Its important to note that consolidated financial statements dont replace the individual reports used by each business entity, which still need them to operate independently and make decisions. Consolidated financial statements centralize the financial information of a parent company and its subsidiaries into a single report. By doing so, they show the true financial position and performance of the entire organization rather than each  entity that is part of it. The first crucial step involves removing the parent company’s investment in subsidiaries from the consolidated balance sheet. This elimination prevents double counting – imagine if you counted both your investment in a subsidiary and the subsidiary’s assets separately; you’d be counting the same value twice. How much control does your parent company have over your subsidiaries and other entities?

Different ERP Systems Between Subsidiaries

Depending on the company’s situation, it may be required to provide consolidated financial reports that comply with accounting standards such as GAAP and IFRS. The Statement of Comprehensive Income process of building your consolidated financial statements doesnt have to be tedious or stressful. With a consolidated view of the organizations financial health, your finance team and company leaders can make fully informed decisions not undermined by missing or inaccurate information. These decisions may include investments, M&A or other strategically impactful actions that determine the organizations future financial performance. One of the most significant financial challenges companies face, particularly those managing multiple entities, is getting a comprehensive view of their financial health.

Consolidate those financial statements

• The machinery originally cost the parent $800,000, resulting in a $200,000 gain on sale in the parent’s books.
• Thats because their workflows were manual and as a result, massively disjointed.
• With accurate and reliable consolidated financial statements, businesses can enhance their financial reporting practices and set a solid foundation for future growth and success.
• If a subsidiary is under temporary control or held for resale, it may be exempt from consolidation.
• The Generally Accepted Accounting Principles (GAAP) govern when and how companies should consolidate their financial statements—so they are the right place to check whenever you’re unsure about what the right move would be.
• If you don’t own 100% of an entity, you should adjust the entity’s equity and income to reflect the portion that is attributable to non-controlling interests (NCI).

This typically occurs when a parent company owns more than 50% of the voting interest in its subsidiary, making it the majority shareholder and enabling it to make significant decisions on behalf of the subsidiary. As you can see, you’ll create a similar sheet for all of the other statements (liabilities, assets, etc.). You would then create a final consolidated financial statement with all of the totals. After the data is entered correctly, you can perform intercompany eliminations and then consolidate the data into the final consolidated financial statement.

Consolidate Reports

Intercompany transactions present a unique set of challenges in financial consolidation. Eliminating these transactions is essential to prevent overstating revenues, expenses, assets, and liabilities, but the process is complicated by the variety of intercompany dealings. Well, the issue with current financial automation software is the fact that accounting has been manually done on Excel Spreadsheets for the better part of three decades. With such a finicky process – that is so detrimental to a company – the mere idea of uprooting all of an organization’s current methods is daunting. But the numbers are in and it is time to consider financial consolidation software or be left behind.

Step 4: Eliminate intercompany transactions

Maintaining up-to-date financial reports is crucial for ensuring compliance and providing accurate financial data to stakeholders. The official first step in consolidating financial statements is identifying all subsidiaries and related entities that need to be included in the consolidated financial reports. Any entity the parent company has control or significant influence over must be part of the consolidation process. Control is typically defined as owning more than 50% of the voting stock, but entities with joint control or significant influence may also need to be considered.

However, with the right financial consolidation software and expertise, these challenges can be managed effectively. When the priority is to present the enterprise’s overall economic wealth and that its position is financially sound normal balance as one entity, consolidated statements provide that single, aggregated view. Consolidated reporting removes internal transactions and focuses on third-party activity, making it ideal for external stakeholders evaluating total group performance. If two or more entities are under common control but there’s no formal parent–subsidiary relationship, combined statements may be appropriate to reflect the group while preserving separate entity financials.

• Additionally, financial consolidation software streamlines the consolidation process, automating data integration, eliminations, and reporting to enhance efficiency and reduce errors.
• For example, if a parent company owns 40% of another entity, it will report 40% of that entity’s profits or losses in its own income statement.
• Even if both have separate legal entities and both record their financial statements, they need to prepare a consolidated financial statement to help the investors get a better understanding.
• A software platform also provides much-needed shared views for the individuals and teams working together on developing your consolidated financial statements.
• It is essential to consider both domestic and international subsidiaries, as well as special-purpose entities that may require consolidation based on the applicable accounting standards and regulations.