Introduction

A consolidated financial statements is a unified statement that provides a comprehensive overview of the financial health and performance of the entire group of companies owned by one business, enabling finance and accounting teams to:

  • Provide accurate information to stakeholders for better transparency and accountability
  • Comply with accounting industry-accepted standards and any applicable regulations
  • Make more data-driven, strategic decisions

Broadly, the purpose of consolidated financials is to represent the business accurately and in its entirety in terms of its assets, income, liabilities, expenses, cash flow, and equity.

Let’s take a closer look at how they do that.

Understanding Consolidated Financial Statements with a Simple Example

Consolidation of financial statements refers to combining the financial statements of multiple “child” companies or entities to understand their relative contributions and overall financial health to the “parent” company.

Let’s say we have a company called Acme Enterprises, which has three subsidiaries, each of which functions as a separate business:

  • Acme SaaS, a software business with $2M in annual net income
  • Acme Consulting, a technology consulting services business with an annual net income of $250K
  • Acme IT Services, a staff augmentation business making $750K in annual net income

All three subsidiaries produce their own financial statements, including an income statement reflecting their annual income noted above. Individual financial statements are important for the different leaders and key stakeholders in each subsidiary company to understand its financial health.

However, for Acme Enterprises to accurately reflect its financial health, it must produce a consolidated income statement for all three of its subsidiaries.

To do this, the Acme Enterprises finance team must add up the combined income reported on each of their income statements. So in this example, the consolidated income statement for Acme Enterprises would report an income of $3M.

Always Remove Intra-Entity Transactions

Note that when preparing a consolidated financials statement, it is critical to remove all intra-entity transactions. These are transactions that occur when one of the parent company’s entities exchanges goods, services, or assets with another.

For example, if Acme IT hired Acme Consulting to provide IT consulting services to one of its clients, that transaction would need to be removed from the consolidated statement. While the resulting financial transaction would impact the individual income statements for both the subsidiary companies, it had no real effect on the parent company’s bottom line. Rather, it just moved money around within Acme Enterprises.

Requirements for Consolidated Financial Statements

Preparing consolidated financial statements is a fairly complex task, involving the technical expertise and capabilities of experienced accountants and data analysts.

Common requirements for consolidated financial statements of publicly traded companies include:

  • Control over entities: If the parent company does not have control over the subsidiary but significantly influences its financial and operating policies, the subsidiary has to be included in the consolidated financial statement.
  • Common reporting period: A common reporting period must be defined to prepare the financial statements of the parent company and its subsidiaries.
  • Consistent accounting policies: Both the parent company and their subsidiaries must use consistent accounting policies.
  • Intercompany transactions and balances: It is crucial to eliminate any intercompany transactions and balances in the consolidation process to avoid double-counting.
  • Minority interests: The portion of the subsidiaries not owned by the parent company must be adjusted for minority interests (also referred to as non-controlling interests), which is the portion of an entity’s stock not owned by the parent company.
  • Disclosures: The consolidated financial statements must disclose relevant information, including the basis for consolidation, the percentage of ownership in each entity, and any changes in the ownership structure during the reporting period.
  • Compliance with accounting standards: The consolidated financial statements must comply with applicable accounting standards and regulatory reporting requirements.

Understanding IFRS Regulations

International Financial Reporting Standards (IFRS) — issued by the International Accounting Standards Board (IASB) — are a set of accounting rules for public companies preparing consolidated financial statements to make them consistent, transparent, and easily comparable worldwide. It has been adopted in over 160 jurisdictions across Europe and Asia.

As a CFO in the parent company, especially if that company reports internationally, you would need to use “uniform accounting policies for like transactions and other events in similar circumstances,” as mandated by the IFRS 10 Consolidated Financial Statements.

The United States, on the other hand, uses a different system known as Generally Accepted Accounting Principles (GAAP).

Understanding GAAP Regulations

GAAP is an accounting framework, developed and maintained by the Financial Accounting Standards Board (FASB) for public companies in the U.S. to compile their financial statements. The aim is to ensure that these consolidated financials or accounts are comprehensive, consistent, and comparable. GAAP is also used for governmental accounting matters.

Are Private Companies Required to Consolidate Their Financial Statements?

While publicly traded companies are required to prepare consolidated financial statements on a quarterly basis, private companies are not mandated to do so.

However, most private companies that act as a “parent company” to multiple businesses also generate their own consolidated financial statements.

The need to fully understand your finances is universal among all businesses, large or small, public or private.

What Information Should Be Included in a Consolidated Financial Statement?

Both GAAP and IFRS provide clear guidelines for preparing consolidated financial statements. These standards ensure transparency, accuracy, and consistency in reporting. Below are the key components that must be included:

1. Income Statement

The income statement, also known as the profit-and-loss (P&L) statement, summarizes the company’s revenues and expenses during a specific reporting period. It includes:

  • Revenue from both operating and non-operating activities
  • Cost of goods sold (COGS) and other operating expenses
  • Gross profit, operating profit, and net profit

This statement helps stakeholders analyze the company’s financial performance.

