What Is a Consolidated Financial Statement? (Definition & Example)
Consolidated financial statements show the combined financial position and performance of a parent company and its subsidiaries. This concept is essential in accounting, business management, and for exams like Class 12 Accountancy, CA, and competitive tests. Understanding it enables better analysis of group entities’ real financial health and decision-making.
| Statement Type | What It Shows | Who Prepares | Purpose |
|---|---|---|---|
| Consolidated Financial Statements | Combined results of parent and subsidiaries as a single entity | Parent company (with subsidiaries) | Holistic view for stakeholders and compliance |
| Separate Financial Statements | Financials of an individual legal entity | Parent or subsidiary individually | Legal reporting, tax, statutory requirements |
| Unconsolidated Statements | Like separate, but without group-combined data | Entities not reporting on group basis | Shows individual results only |
What Are Consolidated Financial Statements?
Consolidated financial statements are reports that combine the assets, liabilities, income, and expenses of a parent company and its subsidiaries. This provides a single, unified view of the group's financial position as if it were one business. This reporting method avoids the double counting of internal transactions and shows the real position to investors, regulators, and management.
Purpose and Applicability of Consolidated Financial Statements
The main purpose of consolidated financial statements is to present a clear picture of a group’s overall financial performance. Consolidation is required when a company controls one or more subsidiaries. As per Ind AS 110, IFRS 10, and the Companies Act, 2013, a parent company must consolidate its financial statements if:
- It owns more than 50% voting rights in another company (subsidiary)
- It exercises control (decision-making power) over another entity, even with less than 50% ownership
Refer to Accounting Standards and Companies Act 2013 for specific rules.
Steps in the Consolidation Process
Preparing consolidated financial statements follows a systematic process. Each step ensures that the combined accounts reflect the correct group position:
- Combine the assets, liabilities, income, and expenses of parent and subsidiaries line by line.
- Eliminate all intra-group transactions and balances (e.g., sales, receivables/payables, dividends).
- Identify and show non-controlling interests (minority shareholders in subsidiaries).
- Recognize goodwill or gain on consolidation, if any.
- Prepare final statements—Consolidated Balance Sheet and Consolidated Statement of Profit & Loss.
Explore the Financial Statements of a Company page for more on group reporting.
Formats and Structure of Consolidated Financial Statements
A consolidated financial statement closely follows the structure of regular financial statements, but merges relevant line items. Here’s a simplified format:
| Consolidated Balance Sheet (Extract) | Group Total |
|---|---|
| Assets |
|
| Liabilities & Equity |
|
Illustrative Example of Consolidation
Let’s consider ABC Ltd. (parent) owns 80% of XYZ Ltd. (subsidiary). How is consolidation done?
- ABC Ltd. and XYZ Ltd. prepare their separate Balance Sheets and P&L Accounts.
- Combine each item line-wise (assets, liabilities, income, expenses).
- Remove intra-group items (e.g., if ABC sold goods to XYZ, eliminate those sales and purchases).
- Show Non-Controlling Interest (20% of net assets and profit of XYZ Ltd.).
- Calculate goodwill if ABC Ltd. paid above fair value for XYZ Ltd.
- Present the final group financials as consolidated statements.
Refer to Balance Sheet vs Consolidated Balance Sheet for visual comparisons.
Key Differences: Consolidated vs Separate Financial Statements
| Basis | Consolidated Financial Statements | Separate Financial Statements |
|---|---|---|
| Scope | Whole group (parent + subsidiaries) | Individual company only |
| Inter-company Transactions | Eliminated | Included (not adjusted) |
| Minority Interest | Shown separately | Not shown |
| Purpose | Holistic group view | Legal or statutory reporting for one entity |
Applicability and Legal Requirements
As per Ind AS 110 and Companies Act 2013, consolidation is mandatory if a parent has control. IFRS 10 sets similar global guidelines. The cost or equity method applies only if full consolidation does not meet the control test, such as for associates or joint ventures. Always refer to the specific provision relevant to your exam syllabus or region.
Related: Indian Accounting Standards and IFRS
Real-World Use and Student Applications
Understanding consolidated financial statements is vital for interpreting group company results, appearing in board exams, CA/CS/CMA, and business analysis roles. This knowledge also helps interpret annual reports of large companies or while working in finance and audit professions. At Vedantu, we focus on making such topics easy and relevant for your academic and career needs.
Expand your understanding with Analysis of Financial Statements and Objectives and Functions of Accounting.
In summary, consolidated financial statements combine a parent and its subsidiaries into one clear financial report. This aids in compliance, investment decisions, and business analysis. Knowing the differences from separate statements and when consolidation is required will help you in exams and your professional journey.
FAQs on Consolidated Financial Statements Explained for Students
1. What is a consolidated financial statement?
A consolidated financial statement combines the financial information of a parent company and its subsidiaries, presenting them as a single economic entity. This provides a holistic view of the group's financial health.
2. What is the difference between consolidated and separate financial statements?
Consolidated financial statements show the combined financial position of a parent company and its subsidiaries as a single entity. Separate financial statements, on the other hand, present the financial information of each individual company separately.
3. How do you know if financial statements are consolidated?
Consolidated statements will clearly state that they include the financial information of the parent company and its subsidiaries. They will also include a section for minority interest (the portion owned by shareholders other than the parent company). Look for terms like "group accounts" or "consolidated statements of financial position."
4. Who prepares a consolidated financial statement?
The parent company or holding company typically prepares consolidated financial statements. This is in accordance with accounting standards like Ind AS 110 and IFRS 10.
5. When are consolidated financial statements required?
Consolidated financial statements are required when a company has control over another entity (subsidiary), as defined by accounting standards. This usually involves owning a majority of voting shares. The specific requirements are outlined in standards like Ind AS 110, IFRS 10, and the Companies Act 2013.
6. What are the major steps in preparing consolidated financial statements?
Preparing consolidated financial statements involves several key steps:
• Combining the financial statements of the parent and its subsidiaries.
• Eliminating intra-group transactions (transactions between the parent and subsidiaries).
• Adjusting for differences in accounting policies.
• Calculating minority interest.
• Presenting the consolidated financial statements in accordance with applicable accounting standards.
7. What is minority interest in consolidated financial statements?
Minority interest represents the share of the net assets and profits of a subsidiary that is owned by shareholders other than the parent company. It's a crucial component of consolidated financial statements, reflecting the portion not controlled by the parent company.
8. What is the difference between consolidated, combined, and unconsolidated financial statements?
Consolidated statements combine parent and subsidiary financials as a single entity. Combined statements simply add the financials of separate entities without eliminating intra-group transactions. Unconsolidated statements show only the parent company's financials, ignoring subsidiaries.
9. How are intra-group transactions eliminated in consolidation?
Intra-group transactions (transactions between the parent and its subsidiaries) are eliminated to avoid double-counting. This involves removing intercompany sales, receivables, payables, and other related transactions from the combined financial statements.
10. What are some examples of consolidated financial statements?
A large conglomerate with numerous subsidiaries would need consolidated financial statements. For example, a multinational corporation with manufacturing plants, distribution centers and retail outlets in various countries would require consolidated statements presenting a holistic view of the group’s performance and position. These statements would include a consolidated balance sheet, income statement, and statement of cash flows.
