In the world of finance and operations, transparency is essential. Especially when a company owns several subsidiaries, it becomes important to provide a clear and comprehensive picture of the financial health of the whole group.
That is exactly where consolidated financial statements come in.
What are consolidated financial statements?
A consolidated financial statement is a financial report in which the figures of a parent company and its subsidiaries are combined into one.
Instead of separate financial statements for each entity, the consolidated version provides an overall view of the financial position, performance and cash flows of the entire group as if it were a single company.
Why is consolidation necessary?
Imagine a holding company owns three subsidiary companies. Each of those companies has its own revenues, expenses, assets and liabilities. If you only look at the financial statements of the holding company, you miss crucial information about the group’s true financial situation. By consolidating:
- Avoid double counting, such as internal transactions between group companies.
- Get a fairer picture of the group’s financial strength.
- Comply with legal obligations, as consolidation is mandatory for medium and large enterprises in many countries.
What is being consolidated?
The preparation of consolidated financial statements includes the aggregation of the following components:
- Balance sheet: assets, liabilities and equity of the group.
- Profit and loss account: combined revenues and expenses.
- Cash flow statement: incoming and outgoing cash flows of the group.
- Notes: additional information on, for example, group structure, associates and accounting policies.
How does it work in practice?
Consolidation is usually done in four steps:
- Identification of the entities to be consolidated: these are usually subsidiaries in which the parent company has a controlling interest (>50% of voting rights).
- Elimination of internal transactions: such as mutual loans, sales or dividend payments.
- Uniform accounting policies: all entities should use the same accounting policies.
- Aggregation of figures: the financial data are added up and presented as a single entity.
Who should prepare consolidated financial statements?
In the Netherlands, medium-sized and large companies are required to prepare consolidated financial statements, unless there is an exemption (e.g. if the company is part of a larger group that already consolidates).
The rules for this are laid down in Title 9 of Book 2 of the Civil Code and in the Guidelines for Annual Reporting (RJ).
Consolidated financial statements are more than an administrative requirement. It is a powerful tool for investors, lenders and other stakeholders to understand the true financial situation of a group of companies.
For entrepreneurs, it also means an opportunity to steer strategically on the basis of a complete financial overview.