2. Balance Sheet

The balance sheet provides a snapshot of the company’s financial position at a given time. It lists:

  • Assets: Cash, accounts receivable, inventory, investments, and property
  • Liabilities: Loans, accounts payable, and other financial obligations
  • Equity: Shareholder investments and retained earnings

For consolidated financial statements, intercompany transactions are eliminated to avoid duplication of revenue and expenses.

3. Cash Flow Statement

The cash flow statement records all cash movements during the reporting period. It is divided into three sections:

  • Operating Activities: Cash inflows from sales and outflows from expenses
  • Investing Activities: Purchases and sales of assets or investments
  • Financing Activities: Debt repayments, equity issuances, and dividend payments

This statement allows investors and analysts to evaluate liquidity and cash management.

4. Statement of Changes in Equity (IFRS Requirement)

Under IFRS, companies must include a Statement of Changes in Equity. This document reports:

  • Changes in retained earnings due to net income and dividend distributions
  • Adjustments related to share issuances, repurchases, or other equity transactions
  • Other comprehensive income affecting equity

This statement provides insight into how the company’s equity has evolved over time.

5. Summary of Accounting Policies

Consolidated financial statements must also include a summary of accounting policies. This section explains:

  • The company’s revenue recognition methods
  • Asset valuation and depreciation policies
  • Expense allocation strategies

This disclosure ensures transparency and consistency in financial reporting.

Tip: Stay updated on any changes in the parent company’s structure, ownership, or operations. These updates must be reflected in the consolidated financial statements.

Benefits of Consolidated Financial Statements

1. A Complete View of the Business

Consolidated financial statements provide a comprehensive overview of a company’s financial health. They show the parent company’s assets, liabilities, profits, and expenses while accounting for the impact of its subsidiaries.

2. Reduced Manual Work and Paperwork

By consolidating financial data into a single document, companies eliminate the need for multiple individual reports. This process reduces:

  • Data entry errors from manual inputs
  • The need to collect financial reports separately from each entity
  • The time spent on merging financial information manually

Financial consolidation software, such as PivotXL, further automates these processes, making financial reporting more efficient.

3. Simplified Business Overview

By eliminating intercompany transactions, consolidated financial statements provide a clear and simplified view of the company’s overall performance. This simplification makes it easier for executives, investors, and auditors to assess financial health.

4. Greater Transparency and Compliance

Aligning with GAAP and IFRS standards ensures that financial statements are transparent and consistent. Standardized financial reporting:

  • Builds trust with investors and stakeholders
  • Helps in securing better funding opportunities
  • Ensures compliance with regulatory requirements

Broader Applications of Financial Consolidation

Financial consolidation is not limited to parent companies and subsidiaries. Companies can also use this concept to analyze different business dimensions, such as:

  • Geographic regions
  • Product categories
  • Market sectors

Even though these are not subsidiaries, they can be treated as separate entities for financial reporting.

Example: Consolidation Across Geographic Regions

A company operating in multiple regions—such as the United States and India—may prepare separate income statements for each region. These financials can then be consolidated to show the company’s overall financial performance.

  • The U.S. operations may have higher revenue and marketing expenses
  • The Indian operations may have lower costs but higher profit margins
  • Combining these reports provides a holistic view of regional profitability

This method allows businesses to evaluate financial performance by location and make informed strategic decisions.

Example: Consolidation by Product Line

If a company offers multiple product lines, it can prepare separate income statements for each product. For example:

  • Product A: High revenue but high production costs
  • Product B: Moderate revenue with high margins
  • Product C: Lower revenue but steady customer demand

Consolidating these reports helps management understand which products contribute the most to profitability.

Challenges of Multi-Dimensional Reporting

Traditional spreadsheets make multi-dimensional financial consolidation difficult and time-consuming. As a business grows, manual reporting methods become error-prone and inefficient.

Solution: Advanced financial reporting tools, such as PivotXL, help companies consolidate and analyze financial data efficiently. These tools offer:

  • Automated data integration from multiple sources
  • Real-time financial insights
  • Scalability for growing businesses

By leveraging automation, companies can reduce errors, improve efficiency, and enhance financial visibility.

How Technology Improves Efficiency and Accuracy of Consolidated Statements

Many companies continue to rely on spreadsheets to consolidate their financial statements. Pulling and compiling data from multiple source systems and checking to ensure its accuracy requires a lot of time and effort on a task that could be easily automated with a financial management software like PivotXL.

With its robust integrations, PivotXL can consolidate financial data from multiple sources into a single platform. As a multi-dimensional modeling software, PivotXL allows users to slice and dice their data in any way they need to understand their business in all its different dimensions.

With dynamic dashboards and automated, real-time reporting, PivotXL enables finance teams to share financials with stakeholders at any time, ensuring accuracy, consistency, and efficiency in financial consolidation.