Mastering the Art of Preparing Consolidated Financial Statements- A Comprehensive Guide with Real-World Examples

How to Prepare Consolidation of Financial Statements with Examples

Consolidation of financial statements is an essential process for companies that have subsidiaries or are part of a group. It involves combining the financial information of all the entities within the group into a single set of financial statements. This process helps in providing a comprehensive view of the group’s financial position, performance, and cash flows. In this article, we will discuss how to prepare consolidation of financial statements with examples.

Step 1: Identify the Parent and Subsidiary Companies

The first step in preparing consolidation of financial statements is to identify the parent and subsidiary companies. The parent company is the one that has control over the subsidiary company. Control is generally defined as ownership of more than 50% of the subsidiary’s voting rights.

For example, let’s consider Company A as the parent company and Company B as its subsidiary. Company A owns 60% of the voting rights in Company B, making it the controlling entity.

Step 2: Gather Financial Statements

Once the parent and subsidiary companies are identified, gather their individual financial statements. These statements include the balance sheet, income statement, and cash flow statement. Ensure that the financial statements are prepared in accordance with the relevant accounting standards.

Continuing with our example, gather the financial statements of Company A and Company B.

Step 3: Eliminate Intercompany Transactions

Intercompany transactions are transactions between the parent and subsidiary companies. These transactions need to be eliminated to avoid double-counting of assets, liabilities, revenues, and expenses. Eliminate the following types of intercompany transactions:

– Intercompany sales and purchases of goods or services
– Intercompany loans and interest income
– Intercompany dividends
– Intercompany salaries and expenses

In our example, assume that Company A sold goods to Company B for $100,000. This transaction needs to be eliminated to avoid double-counting the revenue and cost of goods sold.

Step 4: Adjust for Non-controlling Interest

Non-controlling interest refers to the ownership stake in a subsidiary held by investors other than the parent company. Adjust the consolidated financial statements to reflect the non-controlling interest’s share of the subsidiary’s net assets and earnings.

Assuming Company B has non-controlling interest of 40%, the consolidated net assets and earnings would be adjusted accordingly.

Step 5: Prepare Consolidated Financial Statements

With the elimination of intercompany transactions and adjustment for non-controlling interest, prepare the consolidated financial statements. These statements should include:

– Consolidated balance sheet
– Consolidated income statement
– Consolidated cash flow statement

In our example, the consolidated balance sheet would reflect the combined assets, liabilities, and equity of Company A and Company B.

Conclusion

Preparing consolidation of financial statements requires careful attention to detail and adherence to accounting standards. By following the steps outlined in this article, companies can ensure accurate and comprehensive consolidated financial statements. It is crucial to understand the intercompany transactions and adjust for non-controlling interest to provide a true and fair view of the group’s financial position and performance.