Do you know what really goes into the making of a financial statement, outlining the genuine happenings of a company with several subsidiaries? Consolidated financial statements are your gateway into capturing a unified and seamless financial picture for an entire group of companies.
But to put it bluntly not always would it prove to be easy: Intercompany transactions, adjusting for minority interests and other regulations can seem like putting together a really giant puzzle. But don't worry! This guide will cover all you need to know-including best practices - to make you a pro at consolidation and confident in your skills. Let's dive in!Â
What are Consolidated Statements?
Consolidated Statements are known as the statements of financial position for a parent company and its subsidiaries taken together. They give an idea of the group’s position as if it were one single company. Included in the statements- consolidated statement of financial position, consolidated statement of comprehensive income and consolidated statement of cashflows.
The ultimate objective of consolidated financial statements is to make it possible for stakeholders to critically reflect on the financial performance of a company from a wider viewpoint. In India, it is frequently demonstrated by means of American accounting concepts such as IFRS (International Financial Reporting Standards) and Ind AS (Indian Accounting Standards).
Why Do Consolidated Statements Matter?
Consolidated Statements are important financial statements that give much transparency since they provide a comprehensive financial position and result of the company and its subsidiaries. To an investor and shareholder, it would be essential to find out what value the company holds.
Compliance to Regulation: SEBI (Securities and Exchange Board of India) requires Indian companies registered with stock exchanges to issue Consolidated Financial Statements. This gives way under international conventions to standardize and make Financial Reports transparent.
Better Decision: Management can make proper management decisions based on an overview of the group's finances. Efficient Consolidated Statements enable scope to develop strategy and evaluate risk.
Elements of Consolidated Statements
Consolidated Balance Sheet: This is the balance sheet of the parent and all the subsidiaries combining their assets, liabilities, and equity. It removes all intercompany transactions to eliminate double counting.
Consolidated Income Statement: The statement displays all revenues and expenses of the group. Intra-group sales and income are removed.
Consolidated Cash Flow Statement: This statement presents the cash flows from operations, investments, and financing for the group as a whole.
Preparation Steps for Consolidated Statements
Identify Parent and subsidiaries: Most first identify those that will be consolidated. Accounting Principles defined parent as one that controls another entity commonly known as subsidiary by holding more than 50% of voting shares of the subsidiary.
Uniform Accounting Policies: ensures that all entities within the group follow uniform Accounting Principles and policies. For example, when the parent entity adopts Ind AS, it will ensure that the accounting practices of the subsidiaries need to align themselves with Ind AS.
Intercompany Elimination: The intercompany transactions between the parent entity and subsidiary entities should be removed. Such examples include intercompany sales, receivables, and payables. If included, it inflates the financial position of the group.
Minority Interest: When the parent does not wholly own a subsidiary, minority interest must be recognized. Minority interest appears as a separate figure in the equity section of the Consolidated Financial Statements.
Combine Financial Data: All intercompany balances between the parent and all subsidiaries need to be removed from the data pertaining to the parent's and its subsidiaries' finances. The consolidated data serve as the base for the Consolidated Statements.
Challenges in Creating Consolidated Statements
Although Consolidated Financial Statements are particularly significant, the process of preparation can be quite complex:
Intercompany Transactions: Complicated intercompany transactions need to be maintained and reconciled with strict care.
Multiple Currencies: If both parent and subsidiaries operate in different countries, there is the need for conversion between various currencies, which creates complications.
Non-Uniform Accounting Practices: All the entities have uniform Accounting Principles, which becomes tough if some subsidiaries are based in regions with different standards.
Role of Technology in Simplifying Consolidation
Advanced Financial Software: With advancements in financial software, companies' preparation for consolidated statements has become much easier. Automated financial tools can easily locate and remove intercompany transactions. Further, such tools provide real-time information on data thus more strategic decision-making is undertaken.
The global financial software market is expected to reach $37.8 billion in 2028 with a CAGR of 6.1% as per the 2023 report of Statista. The growth depicts the growing dependency on technology to simplify financial-related operations.
Consolidated Statements and Financial Reporting Trends in India
India has adopted international standards of Financial Reporting, and Ind AS brought in a major shift in the preparation of Consolidated Statements. Ever since its implementation for listed companies from 2016, there is quality improvement in financial disclosures.
Key Statistics:
According to a 2023 report by EY, 85% of India's CFOs consider the accuracy of Consolidated Financial Statements very crucial since the statement attracts global investors.
The ICAI has indicated that compliance with International Accounting Principles through Ind AS will make India's operating position even stronger in global markets.
Preparation for Certification and Upskilling
Obtaining a financial modeling certification is one of the ways by which finance professionals in India could broaden their exposure to Consolidated Statements. These certifications expose professionals completely towards financial analysis, consolidation, and Financial Reporting. Advanced topics like corporate finance and consolidation techniques may offer the edge a professional requires over others.
Today in India there are numerous Edtech platforms that provide targeted financial modeling certifications to help build practical knowledge on the preparation of Consolidated Financial Statements for finance professionals involved with such preparation. Such investments in terms of money would bring power to finance professionals and enable them to perform their jobs much better.
Conclusion
Prepared statements of Consolidation would fall under the most crucial aspect as a finance professional in addition to the fact that consolidation financial statements play an extremely important role in bettering compliance, transparency, or indeed decision-making. Being abreast with the evolving technology and adding a finance modeling certification will further position you as a qualified financial professional.
For those aiming to climb higher up the rungs in finance, constant updates of knowledge can be a good move toward building a successful career.
FAQs
- What are consolidated statements?
Consolidated statements are such financial statements that comprise all the data of a parent company and its subsidiary companies into one statement. This integrates balance sheet, income statement, and cash flow statement together, thus giving a good holistic view of the financial health of the whole group.
- Why do consolidated financial statements matter?
The overall position of a group of companies is represented in consolidated financial statements. Group-wide performance, risks, and opportunities are thus better understood by stakeholders such as investors and management if overall consolidated financial statements are produced.
- What accounting standards govern the presentation of consolidated financial statements?
The consolidated financial statements shall comply with several accounting principles: General Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).
- How to prepare consolidated financial statements?
Preparation of consolidated financial statements encompasses the following steps:
- Identify the reporting entity: Identify which subsidiaries to be included based on the subsidiary controls or ownership.
- Gather financial information: Obtain trial balances and other relevant data from each of the entities.
- Adjust for accounting policies: Ensure that all the entities apply uniform accounting practices.
- Consolidate the financial statements: Add the assets, liabilities, revenues, and expenses of each of the entities.
- Make any disclosures necessary: Give pertinent disclosures relating to subsidiaries and the consolidation techniques.
- What are some typical problems experienced in preparing consolidated financial statements?
Some common problems are:
- Ensuring compliance with varying standards of accounting among different jurisdictions.
- Intra-group transactions to be eliminated during consolidation
- Alignment of the diverse accounting policies for subsidiaries.
- Compliance with legislative changes affecting consolidations
- What are the measures that help me produce accurate consolidated financial statements?
To attain accuracy:
- Establish proper controls of internal financial reporting
- Use consolidation software for finance to improve and simplify data collection and reporting
- Maintenance and reconciliation of intercompany transactions on a continual basis before consolidation
- Auditing thoroughness checks if the information reported is valid.
- What is the role of financial modeling qualification in the preparation of consolidated statements?
Certification on financial modeling offers professionals the apt skills to make accurate models that try to reflect complex business structures. It is helpful in consolidated statement preparation because it enhances analytical skills and an understanding of how financially different entities play out within a group.
