Economics
Financial Consolidation
Financial consolidation refers to the process of combining financial information from different business entities within a group to present a unified view of the group's financial position. This involves aggregating financial data, eliminating intercompany transactions, and preparing consolidated financial statements. It provides a comprehensive overview of the group's financial performance and position, aiding in decision-making and financial analysis.
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7 Key excerpts on "Financial Consolidation"
eBook - PDF- Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Leo van der Tas(Authors)
- 2016(Publication Date)
- Wiley(Publisher)
As stated in paragraph B86 of IFRS 10, consolidated financial statements ‘combine like items of assets, liabilities, equity, income, expenses and cash flows’ of the entities in the group. This process of adding the financial statements together can be seen in its simplest form in figure 20.2. In this example there are two entities in the group, P Ltd and S Ltd. The consolidated financial statements are prepared by adding together the assets and liabilities of both entities. In chapter 21 a consolidation worksheet is used to perform this addition process. This aggregation process is subject to a number of adjustments, and these are covered in detail in later chapters. However, in this chapter, the process of consolidation should be seen simply as a process of aggregation of the financial statements of all entities within the group. Note that the consolidation process does not involve making adjustments to the individual financial statements or the accounts of the entities in the group. This is because the individual companies within the group remain separate legal entities. The consolidated financial statements are an additional set of financial statements and are prepared using a worksheet to facilitate the addition and adjustment process. LO1 CHAPTER 20 Consolidation: controlled entities 563 The consolidated financial statements consist of a consolidated statement of financial position, consoli- dated statement of profit or loss and other comprehensive income, a consolidated statement of changes in equity, and a consolidated statement of cash flows. The following definitions are contained in Appendix A of IFRS 10: Group A parent and its subsidiaries. Parent An entity that controls one or more entities. Subsidiary An entity that is controlled by another entity. The consolidated financial statements combine the financial statements of all the entities within a group. The entities in the group consist of two types; namely, parent and subsidiary.
eBook - PDF- Paul Taylor(Author)
- 1996(Publication Date)
- SAGE Publications Ltd(Publisher)
In the UK group financial statements must take the form of consolidated statements for all subsidiaries unless the group as a whole is exempt, or in the case of subsidiaries which meet exclusion criteria. Additional disclosures for excluded subsidiaries must then be provided. Recently the world-wide trend has been towards consolidated statements as the only acceptable format for group accounts. Consolidated financial statements also include associates over which significant influence but not control is exercisable by the par-ent. OBJECTIVES OF GROUP FINANCIAL STATEMENTS Group ac counting grew out of the limitations of individual company accounting as dis-cussed in Chapter 1. However, internationally it has, and also can in principle, serve a variety of purposes. Walker (1978a) provides a comprehensive analysis of overlapping hypotheses in the accounting literature as to objectives and what follows draws in part on his analysis. Traditional ly, one view is that group financial statements, mere memorandum state-ments, are prepared for the proprietors of the parent, the primary entity, to amplify infor-mation in the parent's own accounts because the parent's business is carried out through al liances with other economic entities. Consolidation is one possible format for this amplification, another being for example, separate financial statements for subsidiaries. From within this perspective others attribute vastly greater importance to consolidation, since a group's legal structure as parent and subsidiaries is often a result of historical acci-dent as to the sequence of acquisitions, or is set up for taxation or other reasons. In this case consolidated financial statements would be of primary importance and the parent's individual financial statements secondary.
eBook - PDF- Debra C. Jeter, Paul K. Chaney(Authors)
- 2019(Publication Date)
- Wiley(Publisher)
It is, however, consistent with the stated objective of the IASB and the FASB to move away from rules-based accounting in favor of principles-based accounting. On July 30, 2002, President Bush signed into law an Accounting Industry Reform Act, requiring chief executive officers to certify the validity of their firms’ financial statements beginning August 14, 2002. Other aspects of the act included the follow- ing: the establishment of an oversight board for the accounting industry and the audit- ing sector in particular (the PCAOB or The Public Company Accounting Oversight Board); restrictions on the types of consulting services allowed to be performed by auditors, such as bookkeeping, financial systems design, and personnel and legal ser- vices; bans on personal loans from companies to their top officials and directors; and the creation of new penalties for corporate fraud. 3.2 REQUIREMENTS FOR THE INCLUSION OF SUBSIDIARIES IN THE CONSOLIDATED FINANCIAL STATEMENTS The purpose of consolidated statements is to present the operating results and the finan- cial position of a parent and all its subsidiaries as if they are one economic entity. Given this purpose and problems related to off-balance-sheet financing, the FASB has taken the position that essentially all controlled corporations should be consolidated. In gen- eral, the objective of consolidation is to provide the most meaningful financial presenta- tion possible in the circumstances. The FASB has reemphasized the basic position that parent-company-only financial statements are unacceptable for general purpose distri- bution; that is, the consolidated financial statements are the primary statements of the economic entity. It notes that parent-company-only statements may be needed in addition to consolidated financial statements for the interests of such parties as bondholders, other creditors, and preferred shareholders of the parent.
