Consolidated financial statements are an essential part of the accounting process for group companies. This key information provides perspective on the entire business, something that is often lost when looking only at figures for the parent or a single subsidiary. Although consolidated financial statements can be time consuming and – without the right software – may be complex to pull together, they remain an essential part of the process.
What are consolidated financial statements?
They are essentially aggregated financial results. Rather than a single set of figures that relates to one company within a group, consolidated financial statements show assets, liabilities, equity, income, expenses and cash flows of the parent company and its subsidiaries. Consolidated financial statements are usually prepared by a parent company. They are generally drawn from individual financial statements that are put together by subsidiaries, including an income statement, balance sheet and statement of cash flow.
Are consolidated financial statements really important?
Given that each company within the group prepares its own set of financial statements, is it really necessary to go to the trouble of compiling a consolidated version for the entire group? The short answer is: yes. There are a number of reasons why it remains important for any group of companies to continue to prepare consolidated financial statements.
- Broad perspective. Insights offered by consolidated financial statements relate to the entire business. This may be crucial, whether for potential investors, the owner of the business or for analysts. The consolidated version of financial statements indicates the health of the business as a whole and will also show how each subsidiary within the group impacts on the parent business.
- Reducing the volume of paperwork involved. Without consolidated financial statements, anyone looking to get an overview of the group as a whole would need to go through an individual set of paperwork for each of the companies. That could be multiple documents – for example if a parent company owns seven subsidiaries the total will be 32 separate financial reports (four for each of the subsidiaries and the parent company). Where consolidated financial statements are prepared only a single document is required. This makes it quicker to access data and much easier to grasp the state of the business as a whole.
- Simplifying the process. Consolidated financial statements – especially where prepared using software – enable the process of analysis to be considerably simplified. For example, it can exclude those transactions that occur between subsidiaries and a parent company that in effect already cancel each other out. This produces a much more simplified version of financial statements that focus on the key data that is necessary for analysis and decision-making.
The use of consolidated financial statements is key today for any organisation operating within a group, no matter what stage the business is at. By opting to use consolidation software it’s possible to reduce the complexity of the process of preparing these statements and optimise the way that they are used as a result.