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Purpose of Consolidation of Financial Statements







Meaning and definition of Consolidated Financial Statements



Consolidated financial statements refer to the financial statements which lead to the subsidiaries of the holding company its summative accounting figure. Putting another way, consolidated financial statements can be addressed as the combined financial statements of a parent company and its subsidiaries.



According to IAS 27 "Consolidated and separate financial statements", consolidated financial statements are the financial statements of a group presented as those of a single economic entity.



As stated by Investopedia, the consolidated financial statements enable you to determine the general health of an entire group of companies as compared to a company’s stand alone position. This is because these financial statements provide an aggregated look at the financial position of a company and its subsidiaries.



Purpose of consolidated financial statements



The key purpose of preparing consolidated financial statements is reporting the financial condition and operating result of a consolidated business group, which is considered as a single entity comprised of more than one companies under a common control (also counting entities other than “companies”)



General principles of consolidated financial statements



The general principles involved in consolidated financial statements are:



1. A consolidated financial statement should essentially provide true and fair picture of financial condition and operating result of the business faction.



2. A consolidated financial statement needs to be prepared on the basis of legal-entity based financial statements of the parent company and its subsidiaries which belong to the business faction, and prepared in accordance with the GAAP.



3. A consolidated financial statement needs provide a clear vision about the financial info requisite for interested parties not to mislead their judgments about the business groups’ condition.



4. The procedures and policies used for preparing consolidated financial statements need to be applied ad infinitum and should not be changed without any reason.



Checklist for preparation of consolidated financial statements



1. Estimate group holdings and establish each entity’s status in the question.



2. Ascertain the fair value of acquired assets and calculate net assets of the subsidiary.



3. Estimate goodwill arising on acquisition.



4. Adjust for any intra-group activities.



5. Estimate the balance carried forward on consolidated retained earnings.



6. Estimate the balance carried forward on consolidated reserves.

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