company and its overall goals. A more informed and engaged workforce is always a good thing!
So that’s it: take a good hard look at your company’s ownership structure, then consult the relevant accounting standards to determine when consolidation is necessary. You’re already on the right track to a final consolidated financial statement report.
7 steps to consolidate your financial statements
Now that you have a better handle on when financial consolidation is necessary, let's get into the process of actually creating consolidated financial statements. It’s a little technical, but we'll break it down into manageable steps to get your consolidated financial statement report ready to go.
1. Identify subsidiaries and investments
Begin by identifying all subsidiaries, joint ventures, and other entities in which your company has a controlling interest or significant influence. Then determine the extent of your company's ownership or control over each entity.
Our section above will help you out a bit with this process. Remember: when in doubt, consult the relevant accounting standards such as GAAP.
2. Gather financial statements
Time to get it all together. Collect the financial statements of the parent company and its subsidiaries, ensuring they are prepared using consistent accounting policies and consolidated reporting periods. This includes balance sheets, income statements, statements of cash flows, and statements of changes in equity.
3. Eliminate intra-entity transactions
Your statements might not always be neat and tidy right off the bat—you have to eliminate intra-entity transactions first. An intra-entity transaction is when your entities exchange goods, services, or assets between each other. While this is a common practice, you still need to account for it.
Review the financial statements for any intra-entity transactions, including intercompany sales, loans, or transfers. Eliminate these transactions to avoid double-counting and ensure accuracy in the consolidated financials.
4. Adjust for non-controlling interests
A consolidated financial statement shows the whole picture, so if you don’t fully own a company, you need to account for that. If you don’t own 100% of an entity, you should adjust the entity’s equity and income to reflect the portion that is attributable to non-controlling interests (NCI). So you’ll need to adjust equity balances and deduct the NCI’s share of net income from the total, consolidated net income.
This makes sure that you aren’t taking credit for something that isn’t actually under the control of the parent company. You’ll also need to disclose the non-controlling interests' share of equity and net income separately in the consolidated financial statements.
5. Consolidate those financial statements
Combine the financial statements of the parent company and its subsidiaries into a single financial statement. This involves aggregating assets, liabilities, equity, revenues, expenses, and cash flows of all entities being consolidated.
Prepare the consolidated balance sheet, income statement, statement of changes in equity, and statement of cash flows. These statements provide a comprehensive view of the financial position, performance, and cash flows of the entire group of entities.
6. Review and audit
Measure twice, cut once—basically, make sure you have it right. Review the consolidated financials for accuracy, completeness, and compliance with accounting standards. You can also consider engaging external auditors to perform an audit or review of the consolidated financial statements for additional assurance.
Once you’re satisfied with the results, present the statements to stakeholders, including investors, lenders, and regulatory authorities as needed.
7. Monitor and update
You’re done for now—but there’s always next year. Companies and subsidiaries often change throughout the year, so stay on top of any relevant changes and how they might impact your consolidated statement. Continuously monitor changes in the group's structure, ownership, and operations that may impact the consolidation process. Then you can update the consolidated financial statements as necessary to reflect any changes or new developments.
Rules and guidance often change, so remember to consult relevant accounting standards and seek professional guidance as needed to ensure accuracy and compliance as you complete this process.
Examples of consolidated financial statements
Most major companies have subsidiaries, and so they have to create consolidated statements. Here are just two examples so you can see how it works for them.
You might know that PepsiCo is more than just a soda company—they have numerous subsidiaries, including Frito-Lay and Quaker Oats. As a publicly traded company, their consolidated financial statements are available for all to see in their annual reports. These statements are helpful for shareholders to understand PepsiCo's overall financial health, strategic direction, and potential risks.
Alphabet Inc, Google’s parent company, is a global company with many subsidiaries and divisions, each with their own financial statements. While Alphabet prepares a consolidated financial statement to provide a comprehensive view of its performance, it may also disclose certain financial information separately for its various operating segments, which provides insight into the financial performance of each segment.
