Discover the process of consolidation in financial terms, particularly focusing on Income Statement Consolidation. Learn the intricate steps required by a parent company to integrate and combine all its financials to create a standard-form income statement as part of a set of consolidated financial statements.
Key Insights
- Consolidation in finance terms refers to the integration of the financial statements of all subsidiaries into the parent company's financial statements.
- To create a consolidated Income Statement (IS), the IS values of the investor and the investee are added together and then transaction effects are applied.
- Only the post-acquisition portion of the investees' revenue and losses are included in the consolidated IS.
- Transaction effects include adjustments for extra interest expense on deal debt, lost interest expense on retired debt, and the value of synergies from the M&A transaction.
- Extra depreciation and amortization on PP&E and intangible assets are accounted for, also known as 'step-ups'.
- The tax impact of the above adjustments is also taken into consideration in the consolidation process.
DCF Workflow
-
Forecast Free Cash Flows
5-10 years of FCF based on operating assumptions.
-
Calculate Terminal Value
Gordon growth or exit multiple beyond projection.
-
Discount at WACC
PV each year's FCF, sum to enterprise value.
-
Adjust to Equity Value
Subtract net debt, divide by shares for per-share value.
In finance terms, consolidation refers to the incorporation of the financial statements of all subsidiaries into the financial statements of the parent company.
Consolidation of financial statements requires the parent company to integrate and combine all its financials to create a standard-form income statement, balance sheet, and cash flow statement, as part of a set of consolidated financial statements.
In this video, we will talk about Income Statement Consolidation.
———————————
To create a consolidated IS we would take the IS values of the investor and the investee and add them together. And then apply transaction effects.
First of all, we need to include only the post-acquisition portion of the investees' revenue and losses into the consolidated IS.
Another transaction effect would be an adjustment of extra interest expense on deal debt and lost interest expense on retired debt.
Also, we would need to adjust the value of synergies from the M&A transaction.
We would need to make step-ups for extra depreciation and amortization on PP&E and intangible assets.
And take into consideration the tax impact of the above.
—————————-
Example.
D17=D16*(1-B11)-B7*B8*B10*(1-B11)
