In the dynamic business world, financial statement consolidation is a crucial practice, especially for international companies. Understanding when it’s mandatory and how to do it correctly can make the difference between optimal financial management and regulatory issues. In this article, we break down everything you need to know about financial statement consolidation and how to implement it effectively in your company.
What is financial statement consolidation?
Financial statement consolidation is the process of combining the financial statements of multiple legal entities controlled by a single parent company into one set of financial statements.
Objectives of financial statement consolidation
The main objectives of financial statement consolidation are:
- Reflecting the True Financial Position of the Group: Consolidation provides a more accurate and complete view of the group’s financial situation by eliminating internal transactions and investments in subsidiaries.
- Complying with Accounting and Legal Standards: Financial statement consolidation is a legal requirement in many jurisdictions and must be carried out according to applicable accounting standards, such as International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP).
- Facilitating Decision-Making and Performance Evaluation: Consolidated information provides a solid basis for decision-making and evaluating the financial performance of the business group, helping to identify areas for improvement and growth opportunities.
When is financial statement consolidation mandatory?
The requirement to consolidate financial statements varies depending on each country’s legislation and international standards. However, it is generally mandatory in the following situations:
- Parent Companies: Any company that owns or controls, directly or indirectly, more than 50% of another entity must consolidate the financial statements of the latter.
- Regulatory Requirements: Some countries impose consolidation to comply with local or international accounting standards, such as International Financial Reporting Standards (IFRS).
- Contractual Obligations: In certain cases, agreements with investors, banks, or other stakeholders may require the consolidation of financial statements.
Process and phases for consolidating financial statements
The process of consolidating financial statements includes several critical steps:
- Identification of group companies to consolidate: Determine all entities to be consolidated, based on the parent company’s control, ownership, and influence over its subsidiaries.
- Currency conversion adjustments: If entities operate in different currencies, convert the financial statements to the parent company’s functional currency.
- Harmonization of accounting policies and practices: Ensure all entities apply the same accounting policies to maintain consistency in the consolidated financial statements.
- Elimination of internal transactions and investments in subsidiaries: Eliminate all transactions and balances between the group entities to avoid double counting.
- Summation of account balances: Add up the individual account balances to obtain the consolidated financial statements.
This process can be broken down into several key phases:
Homogenization:
- Temporal Homogenization: The closing dates and periods of all entities’ accounts must match or have no more than a three-month difference.
- Valuation Homogenization: All companies in the group must use the same valuation criteria in their consolidated accounts.
Aggregation:
- Global Integration Method: Completely integrates the expenses, income, and equity of the group companies.
- Proportional Integration Method: Applied to joint ventures, it integrates according to the proportion of the companies’ participation in the capital.
- Equity Method: Applied to associated companies, it adjusts the book value of the investment by the corresponding part of the associates’ equity.
Elimination:
- Remove duplications in the accounts and transactions between the group companies.
Formulation:
- Draft and approve the consolidated accounts, organizing all information to facilitate interpretation.
Challenges in financial statement consolidation
Financial statement consolidation faces challenges such as differences in accounting and tax regulations, difficulties in obtaining information, changes in business structures, and divergences in accounting policies and practices. To overcome these obstacles, it’s essential to use financial consolidation software, train staff, implement internal control systems, and establish clear policies and procedures.
Gain clear and accurate insight into your financial health
Financial statement consolidation is not only a legal obligation in many cases but also a beneficial practice for obtaining a clear and precise view of a business group’s financial health. For international companies, understanding and correctly applying this process is essential to ensure transparency, comply with regulations, and make informed decisions.
If your company needs expert advice on reporting and financial consolidation for companies or any other accounting and fiscal aspect, contact us. Our team of professionals is here to help you achieve a precise and efficient consolidation, ensuring that your business group has a solid foundation for decision-making and future growth.
