Consolidated financial statements are the "

financial statements Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to un ...

of a group in which the

assets In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that ca ...

, liabilities, equity,

income Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. F ...

expenses An expense is an item requiring an outflow of money, or any form of fortune in general, to another person or group as payment for an item, service, or other category of costs. For a tenant, rent is an expense. For students or parents, tuitio ...

and cash flows of the

parent company A holding company is a company whose primary business is holding a controlling interest in the securities of other companies. A holding company usually does not produce goods or services itself. Its purpose is to own shares of other companies ...

and its

subsidiaries A subsidiary, subsidiary company or daughter company is a company owned or controlled by another company, which is called the parent company or holding company. Two or more subsidiaries that either belong to the same parent company or having a s ...

are presented as those of a single

economic entity In accounting, an economic entity is one of the assumptions made in generally accepted accounting principles. Almost any type of organization or unit in society can be an economic entity. Examples of economic entities are hospitals, companies, ...

", according to International Accounting Standard 27 "Consolidated and separate

financial Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of ...

statements", and International Financial Reporting Standard 10 "Consolidated financial statements".

Consolidated statement of financial position

While preparing a consolidated financial statement, there are two basic procedures that need to be followed: first, cancel out all the items that are accounted as an asset in one company and a liability in another, and then add together all uncancelled items. There are two main type of items that cancel each other out from the consolidated statement of financial position. * "Investment in subsidiary companies" which is treated as an asset in the parent company will be cancelled out by "share capital" account in subsidiary's statement. Only the parent company's "share capital" account will be included in the consolidated statement. * If trading between different companies in one group happen, then the payables of one company will be cancelled by the receivables of another company.

Goodwill arising on consolidation

Goodwill is treated as an intangible asset in the consolidated statement of financial position. It arises in cases, where the cost of purchase of shares is not equal to their par value. For example, if a company buys shares of another company worth $40,000 for $60,000, we conclude that there is a goodwill worth or $20,000. Proforma for calculating goodwill is as follows: ''Goodwill'' Fair value of consideration transferred Plus fair value of non-controlled interest at acquisition Less ordinary share capital of subsidiary company Less share premium of subsidiary company Less retained earnings of subsidiary company at acquisition date Less fair value adjustments at acquisition date

Non-controlled interest

If the parent company does not buy 100% of shares of the subsidiary company, there is a proportion of the net assets owned by the external company. This proportion that is related to outside investors is called the non-controlling interest (NCI). The proforma for calculating the NCI is as follows: ''Non-controlling interest'' Fair value of NCI at acquisition date Plus NCI's share of post-acquisition retained earnings or other reserves

NCI at the reporting date

Intra-group trading

In a group of companies, they can have trade relations with each other. For example, company A buys goods for one price and sells them to another company inside the group for another price. Thus, company A has earned some revenue from selling, but the group as a whole didn't make any profit out of that transaction. Until those goods are sold to an outsider company, the group has unrealised profit.

Consolidated statement of financial position

Goodwill arising on consolidation

Non-controlled interest

NCI at the reporting date

Intra-group trading

See also

References

Further reading