By Chron Contributor Updated September 09, 2021
If one company owns part or all of another company, it may be required to prepare a consolidated financial statement. The companies remain separate legal entities and each maintains its own set of books. Consolidated financial statements are often used for reporting to investors, government agencies or applying for loans and grants. Statement 141 from the Financial Accounting Standards Board lays out the rules for preparing consolidated financial statements; this supersedes APB Opinion No. 16, per the team at CPA Class.com.
Individual Financial Statements
All businesses must prepare a set of financial statements showing the activity for the previous accounting period. This typically includes a balance statement, income statement, statement of cash flows and a report of shareholders' equity. The individual financial statements show all transactions regardless of the source of the funds.
Subsidiary holdings must be shown as a stock asset on the parent company's financial statements and shareholders' equity on the subsidiary's financial statements. Standalone financial statements are not required for companies owned 100 percent by the parent but may be used for internal management purposes.
Consolidated Accounts in Financial Statements
A consolidated financial statement combines the information from the subsidiary companies' individual financials. The entire enterprise is treated as a single entity for accounting purposes. The difference between consolidated and unconsolidated financial statements lies therein, explains information from Legal Zoom. An unconsolidated financial statement would treate each subsidiary separately from an accounting perspective, while a consolidated one accounts for every subsidiary together.
When you are compiling a consolidated financial statement, the ownership percentage of the parent company matters. You must adjust the accounts on the general ledger to represent the ownership percentage of the parent company. Use the company's goodwill account to post the balancing entries to your adjustments.
Dealing with Intracompany Transactions
Transactions between two affiliated companies are disregarded when preparing the consolidated financial statements. These intracompany transactions do not change the net position of the overall operation. You do not want to count revenue on products or services sold only to your affiliates. This makes sense, because consolidated financial statements account for all activities of all subisidiaries together.
This is not a true measure of the company's earnings on the open market. Some common intracompany transactions include loans or payments for supplies or products. These items are only shown on the individual financial statements for the individual companies.
Controlling Interests of Parent Company
The acceptable accounting method for consolidation depends on whether the parent company has a controlling interest in the subsidiary, explains the Cornell University Legal Information Institute. For instance, if the parent owns more than 50 percent of the subsidiary, you must value the subsidiary's accounts at their current market value. If ownership falls between 20 and 50 percent, report the value of the accounts less the amount of any declared dividends or operating losses posted by the subsidiary.
Ownership of less than 20 percent requires you to use the original cost of the subsidiary. Note any information related to the non-controlling interest in the disclosures to the consolidated financial statements.
