Consolidation the presentation of a parent company and its subsidiaries (affiliates) as one entity in the financial statements of the parent essentially as if the company group were a single entity.  Consolidated financial statements are the combined financial statements of a parent company and all its subsidiaries (statements of financial position, statements of comprehensive income, cash flow statements, statements of changes in equity, etc.), both domestic and foreign, including special purpose entities (SPEs).

When subsidiaries are consolidated, the parent’s consolidated financial statements will combine all of the assets, liabilities, revenues and expenses of these less than wholly owned subsidiaries.

How to Prepare Consolidate Financial Statements
   1.   Combine balance sheets line-by-line;
   2.   Combine income statements line-by-line;
   3.   Eliminate any unrealized intercompany gains and losses and balances;
   4.   Eliminate the investments in subsidiaries; and
   5.   Report noncontrolling interests on the balance sheet and income statement.

For investments in companies of more than 50% of the voting rights, the investing company is assumed to have control over the investees and full consolidation is normally mandatory.  Generally, the consolidation requirement is based on the concept of substance over form.  There is no exception to consolidation for subsidiaries whose business is different in nature to that of the parent’s nor for subsidiaries for which control is intended to be temporary.

Under IFRS, a parent is not required to – but may – present consolidated financial statements if, and only if, all of the following four conditions are met:

  • The parent is itself a wholly-owned or partially-owned subsidiary of another entity and its other owners have been informed about, and do not object to, the parent not presenting consolidated financial statements;
  • The parent’s debt or equity instruments are not publicly traded;
  • The parent did not file, nor is it in the process of filing, its financial statements with a regulatory organization for the purpose of issuing any class of instruments in a public market; and
  • The ultimate or any intermediate parent of the parent produces consolidated financial statements available for public use that comply with IFRS.

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