Consolidated financial statements is the grouping of the financial statements of the controlling entity (parent) with the separate financial statements of the subsidiaries, in order to be presented as if they were a single economic entity.
Main terms for evaluating the preparation of consolidated financial statements
According to IFRS 10 “Consolidated Financial Statements”, an entity controls when it has power over other entities, has rights to variable returns and has the ability to influence returns through its power over them.
An entity (parent) has power over one or more entities when it has rights that give it the current ability to direct the relevant activities, i.e. activities that significantly affect the returns of one or more entities (subsidiaries).
An entity that is controlled by another entity.
When should an entity consolidate its financial statements with the entities it controls?
If an entity prepares its financial statements in compliance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), has control and power in one or more entities, it will be required to consolidate the financial statements in compliance with International Financial Reporting Standard No. 10 “Consolidated Financial Statements”.
Is it possible for a parent company not to consolidate its financial statements with one or more other entities?
According to IFRS 10, a controlling entity need not consolidate consolidated financial statements if it meets all of the following conditions:
- The parent has informed, without objection, subsidiaries and other (non-voting) owners that it will not present consolidated financial statements.
- Its debt or equity instruments are not traded in a public market, either in a local or foreign stock exchange.
- It does not register its financial statements, nor is it in the process of doing so, with a regulatory organization.
- Its ultimate parent company prepares consolidated financial statements.
Considerations in the preparation of consolidated financial statements
- The financial statements to be consolidated should have the same accounting framework.
- The parent shall present non-controlling interests in the consolidated statement of financial position, within equity, separately from the equity of the owners of the parent.
- Similar portions of assets, liabilities, equity, income and expenses are combined.
- The amount of the parent’s investment in each subsidiary and the parent’s share in the equity of each subsidiary are offset (eliminated).
- Assets, liabilities, equity, income and expenses and intragroup cash flows related to transactions between group entities are eliminated in full.
What is the advantage of preparing and presenting consolidated financial statements?
When a controlling (parent) entity complies with all IFRS and consolidates its financial statements with one or more entities in which it maintains control and power, it will allow, in a single set of financial statements, to inform owners and other users of the Group’s economic situation and performance.
Likewise, having consolidated financial statements will help the Group to be able to participate in bidding processes with private and state entities. It would also help to obtain new financing from banks.
At Vargas Alencastre, García y Asociados, we assist entities in their preparation and presentation of consolidated financial statements in compliance with consolidation procedures according to IFRS.