eBook - PDFFinancial Accounting Theory and Analysis
Text and Cases
- Richard G. Schroeder, Myrtle W. Clark, Jack M. Cathey(Authors)
- 2022(Publication Date)
- Wiley(Publisher)
Although empirical research indicates that the liabilities of pre- viously unconsolidated subsidiaries may be perceived by market participants as parent company liabilities, one would expect a loss of comparability among the financial information provided across companies comprising varying combinations of different types of business entities. 23 In addition, proponents of proportionate consolidation argue that the consolidation process exagger- ates reported amounts for assets and liabilities and hence affects the calculation of performance measures, such as debt-to-equity ratios. Some accountants as well as users of accounting information would prefer that in addition to consolidated financial statements, companies also report the separate financial statements of the individual companies that constitute the consolidated group. In this way, users would eval- uate the individual as well as the combined performance and financial position of the group and might better be able to assess the incremental addition of each unit to the total combined report- ing entity. Separate presentation of subsidiary financial statements is consistent with the reporting entity concept proposed by the FASB and described earlier. The reporting entity exposure draft states that a portion of an entity (in this case a consolidated entity) could qualify as a reporting entity if its economic activities can be distinguished independent from the rest of the entity, and such information is potentially useful for decision making about providing resources to it. Because a subsidiary provides its own separate accounting information that is then used by the parent company to prepare consolidated financial statements, its economic activities are distinguished independent from those of the parent company.
eBook - ePub- Steven Collings(Author)
- 2016(Publication Date)
- Wiley(Publisher)
Interpretation and Application of UK GAAP for Accounting Periods Commencing on or after 1 January 2015 for detailed commentary on how the consolidation process is to be achieved. However, this section of the book will give a general overview of the consolidation process.Consolidated financial statements are prepared to show the results of the group in line with its economic substance, which is that of a single reporting entity. Consolidation starts from the date of acquisition, which is the date on which the parent obtains control over the subsidiary. It is important to emphasise that this date may not necessarily be the same date on which legal completion takes place and therefore care needs to be taken to ensure consolidation starts only from the date on which control is passed to the parent.Accounting Policies
Amounts that are included in the consolidated financial statements should be based on uniform accounting policies; that is, the parent and subsidiary's financial statements should both have the same accounting policies. However, if a subsidiary uses certain accounting policies which differ from those of the parent in its individual financial statements, then consolidation adjustments will be needed to ensure that the results of the consolidated financial statements are based on uniform policies.Accounting Period
Subsidiaries should, wherever practicable, use the same accounting reference date as that of the parent.Where a subsidiary uses a different accounting reference date, interim financial statements should be prepared to the parent's accounting reference date. If the preparation of interim financial statements is not practicable, then the subsidiary's financial statements for the previous financial year should be used, provided that the subsidiary's financial year did not end more than three months from the parent's year-end. In this case, any changes which have taken place in the intervening period which materially affect the view given by the group financial statements should be taken into account in the preparation of the consolidated financial statements.
eBook - ePub- Andreas Krimpmann(Author)
- 2015(Publication Date)
- Wiley(Publisher)
M CONSOLIDATED FINANCIAL STATEMENTS About this chapter: The consolidation is done. Now, consolidated financial statements have to be prepared which is much more than just to compile all data into one set of accounts and derive the required statements. Additional explanations are required due to the disclosure requirements of IFRS. Furthermore, some legislation requires the preparation of management discussions that need to be integrated into consolidated financial statements. This chapter highlights all topics that are required in preparing the full set of consolidated financial statements. 1. THE BASICS The preparation of the required statements and accompanying documents of consolidated financial statements is the final task before audit. All consolidated data have to be brought in a reportable and readable format that complies with the reporting requirements of IAS 1 – the purpose of the audit. Parents use this opportunity by preparing annual reports that include not only consolidated financial statements together with their accompanying documents but also information about the group, their products, services and business activities and governing letters from the chairmen of the board and the management and other important information. These annual reports are usually available as a glossy. The financial section of annual reports includes mandatory as well as voluntary items. Voluntary elements are often included as consolidated financial statements under IFRS are accepted by some legislations as a substitute to consolidated financial statements based on local accounting standards if mandatory items of these accounting standards are part of consolidated financial statements under IFRS
eBook - PDFFinancial Accounting Theory and Analysis
Text and Cases
- Richard G. Schroeder, Myrtle W. Clark, Jack M. Cathey(Authors)
- 2019(Publication Date)
- Wiley(Publisher)
Although empirical research indicates that the liabilities of pre- viously unconsolidated subsidiaries may be perceived by market participants as parent company liabilities, one would expect a loss of comparability among the financial information provided across companies comprising varying combinations of different types of business entities. 22 22 E. E. Comiskey, R. A. McEwen, and C. W. Mulford, “A Test of Pro Forma Consolidation of Finance Subsidiaries,” Financial Management (Autumn 1987): 45–50. 562 ACCOUNTING FOR MULTIPLE ENTITIES In addition, proponents of proportionate consolidation argue that the consolidation process exag- gerates reported amounts for assets and liabilities and hence affects the calculation of performance measures, such as debt-to-equity ratios. Some accountants as well as users of accounting information would prefer that in addition to consolidated financial statements, companies also report the separate financial statements of the individual companies that constitute the consolidated group. In this way, users would eval- uate the individual as well as the combined performance and financial position of the group and might better be able to assess the incremental addition of each unit to the total combined report- ing entity. Separate presentation of subsidiary financial statements is consistent with the reporting entity concept proposed by the FASB and described earlier. The reporting entity exposure draft states that a portion of an entity (in this case a consolidated entity) could qualify as a reporting entity if its economic activities can be distinguished independent from the rest of the entity, and such information is potentially useful for decision making about providing resources to it. Because a subsidiary provides its own separate accounting information that is then used by the parent company to prepare consolidated financial statements, its economic activities are distinguished independent from those of the parent company.
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