Problems in the Preparation of Consolidated Financial Statements

Problems in the Preparation of Consolidated Financial Statements

We have examined the general principles associated with the practice of consolidating the financial statements of groups of companies. The examples which were chosen for this purpose were simplified to avoid many of the complications which arise in practice. This webpage is addressed to an analysis of the financial accounting implications of the most common problems which arise when consolidating financial statements. The list of problems considered in this webpage is not exhaustive; while they add to the volume of data to be processed and increase the arithmetical complexity of consolidation, they do very little to extend the principles which we have already examined. Hence, this webpage serves to test the logic of those principles.

Consolidating the financial statements of multiple subsidiaries

It has been assumed that the parent company has but one subsidiary. This assumption is unrealistic, as most public companies have several subsidiaries and often a public group will consist of over a hundred companies. Where there is more than one subsidiary company, then in each case the cost of control, group income statement, and minority interest if applicable, will need to be calculated. The resulting figures will be put together so that in the group balance sheet one total figure will be given for each of the primary adjustments.

The acquisition of a subsidiary at less than book value

Occasionally a subsidiary may be acquired for less than the apparent or given value of its net assets, in which case goodwill will appear as a negative figure.

The credit balance on the cost of control account is usually shown separately as a capital reserve in the balance sheet, under a heading such as 'Surplus arising on acquisition of subsidiary'. Less commonly it may be deducted from any goodwill in the balance sheet, so that a figure for the net cost of control is shown in the group accounts.

The treatment of losses made by subsidiaries

Subsidiaries do not always yield income, but may sustain a loss. A parent will have to bear its share of losses made by its subsidiary and a minority interest will also have to bear its proportionate share of any loss.

Consolidating subsidiaries having complex capital structures

A subsidiary company may have a more complex share capital structure than so far envisaged. Commonly it may be found to have some form of fixed interest share capital, usually preference shares, with a fixed share of the income and no voting rights. If no offer is made for such shares during the takeover, the preference shareholders become a minority of the group and are included in the calculation of the minority interest of that subsidiary.

A preference dividend due but not paid will not be included with the minority interest, but will be shown as a proposed dividend under the current liabilities, in just the same way as a dividend due to the ordinary minority shareholders. Debenture holders are not shareholders and do not form part of a minority interest. They are debt creditors and their position will be considered later.

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Read on: Financial Accounting Summary

It has been explained that group accounts are not the accounts prepared from a set of books kept by a group, but are an amalgamation of the accounts of the companies making up the group. Neither are they the straight addition of like items in different balance sheets, but a total view of the group. The accounts of the parent company usually have the biggest influence on the group accounts and the accounts of the subsidiaries are merged with those of the parent so that the group reports on the entire income, assets and liabilities under its control. The important adjustments, called primary adjustments,... see: Financial Accounting Summary