Consolidated financial statements are financial statements that often come from companies with several subsidiaries or divisions. In financial statement reporting, companies often use the term “consolidated” to refer to the aggregated reporting of their entire company. On the other hand, consolidated financial statement reporting is described by the Financial Accounting Standards Board as reporting of an organization with a parent company and subsidiaries.
The requirements for financial statement reporting are minimal for private companies, but public companies must adhere to the Financial Accounting Standards Board’s Generally Accepted Accounting Principles (GAAP). If a corporation reports globally, it must follow the International Financial Reporting Standards set out by the International Accounting Standards Board (IFRS). For businesses that want to issue consolidated financial statements with subsidiaries, both GAAP and IFRS have distinct guidelines.
Companies need to combine all their financial accounting functions to come up with a consolidated financial statement that shows data in a balance sheet, income statement, or cash flow statement when it comes to the consolidation of financial statements. Companies often decide to file a consolidated financial statement yearly because of tax benefits. The criteria for filing are usually made according to how much the parent company owns in the subsidiary. As a general rule, if you own at least 50% or more in another company, it is considered a subsidiary. As a parent company, you can include the consolidated financial statements of your subsidiaries.
On the other hand, private companies decide to create consolidated financial statements, including subsidiaries, annually. The decision to file this annually is often based on tax benefits that the company can obtain from filing a consolidated financial report instead of an unconsolidated one. Public companies often create consolidated or unconsolidated financial statements for a more extended period.
Why Do You Need Consolidated Financial Statements?
Provides a Thorough Analysis
Other than the business owners, many investors and financial analysts use consolidated statements to get a better sense of the parent company’s complete financial picture. This allows them to check the company’s overall health and how each subsidiary affects the parent company at a glance.
There is much less paperwork for combined financial statements. There are 40 separate standalone financial reports to view if the parent company holds nine subsidiaries, including the four basic financial statements for each subsidiary plus the parent company. Not only would it be impossible to track down all of these documents, but it would also be challenging to go through each one and try to get a sense of how the company is doing. This pile of reports was reduced to only four consolidated reports using consolidated financial statements. As a result, assessing the financial stability of a parent company requires less paperwork and effort.
Streamlining of Transactions
Consolidation software like Performance Canvas eliminates all transactions between subsidiaries and the parent company because it creates balance. By removing these transactions, you can get a clearer picture of your company’s success.
Consolidated Financial Statements Updates
Consolidated financial statements will continue to improve over time, making the process of assessing a parent company much clearer. For the most part, some firms used consolidated reports to conceal losses and liabilities in notable subsidiaries formed solely to hide financial problems in the past. Legal boards like The Financial Accounting Standards Board and the International Accounting Standards Board review the definitions and specifications for consolidated statements regularly to improve their reliability and usability.
Simplify Consolidated Financial Statements with Cloud PCF
Consolidated financial statements are difficult to prepare, especially for parent companies with a large number of subsidiaries. Consolidation software like Cloud PCF, on the other hand, has made planning more straightforward and more convenient. For their part, standards bodies such as the FASB and the IASB constantly improve the process. With all of the advantages of consolidated financial statements in mind, it’s easier to see why GAAP needs them.
If you’re looking for a complete Financial consolidation software equipped to handle budgeting, planning, forecasting, reporting, and more, book a free trial today and explore why PCF remains a popular choice for businesses today.