What is a consolidated financial statement and why is it useful to investors

According to GAAP (Generally Accepted Accounting Principles), parent companies must prepare consolidated financial statements to report on the financial well-being of both the parent company and all its subsidiaries.

These statements are often prepared with the use of financial consolidation software which takes financial figures from each individual subsidiary and combines them into one overall report. Since each subsidiary also prepares its own standalone financial report, consolidated financial statements may seem to some to be an unnecessary extra step.

But is this really the case?

An analysis of the importance of consolidated financial statements reveals these statements offer several benefits to investors, financial analysts and others who may be evaluating the health of the parent company. In this article, we will review consolidated financial reports in more detail including the unique benefits they offer.

Who Prepares Consolidated Financial Reports?

Consolidated financial reports are prepared by any parent company that owns one or more subsidiaries. For example, it is common for one company to purchase smaller companies that can complement the primary business and make it even stronger. The smaller companies can help the profitability of the parent company while also continuing to operate as separate entities.

Each subsidiary must prepare its own financial statements including balance sheet, income statement, statement of cash flows and statement of retained earnings. This information for each subsidiary is then combined using consolidation software to create consolidated financial reports that represent the financial position of the parent company.

How Consolidated Financial Reports Are Prepared

Financial consolidation software is typically used to prepare consolidated financial reports because it is not as simple as adding up the financial statements from each subsidiary. In the consolidated report, the transactions among subsidiaries or a subsidiary and a parent company are eliminated to avoid double counting. For example, if a parent company purchases goods or services from a subsidiary, the parent company’s purchase and the subsidiary’s sale are both eliminated so this transaction doesn’t distort the final figures. It can be quite tedious to do this manually but consolidated software simplifies the preparation of the final reports.

Benefits of Consolidated Financial Reports

Consolidated financial reports are a GAAP requirement for good reason. Some of the many benefits of consolidated financial reports include:

Complete Overview – Consolidated statements allow investors, financial analysts, business owners and other interested parties to get a complete overview of the parent company. At a glance, they can view the overall health of the business and how each subsidiary impacts the parent company.

Reducing Paperwork – With consolidated financial statements, there is also less paperwork involved. If the parent company owns nine subsidiaries, there are 40 separate standalone financial reports to view i.e. the four basic financial statements for each subsidiary plus the parent company. Not only would it be hard to track down all these records, it would be extremely difficult to look over each of them and try to get an overall view of how the business is performing. Consolidated financial statements cut this pile of reports down to just four consolidated reports. This results in less paperwork and less effort being expended to assess a parent company’s financial health.

Simplification – Consolidation software cuts out all transactions that occur between subsidiaries and the parent company since, in the grand scheme of the business, these things cancel each other out. Eliminating these transactions gives a simplified view of business performance.

Updates to Consolidated Financial Statements – Over time, consolidated financial statements will continue to evolve to make the process of evaluating a parent company even more transparent. One of the reasons for this is that in the past some companies have used consolidated reports to hide losses and liabilities in special subsidiaries that were created specifically for hiding these financial problems. The Financial Accounting Standards Board and the International Accounting Standards Board regularly revisit the definitions and requirements for consolidated statements in order to make them more reliable and easier to use.

SUMMARY: Consolidated financial statements can be complex to prepare, especially for parent companies that include many subsidiaries. However, consolidation software has made preparation easier and standards boards like FASB and IASB regularly work to improve the process. Knowing all the important benefits of consolidated financial statements, it is easier to understand why GAAP requires them.

Consolidated Financial Statements are required by a parent company to show the true view of their current financial position by combining the financial information of all entities. They consist of a balance sheet, income statement, and cash flow statement providing a 360-degree view of the health of a parent organization and its subsidiaries. These statements assist in updating board members, stakeholders, and investors of the company’s financial position in its entirety without needing to look into each entity individually.

What is the Financial Consolidation Process

The financial consolidation process refers to bringing together financial information from numerous departments or entities of an organization for the purpose of reporting. This process usually involves bringing together information from the GL and other data and combining it into a single chart of accounts, making sense of it, and then reporting on it. Consolidated financial statements tell an organization a lot about how they are performing. 

Consolidated Financial Statements Example

ACME has $1,000,000 in revenues and 500,000 of assets that they include in their financial statements. That being said, ACME also oversees 2 subsidiaries, each of which produce $3,000,000 in revenues and $1,000,000 in assets. It would be inaccurate to simply report on the $1,000,000 in revenues of the parent company, as the company oversees the subsidiaries as well. This is where consolidated financial statements come in- they bring together the numbers of the parent company, alongside the numbers of the subsidiaries, to present an accurate and complete picture of financials. 

