Consolidation is the merging of the financial figures of several entities within a group into one set of consolidated financial statements. It shows how the group stands as a whole, without transactions between the entities distorting the picture. In this article you can read what consolidation is, why it is needed, how the process works, which entities have to be included and how you keep the underlying administration in order.
Table of contents
What does consolidation mean?
Consolidation is the process in which the financial data of several entities within a group are combined into one clear report. Think of a parent company with a number of subsidiaries. Instead of presenting a separate annual account for each entity, you draw up one set of consolidated financial statements that reflects the whole.
Why is consolidation needed?
Consolidation gives a realistic and transparent view of the financial position of a group as a whole. Without it every entity looks like it stands on its own, while in practice there are transactions, loans and ownership relationships between them that distort the picture. It is also often a legal requirement. Within the EU the obligation and the exemptions for smaller groups derive from the Accounting Directive, implemented in national law, so the exact thresholds differ per country. For groups reporting under IFRS, the standard for this is IFRS 10. In the Netherlands you can find the filing rules at the Dutch Chamber of Commerce.
The main reasons to consolidate:
- Legal obligation: larger groups have to prepare consolidated financial statements, while small groups are frequently exempt.
- Insight for stakeholders: investors, banks and other interested parties want to know how the group stands as a whole.
- Strategic decisions: a consolidated overview is what lets management compare entities on the same basis.
Which entities do you include?
The test is control rather than the shareholding percentage on its own. Where the parent controls an entity, that entity is fully consolidated and any share held by others appears as a minority interest. Where there is significant influence but not control, typically a participation without a majority, the interest is usually accounted for under the equity method instead, so only the share of the result comes through rather than the full balance sheet. This matters in practice because a group can hold 50% of a joint venture and still not consolidate it.
How does consolidation work?
The consolidation process runs through a number of steps:
- Collecting the financial data of all entities within the group, on the same reporting date and in the same accounting policies.
- Eliminating transactions between entities, such as sales between subsidiaries or internal loans.
- Combining balance sheet and profit and loss items into one consolidated overview.
- Applying the consolidation rules, such as accounting for minority interests, goodwill and, where entities report in another currency, translation.
An example in practice
Suppose a parent company owns 100% of two subsidiaries. Each keeps its own books, and they also supply goods to one another. On consolidation those internal sales are eliminated, so the group’s turnover is not inflated by revenue it earned from itself. What remains is a cleaner view of how the group performed against the outside world.
Automating consolidation
There are consolidation tools that simplify the process considerably: they identify intercompany transactions, eliminate them, translate currencies and generate reports according to the applicable standard, such as IFRS or a national GAAP.
TriFact365 is not a consolidation tool, but it does supply the reliable source data you consolidate on. Per administration the software recognises purchase invoices automatically and prepares a booking proposal in your own TriFact365 portal; after your check the entry goes to the accounting package of that entity. As a result the books of each subsidiary are current before the figures come together, which is where most consolidation delays actually originate. See how processing incoming invoices works.
Frequently asked questions about consolidation
Consolidation is the merging of the financial figures of several entities within a group into one set of consolidated financial statements, with the transactions between those entities eliminated.
A parent that controls subsidiaries normally has to prepare consolidated financial statements. Within the EU the requirement and the exemption for small groups come from the Accounting Directive as implemented nationally, so the thresholds differ per country.
Full consolidation brings in the entire balance sheet and result of a controlled entity, with a minority interest for the part held by others. The equity method brings in only your share of the result, and is used where there is influence but not control.
Sales, loans or costs between group companies are cancelled out, so the group’s turnover and result are not shown twice or artificially high.
In principle yes. Entities are consolidated on the group’s reporting date and in the group’s accounting policies, which is why a subsidiary with a different year end usually prepares interim figures for the group.
No. TriFact365 automates invoice processing per administration, so the source data per entity is correct. The consolidation itself you run in your accounting or consolidation software.
In closing
Consolidation is more than an administrative obligation. It is the instrument that turns a set of separate entities into a picture you can steer on. Whether you are the CFO of an international group or the adviser to a growing company, understanding what gets included and what gets eliminated is what makes the outcome trustworthy. And that starts with books that are current per entity.
