What are 'Consolidated Financial Statements'
Consolidated financial statements are the combined financial statements of a parent company and its subsidiaries. Because consolidated financial statements present an aggregated look at the financial position of a parent and its subsidiaries, they let you gauge the overall health of an entire group of companies as opposed to one company's standalone position.
BREAKING DOWN 'Consolidated Financial Statements'
Consolidated financial statements report the aggregate of separate legal entities. A parent company can operate as a separate corporation apart from its subsidiary companies. Each of these entities reports its own financial statements and operates its own business. However, because the subsidiaries are considered to form one economic entity, investors, regulators, and customers find consolidated financial statements more beneficial to gauge the overall position of the entity.
Consolidated Statement of Income
The consolidated financial statements only report income and expense activity from outside of the economic entity. Any revenue earned by the parent that is an expense of a subsidiary is omitted from the financial statements. This is because the net change in the financial statements is $0. The revenue generated from one legal entity is offset by the expenses in another legal entity. To avoid overinflating revenues, all internal revenues are omitted.
Consolidated Balance Sheet
Certain account receivable balances and account payable balances are eliminated from the consolidated balance sheet. These eliminated amounts relate to the amounts owed to or from parent or subsidiary entities. Similar to the income statement, this is to simply reduce the balances reported as the net effect is $0. All cash, receivables, and other assets are reported on the consolidated as well as all liabilities owed to external parties.
Consolidated financial statements must be prepared using the same accounting methods across the parent and subsidiary entities. If relevant, the parent and subsidiaries must all be accounted for using generally accepted accounting principles (GAAP) if the consolidated financial statements are to be in accordance with GAAP. All subsidiary equity accounts such as common stock or retained earnings must be eliminated. A non-controlling interest account may be used if the subsidiary is not wholly owned. When preparing the consolidated financial statements, the subsidiary’s balance sheet accounts are readjusted to the current fair market value of the financial assets.
Ownership Calculation Methods
There are three ways to calculate the ownership interest between companies. Only companies that are owned are included in the consolidated financial statements. Ownership is based upon the total amount of stock owned. If a company owns less than 20% of another company's stock, it may use the cost method of financial reporting. If a company owns more than 20% but less than 50%, the company uses the equity method. Under both of these methods, consolidated financial statements are not permitted.