It is common to lose perspective on the entire company when financial data reports focus solely on the parent company or a single subsidiary. As a result, consolidated financial statements are critical information that offers perspective on the entire business. Even though putting them together without the proper technologies can be difficult and time-consuming, this information remains an essential step in the process.
What Is a Consolidated Financial Statement?
In essence, consolidated financial statements are financial results that have been summed up. They display the assets of the parent company and its subsidiaries, liabilities, equity, revenue, expenses, and cash flows rather than just one set of numbers that pertains to one company within a group. In preparing year-end financial reporting, a parent business often prepares consolidated financial statements. They often derive from the several financial statements that subsidiaries put together, such as an income statement, balance sheet, and statement of cash flow.
Purpose of Consolidated Financial Statement
The financial status of a corporation is more accurately represented by the consolidated financial statement. Stakeholders must be aware of a company’s true financial situation. All that is displayed in a standalone financial statement is the investment amount in a subsidiary business. On the other hand, a company’s specific assets and liabilities are made clear to stakeholders through its consolidated financial statements. Consolidated shows all of a company’s assets, including those of the parent and the subsidiary. So, its goal is to paint a clearer picture of the decision-making process.
Benefits of Consolidated Financial Statements
Given that each company in the group creates its own set of financial statements, it is still required to create a consolidated version for the entire group. Any group of companies should continue to prepare consolidated financial statements for a variety of reasons.
Generally Accepted Accounting Principles (GAAP) require consolidated financial reports for good reason. Consolidated financial reports have various advantages, some of which are as follows:
Consolidated statements give interested parties, including investors, financial analysts, and business owners, a thorough overview of the parent firm. They can quickly assess the state of the firm as a whole and the effects of each subsidiary on the main business.
Consolidated financial statements also result in less paperwork. If the parent firm owns nine subsidiaries, which can include businesses like event rentals in Toronto, there are 40 unique standalone financial reports to see, including the four basic financial statements for each subsidiary as well as the parent business. Finding all these records would be challenging, and it would be far more difficult to review each one to understand how the company is doing. This mountain of reports was reduced to only four consolidated reports by consolidated financial statements. As a result, evaluating the financial health of a parent firm requires less time and paperwork.
Since transactions between subsidiaries and the parent firm cancel each other out in the overall scheme of the business, consolidation software eliminates all these transactions. By eliminating these transactions, the performance of the firm is more clearly shown.
Updates to Consolidated Financial Statements
Consolidated financial statements will keep developing over time to provide transparency in the process of assessing a parent business. This is due, in part, to the fact that in the past, certain businesses have utilized consolidated reporting to conceal liabilities and losses in particular subsidiaries established just for this purpose. The preparation of consolidated financial statements can be challenging, particularly for parent businesses with several subsidiaries. Luckily, accounting groups globally offer simplified preparation, even if it is a fiscal consolidation in Malta, and the boards for these standards continuously strive to enhance the process. Knowing all the key advantages of consolidated financial statements makes it simpler to comprehend why businesses need them.