Consolidated financial reports are general statements of the parent company and all other subsidiaries in just one financial report.
These statements serve to depict the consolidated position of a company overall, comprehensively describing its entire financial health, and encompassing all its different forms of entities and activities.
Consolidated financial reports are most used by investors, creditors, and regulators for a grouping’s position in terms of finance instead of judging each subsidiary.
Importance of Consolidated Financial Reports
Consolidated financial reports offer the latest and most accurate information about a business group’s financial situation. All duplication and intra-company transactions are eliminated by consolidating all the data from the subsidiaries.
All the resources and obligations of the company are summed up into such reports, where general performances clearly emerge. For example, the revenue earned by one subsidiary after selling to another subsidiary is cancelled out because it may raise the group’s revenue.
Also Read: Key Differences Between Revenue and Income
Components of Consolidated Statements of Financial Position
There are three consolidated statements of financial position:
Statement of Consolidated Position: It is also referred to as a consolidated balance sheet, displays the consolidated positions of a parent company and subsidiary companies as an economic entity. It sums assets, liabilities, and equity, but only by eliminating intercompany transactions. Hence, it indicates the consolidated state of a particular group of a company at one point in time, giving investors an overview to evaluate overall stability and financial performance.
Statement of Consolidated Income: A Statement of Consolidated Income, also known as a Consolidated Income Statement, presents the financial performance of a parent company and its subsidiaries as a single entity over a specific period. It combines the revenues, expenses, gains, and losses of all companies within the group while eliminating intercompany transactions to ensure accurate reporting. This statement helps stakeholders, such as investors and regulatory bodies, assess the profitability and financial efficiency of the entire corporate group.
Consolidated Cash Flow Statement: A Consolidated Cash Flow Statement is a summary of the cash inflows and outflows of a parent company and its subsidiaries for a particular period. It depicts how cash is generated and used across the whole group without intercompany transactions, thereby showing a true picture of the financial situation. The statement is significant for investors, creditors, and management since it allows the evaluation of the liquidity of the group, the group’s financial stability, and the group’s ability to meet its obligations.
Also Read: IFRS 10 — Consolidated Financial Statements
Benefits and Uses of Consolidated Financial Reports
The consolidated financial statement is an effective way of having a complete picture of the parent company and its subsidiaries. This is done by merging all their financial statements into one report.
By doing so, there will be an effective identification of the financial position and performance of the whole company, and any transaction between the companies will be removed in order to avoid duplication of financial information. Transparency will be one of the best advantages, as the financial position of the whole company will be judged, and not individual companies.
Moreover, the use of consolidated reports results in improved decision-making. This entails offering a basic outlook, displaying either the income, expenses, assets, or liabilities altogether in one single report. These, therefore, play a significant role in making decisions concerning the net income, growth, or strategy regarding planning. This may assist the subsidiaries in making hassle-free managerial decisions regarding expenditures as well as accounting principles. For investors, the consolidated reports prevent complications, thus making it possible for the investors to make decisions about the overall stability and prospects of growth.
Conclusion
Consolidated financial reports become extremely important if one is to understand the final view of a company’s total financial health with full transparency and accuracy. In other words, consolidated financial reports bring out the most important aspects of the real performance of a company and its propensity stability in terms of finance.
