Advanced Accounting II: Preparation of Consolidated Financial Statements
Advanced Accounting II: Preparation of Consolidated Financial Statements
To see the true strength of a holding company or a large conglomerate, one must look at its Consolidated Financial Statements rather than individual books. Today, we learn the high-level accounting technique of merging multiple legal entities as if they were a single company.
1. Basic Concept of Consolidation: Economic Entity
Consolidated financial statements report a parent and its subsidiaries as a single ‘economic entity.‘
| Category | Parent | Subsidiary |
|---|---|---|
| Definition | Holds control over other entities | Is controlled by another entity |
| Accounting Treatment | Prepares standalone & consolidated F/S | Prepares standalone F/S |
| Control Judgment | Decision-making power (usually > 50% stake) | Performs active activities for the investor |
2. Techniques of Consolidation: Intercompany Transactions and Unrealized Profits
The core of consolidation is to sever the complex internal strings of a group and leave only transactions with ‘external’ parties.
Simply sum the balances of each account of parent and subsidiary
Eliminate the parent's investment asset against the subsidiary's equity
Offset internal sales, purchases, receivables, and payables
Remove internal profits included in inventory etc. not yet sold to external parties
3. Non-controlling Interest (NCI)
If a parent does not own 100% of a subsidiary, the stake of external shareholders must be clearly distinguished.
Composition of Consolidated Net Assets
The rights of controlling and non-controlling shareholders are displayed separately.
- Parent's Ownership Interest70%
- Non-controlling Interest (NCI)30%
Well done! Next, we move on to the final themes of advanced accounting: Foreign Currency Accounting and Derivatives.
Oiyo
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