Explore the intricacies of consolidated financial statements, from their role in representing a corporation's multiple divisions to the criteria for filing, and understand the process for creating such statements according to GAAP and IFRS provisions.
Consolidated financial statements are financial statements of an entity with multiple divisions or subsidiaries
Consolidated financial statements are strictly defined as statements collectively aggregating a parent company and subsidiaries
GAAP and IFRS include provisions that help to create the framework for consolidated subsidiary financial statement reporting
If a company doesn’t choose to use consolidated subsidiary financial statement reporting it may account for its subsidiary ownership using the cost method or the equity method
In general, the consolidation of financial statements requires a company to integrate and combine all of its financial accounting functions together to create consolidated financial statements that show results in the standard balance sheet, income statement, and cash flow statement reporting.
The criteria for filing a consolidated financial statement with subsidiaries are primarily based on the amount of ownership the parent company has in the subsidiary. Generally, 50% or more ownership in another company usually defines it as a subsidiary and gives the parent company the opportunity to include the subsidiary in a consolidated financial statement. In some cases, less than 50% ownership may be allowed if the parent company shows that the subsidiary’s management is heavily aligned with the decision-making processes of the parent company.
We will take a closer look at Income Statement and Balance Sheet Consolidation in the following videos.