Tips for Preparing Consolidated Financial Statements

For companies that have one or more subsidiaries, it is customary to use consolidated financial statements. What is the meaning, function, and method of making consolidated financial statements?

To avoid confusion, distinguish these two things: consolidate is a verb; while consolidation is a noun.

The principle of consolidation is the presentation of financial statements whose contents are a combination of reports belonging to the parent company and subsidiaries in one report.

So that these financial statements make it as if they are one entity. If you’ve ever seen an operating segment report for a business that presents split numbers, a consolidated report is the opposite.

What is debt consolidation and how does it work?

Definition of Consolidated Financial Statements Are

When one company buys a smaller company that can complement the primary business and make it stronger.

This information for each subsidiary is then combined using consolidation software to create consolidated financial statements that represent the financial position of the parent company.

The purpose of preparing these financial statements is to provide an overall objective picture of the company’s financial position and activities.

So that interested groups such as investors and auditors can understand the conditions that exist in the subsidiary and parent company.

This form of financial statements with consolidated principles is needed if the parent company has control over its subsidiary companies.

The requirements for companies that require consolidated financial statements are as follows:

1. Having one or more subsidiaries as evidenced by share ownership;
2. The parent company’s share ownership of the subsidiary is more than 50%;
3. The parent company’s share ownership of the subsidiary is less than 50% but the parent company has full control.

What if the above conditions are not met? If the conditions are not met, then the company can make its own financial statements independently.

How to Make Consolidated Financial Statements

In general, the procedure and process for preparing Consolidated Financial Statements begins with merging by adding together separate Financial Statements consisting of two or more entities (subsidiaries).

Then, adjustments and eliminations are made to transactions that occur within one group.

The process of making Consolidated Financial Statements will be a problem if the ownership of the subsidiary company is less than 100%.

To better understand financial statements with consolidated principles, you can follow the steps for making them.

Here are structured steps that you can follow as a way to create consolidated financial statements:

1. First, please examine the financial statements of the parent and subsidiary entities as a whole. Identify if there are errors or omissions in the recording then make corrections and adjustments.
2. Adjust the report by eliminating the income statement between each company.
3. Eliminate earnings and dividends from subsidiaries.
4. Return the balance of the investment account in the subsidiary to the beginning balance of the period.
5. Make adjustments to make a note of the non-controlling interest in the profits and dividends of subsidiaries.
6. Elimination of reciprocal balances in the subsidiary company’s statements, which are initially reported in the parent company’s financial statements. In contrast, the elimination of equity that was previously reported in the subsidiary’s finances.
7. It’s normal if there are differences in value, just do the allocation and amortization.
8. Eliminate other reciprocal balances such as accounts payable, income and expenses, and others.

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