Ready to leverage automation to streamline financial consolidation?
As companies grow and expand their operations, the complexity of financial consolidation increases substantially. Fortunately, advancements in technology offer innovative solutions to streamline the consolidation process.
Here's how leveraging automation in financial operations can make a difference:
Efficient data integration: Automation-enabled software solutions seamlessly integrate data from various sources. This eliminates the need for manual data entry and reconciliation. The bottom line? Fewer errors and more time saved.
Real-time visibility: With automation, financial data is updated in real-time, providing stakeholders with instant access to accurate and up-to-date information. This enables better decision-making and strategic planning.
Standardized processes: Automation ensures consistency and standardization in financial processes across the organization. By establishing predefined workflows and approval hierarchies, automation software streamlines all financial operations processes, including consolidation, while minimizing discrepancies.
If you have multiple business entities, such as subsidiaries and parent companies, BILL Accounts Payable can be a big help in simplifying a consolidated financial statement and giving a better picture of your company’s financial health. BILL offers multi-entity accounting with automation tools that can streamline how you manage and report financial data. This means you can easily see both how individual subsidiaries are performing and the organization as a whole.
Learn more about BILL Accounts Payable.
Consolidated financial statement FAQ
What are the techniques for the consolidation of financial statements?
You can choose from three main methods:
- Full consolidation: This combines financial statements of all subsidiaries under the parent company, providing a comprehensive view of the group's finances.
- Proportionate consolidation: Joint ventures will likely use this method, where each venturer proportionately consolidates their share of jointly controlled entity's assets and liabilities.
- Equity consolidation: Are you a parent company without full control over the subsidiary? This method is used for significant influence cases, recognizing the investor's share of the earnings or losses.
These techniques help ensure a transparent and reliable consolidated financial statement, adhering to accounting standards such as GAAP.
Who is responsible for preparing consolidated financial statements?
The responsibility for preparing consolidated financials typically belongs to the parent company's finance and accounting team. Within that parent company, here’s a breakdown of how it often works:
- The CFO oversees the entire reporting process of the parent company, including the consolidation of financial statements. They provide strategic guidance and ensure compliance with accounting standards and regulatory requirements.
- The controller or finance director is responsible for coordinating the consolidation process.
- External auditors may be engaged to review the consolidated financials for accuracy, completeness, and compliance with accounting standards and regulatory requirements. They provide independent assurance to stakeholders regarding the reliability of the consolidated financial information for subsidiaries and the parent company.
Who is exempt from preparing consolidated financial statements?
Not all entities are required to prepare consolidated financial statements. Here are some cases where exemptions may apply:
Small and medium-sized enterprises (SMEs)
Many jurisdictions exempt SMEs from creating consolidated financial statements if they meet certain criteria, such as having a low level of activity, limited size, or few subsidiaries. Instead, it’s possible that SMEs may prepare separate financial statements for each entity, including the parent company. Check with an accounting professional to see if this exemption applies to you.
Investment entities
Investment entities that meet specific criteria may be exempt from consolidating their subsidiaries' financial statements. These entities primarily hold investments for capital appreciation, dividends, or both, rather than for operating activities.
Subsidiaries under temporary control
If a subsidiary is under temporary control or held for resale, it may be exempt from consolidation. This exemption applies when the subsidiary is acquired with the intent to sell within a short period or is held for disposal as part of a business strategy.
Other legal exemptions
Some jurisdictions may provide legal exemptions from consolidating financial statements for specific types of entities, such as not-for-profit organizations, public sector entities, or entities with specific ownership structures. Your accounting professional can help you determine whether you fall into one of these categories.
While exemptions from creating consolidated financial statements may reduce certain reporting burdens, don’t think you’re getting away without any extra work. These cases can also come with various disclosure requirements and responsibilities to ensure transparency and accountability in financial reporting.
Not sure which rules and exemptions apply to you, or where to get started? Consult with accounting professionals and regulatory authorities to get clarity.
