Consolidated Reporting

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What is consolidated reporting?

  • What is consolidated reporting?

    A consolidated report is a financial statement of an entity, or parent company, with multiple divisions or subsidiaries. In general, this report includes assets, liabilities, net assets, net equity, expenses, revenue, and cash flow of the controlled entity. Usually, companies decide to consolidate financial statements when there is some sort of advantage, like a tax cut. In fact, once there is at least 50% ownership in another company, the now parent company is required to consolidate financial statements. However, businesses can still do this if they have less than 50% ownership. But they can prove that they heavily influence the management decisions of its subsidiary.

  • What is the difference between consolidated and combined finances?

    Sometimes, people think that consolidated and combined finances are the same thing. However, there is a difference between the terms. On one hand, combined finances are financial statements of multiple subsidiaries of a parent company. On the other hand, consolidated finances indicate the financial position of the parent company and its subsidiaries by aggregating financial results.

  • Why do we consolidate financial statements?

    The purpose of consolidated financial statements is to show the creditors and owners of the parent company where the entire organization (parent and subsidiaries) stands, as if they were one entity. Usually, these statements show how operations and finance impact the organization.

  • What are the rules of consolidation?

    Generally Accepted Accounting Principles (GAAP) requires consolidated financial statements when a company’s ownership interest holds more than half (or 50%) of voting shares. However, consolidation may still be required for company’s with less than 50% voting interest or equity. In this case, a detailed written agreement or other business arrangement between two companies may be enough to establish who must consolidate financial statements.

What are the different methods of consolidation?

There are three different consolidation methods that are determined by the level of power or control of the parent company. Here are the three methods with brief descriptions:

  • 1) Full consolidation: the transfer of all assets, liabilities, and equity to the parent company’s balance sheet, and all expenses and revenue to the parent company’s income statement. Consolidation occurs if the subsidiary is controlled by the parent company.
  • 2) Proportionate consolidation: the transfer of assets and liabilities to the parent company’s income statement based only on their proportion of interest in the joint venture. In addition, revenues and charges are put into the parent company’s income statement based on their proportion of involvement in the joint venture.
  • 3) Equity method: a purely financial method of replacing the Associate’s amount of shares with the proportion of the Associate’s Shareholder’s equity. Oftentimes, businesses use this method when the parent company greatly influences the Associate’s financial and operating policy.

Who is required to prepare consolidated financial statements?

In general, businesses are required to consolidate financial statements the moment an investor gain 50% ownership. So once an investor has at least 50% ownership, they now control the investee’s (now a subsidiary) financial and business decisions.

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