Consolidation of Financial Statements
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Definition
- Consolidation combines the financial statements of a parent company and its subsidiaries into a single set of statements as if they were one economic entity.
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When Consolidation Is Required
- When the parent holds control over a subsidiary, typically through ownership of more than 50% of voting shares.
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Key Steps
- Eliminate intercompany transactions and balances.
- Combine assets, liabilities, revenues, and expenses line by line.
- Recognize non-controlling interest (NCI) for the portion not owned by the parent.
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Elimination Entries
- Remove intercompany sales, loans, and unrealized profits on intercompany inventory to avoid double-counting.
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Goodwill
- Arises when the purchase price exceeds the fair value of identifiable net assets acquired; recognized as an intangible asset.
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Relevance
- Consolidated statements give investors a true picture of the group's overall financial position and performance.