As we all know, financial statements are critical to the operation of a business. Apart from serving as a standard for performance assessment, financial statements assist investors in determining the company’s reliability. Additionally, influential organizations or multinational corporations with subsidiaries often produce consolidated financial statements. This financial report is often used to reduce the parent company’s financial information into a single consolidated financial account.
HashMicro presents Finance ERP for your company’s financial services, with the best financial software in Indonesia to help optimize business management and consolidated financial reports more efficiently. In this article, we discuss how important consolidated reports are for your business.
Table of Contents
- Definition of Consolidated Financial Statements
- The Functions of Consolidated Financial Statements
- Working Principles of Consolidated Financial Statements
- Consolidated Financial Statements Process Flow
Definition of Consolidated Financial Statements
A consolidated financial statement summarizes the financial position of an organization that has many divisions or subsidiaries. In financial statement reporting, companies often use the term consolidated loosely to refer to the aggregated reporting of their full company. On the other hand, consolidated financial statement reporting is defined by the Financial Accounting Standards Board as the financial reporting of an organization formed with a parent company and subsidiaries. In the consolidated financial statements, the financial statements of these companies are combined by adding up similar elements such as assets, liabilities, equity, income, and expenses.
The requirements for producing a consolidated financial statement with subsidiaries are generally determined by the parent company’s ownership percentage in the subsidiary. Typically, 50% or more ownership in another firm qualifies it as a subsidiary and enables the parent company to consolidate its financial statements. In addition, the parent company must show that the subsidiary’s management is correctly aligned with the parent company’s decision-making processes.
Read more: What is ERP and Why is It Important for Businesses?
The Functions of Consolidated Financial Statements
The purpose of these financial statements is to provide an impartial view of the company’s financial situation and actions (parent company and subsidiaries). So that stakeholders like investors and auditors can rapidly comprehend and evaluate the firm as a whole. In addition, other people profit from the compilation of this report, including:
- It understands the long-term impact of subsidiaries on the leading company.
- Provide the parent company’s management team with the most up-to-date information about the performance of its subsidiaries.
- Provide information to other parties who need information about the company.
- The financial ratios based on this report do not indicate the financial health of the consolidation’s constituent companies or the parent company.
- Make it easy for businesses to read and understand their financial situation.
Working Principles of Consolidated Financial Statements
The components of consolidated financial statements are, in theory, the same as those of independent financial statements. Balance sheets, income statements, statements of capital changes (statements of change equity), and cash flow statements are all part of this. Financial statement reporting requirements are minimal for private companies. At the same time, public corporations must adhere to the Financial Accounting Standards Board’s Generally Accepted Accounting Principles (GAAP).
If a corporation reports globally, it must follow the International Financial Reporting Standards set out by the International Financial Reporting Standards (IFRS). For organizations that prefer to produce it with subsidiaries, GAAP and IFRS have specific regulations. The financial statements of the parent and subsidiary firms arrange side by side on a consolidation work page to generate consolidated financial statements. In addition, you may use Microsoft Excel or Accounting ERP software that has these functionalities.
Consolidated Financial Statements Process Flow
As previously explained, consolidated financial statements consist of a consolidated balance sheet, consolidated income statement, consolidated statement of retained earnings, and consolidated statement of cash flows. Above all, this report is for companies with subsidiaries only. The stages that follow detail the consolidation accounting process flow:
1. Record intercompany loans
Firstly, suppose the parent business consolidates its subsidiaries’ cash balances into an investment account, records intercompany loans made by the subsidiaries to the parent company. Additionally, allocate interest income collected on consolidated investments from the parent business to the subsidiaries.
2. Charge payroll expenses
Secondly, if the main business uses a single paymaster system to pay all workers, check that payroll expenditure is correctly allocated to all subsidiaries.
3. Investigate the balances of asset, liability, and equity accounts
Thirdly, Verify the accuracy of the contents of all asset, liability, and equity accounts for both subsidiaries and the corporate parent, and make required adjustments.
4. Eliminate intercompany transactions
If any intercompany transactions have occurred, reverse them at the parent company level to remove their impact on the consolidated financial statements.
5. Close parent company books
Lastly, mark the parent company’s accounting period as closed, indicating that no more transactions were recorded in that time.
Read more: 4 Types of Financial Statements Every Business Owner Should Know
In conclusion, financial statements are one of the most critical documents that a business must prepare. Detailed financial reporting enables entrepreneurs to make informed decisions or plan for sustainable company growth based on accurate financial records. However, some account balance changes and eliminations must complete and modified with caution. As a result, you must generate consolidated financial statements to understand the transaction’s overall nature.
To simplify the preparation of consolidated reports and other financial reports, you may, of course, utilize HashMicro’s Cloud Accounting System. Thus, you can minimize human error by automatically recording and computing accurate accruals and amortizations.