What are consolidated accounts? What are the requirements? Who needs to do it, and why? Let's go through consolidated accounts in practice - step by step.
A group is defined as an economic constellation consisting of a parent company and at least one subsidiary, where the parent company has a controlling interest in the subsidiary, usually by holding a majority of the votes. It is therefore an association of enterprises where the relationship is determined by ownership.
If you want to dig deeper into the different types of group relationships, we have a whole article where we embroider the text on what a group, an unincorporated group and an associated company are, how they differ and what the advantages are of forming a group.
Consolidated financial statements are special financial statements that parent companies need to prepare in addition to the normal annual financial statements. The purpose is to present and describe the results and financial position of the group as a whole, which means that the consolidated financial statements are prepared as if the parent and its subsidiaries were a single economic entity. For this to be possible, all internal transactions within the group, between companies, need to be removed.
The Annual Accounts Act states that the general rule is that all groups must prepare consolidated accounts, and the board of directors of the parent company is always ultimately responsible for their preparation. However, there are some exceptions.
Small groups are not required to prepare consolidated accounts. To be defined as a small group, you must not exceed two of the following three thresholds:
You can also avoid preparing consolidated accounts if the parent company is also a subsidiary of a parent company. As long as the parent company is included in the consolidated accounts of the ultimate parent company and as long as the ultimate parent company is governed by the laws of a state within an EEA country.
At the same time, it is worth pointing out that there is nothing to stop you from preparing consolidated accounts, even if you fall under the definition of a small group. Rather, we would encourage everyone to do so. Not only because it is in line with the general rule that all groups should prepare consolidated accounts, but above all because the consolidated accounts as such are an excellent tool for monitoring and for providing a better overview of the position of the whole group; for understanding how well it is doing overall.
When must consolidated accounts be prepared?
Consolidated financial statements cover one financial year and are normally prepared once a year, in conjunction with the annual financial statements at the end of the financial year.
What must a consolidated financial statement contain?
As with all types of accounting, there are a number of formal requirements and rules to be observed in consolidated accounts. Properly prepared consolidated financial statements include the certificate of incorporation, management report, consolidated balance sheet, consolidated income statement, cash flow statement and notes.
Certificate of Establishment
The certificate of incorporation is simply the document that certifies that the CEO and directors have approved the consolidated income statement and balance sheet at the annual general meeting.
In the management report, the parent company reports on the Group's development, position and results. It also discusses and reports on other major events that have occurred during the financial year, ranging from new investment decisions that will lead to changes, to external factors that have affected performance, such as interest rates, exchange rates or the environment.
Consolidated balance sheet
The consolidated balance sheet aims to describe the relationship between equity, liabilities and assets as if all companies were one entity, a group. It therefore combines the balance sheets of all the companies in the group into one, which means that new conditions are created for obtaining a balance sheet. For example, the companies within the group may have internal debts and receivables to each other which need to be eliminated and recalculated. A key concept in preparing a consolidated balance sheet is the acquisition analysis prepared as at the date of acquisition of the subsidiaries.
Consolidated income statement
Also in the consolidated income statement, some items need to be eliminated. The purpose of the consolidated income statement is to describe the overall performance of the Group, which means that internal profits from intra-group transactions need to be removed from the equation.
Cash flow analysis
A cash flow statement aims to show money coming in and money going out of the business. The point of this is to map the flow of the group's cash and cash equivalents in order to understand more easily where it has come from and where it has gone. You simply want to be able to follow the journey of money into, through and out of the business. Hence the name cash flow statement.
In order to do this in the best possible way, the cash flow statement is divided into three parts: operating activities, investing activities and financing activities. In operating activities, you actually list things that relate to operating activities themselves, such as sales, changes in inventories, current liabilities and receivables. Investing activities simply list different types of investments, such as new acquisitions or sales of fixed assets. Finally, financing activities list such things as new issues, dividends and repayments.
Consolidated financial statements always include notes, which list subsidiaries and associated companies.
Consolidated accounts and consolidation
It may be worth repeating and pointing out that the whole foundation of properly prepared consolidated accounts is based on what is called consolidation. That is, the combination of financial data from several economic entities into one report. As we have also mentioned, for this to be possible, all the items and transactions that have taken place between the various companies of the group need to be limited. This means that the consolidated accounts, in essence, consist of financial data from all the different parts of the group. This may be self-explanatory, but it also means that it is of the utmost importance that all financial data is correctly recorded from the outset and correctly translated into total figures in order for the consolidated accounts to reflect the true financial position of the group.
What we're looking for is that the underlying numbers, as always in economics, are very important to make everything add up. Therefore, as we mentioned, the acquisition analysis, which aims to revalue the assets and liabilities of subsidiaries at the date of acquisition at fair value, becomes a key to properly prepared consolidated financial statements.
Help with the consolidated accounts?
Consolidated accounting can be both complicated and time-consuming. We at Saldo are experts in all types of accounting and bookkeeping and love to help our clients with all kinds of financial issues. We are happy to help you with your group accounting, so that you have more time for value-creating activities.