Consolidated financial statements refer to the combination of financial statements of the parent company as well as its affiliates. Every financial statement is documented as per certain accounting principles. Consolidated financial statements are useful because it gives us an overview of the financial condition of the whole company. In other financial statements, we get to know the financial state only of one company, mostly the parent company.
Parent Company and its Affiliates:
The subsidiaries may possess separate legal identities. These individual companies maintain separate financial records after acquiring stocks of the parent company. They appear to operate on their own but the bottom line is that they are ultimately controlled by the parent company. Since the affiliates are controlled by the main company, the parent company is required to furnish details of its various operational activities and financial status. The operating procedures and fiscal status of the subsidiaries or the affiliates are also required to be presented. In order to do so, the individual records of the different subsidiaries are thoroughly studied.
The individual reports should be fair and accurate. The overall status of the company along with its subsidiaries are worked out in the consolidated financial statements. The consolidated financial statements comprise information about the assets, revenues, liabilities, expenses, profits of the parent company as well as the affiliates. The affiliates include associates, joint ventures and subsidiaries.
In order to avoid confusion, few transactions are required to be omitted prior to the preparation of the consolidated financial statements. This is done to avoid duplication. If an account of these transactions are mentioned twice or repeated, then the actual financial position of the entire company cannot be estimated. The exact status of the company’s liabilities, assets, revenues will be difficult to realize.
Transactions, which need to be eliminated while preparing the consolidated financial statements include the following:
Investments made by the parent company in the affiliates
Advances paid to the subsidiaries
Purchase and sales
The FASAB or Financial Accounting Standards Board and SEC or the Securities And Exchange Commission have taken measures to overcome confusions and problems encountered by the creditors and shareholders of the affiliates.
Last Updated on : 26th June 2013