If your business has subsidiaries, you’ll need to familiarise yourself with the concept of consolidated financial statements. But what is a consolidated financial statement? Find out everything you need to know about the consolidated financial statements format, starting with our consolidated financial statements definition.
Consolidated financial statements definition
So, what is a consolidated financial statement? Essentially, consolidated financial statements are financial statements for business entities that have multiple subsidiaries or divisions. Generally speaking, this involves the production of a consolidated balance sheet, income statement, and cash flow statement. Consolidated financial statements are important, particularly for investors, customers, and regulators. This is because the subsidiaries and parent company form a single legal entity. As a result, consolidated financial statements are necessary to determine the overall financial position of the business.
Does my business need to create consolidated financial statements?
According to UK law – specifically, the Companies Act 2006 (CA06) – medium-sized groups must prepare consolidated, or group, accounts. Small companies are exempt. To qualify as a small company, two of the following three conditions must be met:
The business’s aggregate turnover shouldn’t exceed £6.5m net, or £7.8m gross
The business’s aggregate average number of employees shouldn’t exceed 50
The business’s aggregate balance sheet total shouldn’t exceed £3.26m, or £3.9m gross
Furthermore, it’s important to note that a subsidiary may not need to be included in your consolidated financial statements if its inclusion isn’t material (i.e., necessary) for giving a true and fair view of your business’s finances. Also, subsidiaries may be excluded from your consolidated accounts if any of the following conditions apply:
The interest of the parent company is held exclusively with the intention of a subsequent resale
Obtaining the information required for the creation of a consolidated financial statement would require disproportionate expenses or cause undue delays
Long-term restrictions are in place that stops the parent company from exercising rights over assets or management of the subsidiary
It’s also important to note that the rules regarding consolidated financial statements also apply to overseas subsidiaries. Bottom line: if the business is registered in the UK, then the subsidiaries need to be included in your consolidated financial statements.
How to prepare consolidated financial statements
Once you’ve received financial statements from your business’s subsidiaries, you’ll need to begin the process of producing a consolidated financial statement for the overall company. There are a couple of important guidelines around the consolidated financial statements format that you should bear in mind:
Firstly, you’ll need to maintain uniform accounting policies across the group.
It’s also important to remember that financial statements for all companies within the group should be prepared for the same accounting period-end.
When determining the effective date of acquisition for a subsidiary, you should ensure that this is the date at which control passes (in many cases, this is significantly later than the date found on the official legal agreement).
If you require further guidance regarding consolidated financial statements format and regulations, you should refer to the relevant accounting principles.GAAP and IFRS provide specific guidelines for businesses to help with the consolidated financial statements. Remember, GAAP consolidated financial statements are only necessary for companies with operations in the US. For UK-based companies, you’ll need to adhere to the standards set out by the IFRS.
Goodwill in consolidated financial statements
Goodwill is an essential aspect of consolidated financial statements. Put simply, goodwill can arise when a subsidiary has been purchased for more than the fair value of its assets. It’s also important to remember that negative goodwill can occur when an entity is purchased for less than the fair value of its assets.
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