Larger businesses made up of a parent company and subsidiaries effectively operate as a group of interconnected entities.
Despite often having different branding, products and services, management, and even customer base, they’re regarded by law as being under single control.
Consolidated financial statements, or consolidated annual accounts, are a way of presenting the financial performance and overall position of a parent company and its subsidiaries as a single entity.
What is a consolidated financial statement?
Consolidated financial statements combine the income, expenses, assets and liabilities, and cash flows of the parents and their different subsidiaries into a single report.
The aim is to provide a picture of the financial health of the entire group as if it were one company.
When should financial statements be consolidated?
Consolidated financial statements are expected when a parent company controls one or more subsidiaries.
In law, control means the parent company can govern the financial and operating policies of the subsidiary. In practice, this will usually mean the company owns more than 50 per cent of the voting power in the subsidiary.
Consolidation provides a comprehensive, yet concise, view of the financial performance of the entire group rather than a single part.
When taken alone, a poor-performing subsidiary or one that’s growing rapidly may present a distorted picture of the group’s performance as a whole.
Consolidation prevents misleading results, providing a full view of the financial performance of the group.
What is the difference between consolidated and separate financial statements?
Consolidation financial statements or consolidated annual accounts are a single set of combined financial reports that reflect the total financial position of the entire group.
As described previously, this means that the assets, liabilities, income, and expenses across the group are presented as if they belonged to a single entity.
Separate financial statements refer to the financial reports of a single company.
This could be a parent company, subsidiary, or stand-alone company on its own. It shows the financial health of one company in isolation, ignoring its relationship with other entities in the group.
Separate financial statements are used to give a comprehensive view of the financial position of a single company, consolidated financial statements provide a comprehensive overview of the group as a whole.
What is required for consolidated financials?
Consolidated financial statements will usually include the combined income, expenses, assets, and liabilities of the parent company and its subsidiaries.
Any transactions between the parent and subsidiaries, such as loans or sales, need to be removed to avoid double counting.
If the parent company owns less than 100 per cent of the subsidiary, the portion of the company’s income, assets, and equity that’s not owned by the parent should be reported as a non-controlling interest.
Do I need to prepare consolidated financial statements?
If your company is a parent entity with one or more subsidiaries, then you will usually need to prepare consolidated financial statements.
Under the Companies Act 2006, control is presumed when a parent company has 50 per cent of the voting rights of the subsidiary company.
Who prepares a consolidated financial statement?
The consolidated financial statements will usually be prepared by the accounting team working for the parent company.
They will collect financial data from each of the subsidiaries, make any necessary adjustments, and prepare consolidated financial documents.
Who is exempt from preparing consolidated financial statements?
Certain companies are exempt from preparing consolidated financial statements.
These exemptions typically apply to small groups with an annual turnover of less than £10.2 million, a balance sheet total of less than £5.1 million, and fewer than 50 employees on average across the financial year.
Investment entities are also exempted.
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