How to Consolidate Financial Statements

1. Determine which entities are considered subsidiaries of the parent company. This includes any business where the parent company owns the majority of shares. Other holdings would be considered subsidiaries if the parent company has; majority voting rights, the ability to cast the majority of votes, the parent company has the control to remove or replace the majority of the board, or the power to govern over the subsidiary. Once you understand which entities need to be considered, gather all the financial statements from each entity. 
2. Check the fiscal periods as not to mismatch them. If an entity uses a different timeline from the parent company it is prudent to modify the entity to match the parent company – although this usually occurs during the acquisition, but not always. 
3. Create your reports, open Microsoft Excel, and create tabs for each sheet, one for the balance sheet, income statement, and so forth.  Copy-and-paste the totals from each entity and label the rows to help organize each section such as cash, inventory, etc. Ensure to include rows for the consolidation of debit or credit transactions. Now double-check the numbers inputted before combining them into your consolidated financial statements as attempting to determine where the mistakes are further in the process will be difficult and timely. 
4. Create your consolidated balance sheet reflecting the sums determined previously. Now undergo the intercompany elimination processes for any entities that transact with each other. Use this data to compile the consolidated income statement and cash flow statement. 
5. Once completed review all the sheets with a fine-tooth comb to ensure that none contain duplicate values including intercorporate assets or liabilities and money that flows between the two. 

Current Consolidation Methods and Alternatives

The manual process of copying and pasting numbers from multiple reports is a repetitive mistake-prone task. It requires gathering data from across the organization, numbers that are continuously changing – making it a difficult, timely process. 

Luckily there are now software types that assist in the consolidation of financial statements that have value in their ability to automate and speed up these processes. Consolidation software then transforms these numerous data sets into actionable insights all with a mere click-of-a button.  

Utilizing a solution that allows for a unified interface across multiple accounting processes and departments enables the production of truly consolidated financials easily and instantly. Not only does the automation of these processes guarantee accuracy but the time saved gives the finance department time to do what they were hired for – analyzing the data. 

What are consolidated statements of operations?

consolidated statements of operations is a common header that appears on the income statement. Other variations of this title include consolidated statements of income or consolidated reports of operations. Smaller corporations tend to stick with the common “Income Statements”.

Combined vs Consolidated financial statements- What’s the difference?

When it comes to businesses with subsidiaries, there are two main ways to create unified business statements- they can combine them, or consolidate them. A combined financial statement lists together all the activities of a group of related companies. Though it is combined, the financial statements of each entity are listed separately-each subsidiary or group has its own tab. What this does is it gives those that are looking into the statement the opportunity to see the overall performance of the organization, while also being able to see each individual contribution.

Contrastingly, a consolidated financial statement aggregates the numbers of both the parent company and its subsidiaries. This provides one overarching picture of how the organization is performing on the whole. The subsidiary’s business activities become part of the parent company’s financial statements. 

Condensed vs consolidated financial statements- what’s the difference?

A condensed and consolidated financial statement are similar in that they both provide an overview of how an organization is doing. However, they differ on one key point- a consolidated financial statement gives information about an organization and all of its subsidiaries in the same document. On the other hand, a condensed version sums it all up in a few lines. So, a condensed financial statement is much more succinct and to the point. 

What is Financial Consolidation Software? 

Can you imagine taking statements from your ERP, CRM, Excel Sheets, and having them all in one place? Financial consolidation software does that and more. It allows you to compile data sources from across the business, its multiple departments, and even multiple entities for easy reporting to a parent company, shareholders, and management.  It provides the ability to create real-time accurate analytics and insights into the health of a company’s financials instantly. It removes the continuous human error found on excel spreadsheets that takes other employees even more time to troubleshoot and lets financial professionals do what they were hired to do – interpret the data for decision making.

In a recent study by Gartner, it was found that; ‘finance departments can save their teams from 25,000 hours of avoidable rework caused by human errors by deploying robotic process automation (RPA) in their financial reporting processes.”  

With so much evidence pointing to the overwhelming benefits of automation, it makes you wonder, why have only one-third of the finance departments adopted a financial consolidation software? 

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. 

Financial Consolidation Software made for FP&A professionals

Accounting departments consist of a variety of players including CFO’s, VP’s, Directors, and more, each one requiring something different from a chosen software. Rather than uprooting entire processes and departments, Datarails, the financial consolidation software made by FP&A specialists for finance professionals, works with your existing systems and consolidates them to derive actionable insights.

The platform allows you to upload ERP data, CRM data, and even excel- based spreadsheets all onto one cloud-based platform for the easiest integration as well as in-depth analysis and real-time results. Instead of wasting time on manual processes such as catching errors on endless excel templates, use a software that makes use of your existing infrastructure, and make your reporting processes work for you. 

“Datarails maximized our efficiency and made the current process incredibly effective. It was a big win for us.”

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