How to Consolidate Financial Statements

Organizing Your Information

Determine which holdings to report as subsidiaries. For the purpose of consolidated statements, a company is only considered a subsidiary if the parent company holds a controlling interest in that company. Generally, this means that the parent company owns over 50% of the shares of the subsidiary. This is because this share value would give them majority voting power in the subsidiary. However, there are situations where a company can be considered a subsidiary even when the parents owns a smaller percentage of their shares, such as: The parent has majority voting rights by agreement with the subsidiary's board. The parent has power to govern the policies of the subsidiary under agreement or law. The parent has the ability to remove and replace the majority of the subsidiary's board. The parent has the ability to cast the majority of votes during a meeting of the subsidiary's board of directors. In contrast, a parent may own more than 50% of a subsidiary's shares and not retain control. In this case, they are known as an "unconsolidated subsidiary" and not shown on consolidated statement.

Gather your paperwork together from all the companies. When you consolidate financial statements, you'll need all of the financial information for each company being considered. This will include information for the parent company as well. Specifically, you'll need access to the books (the record of all transactions) for each company, as books are not kept for the consolidated entity. It's easiest to start with the financial statements of the companies being considered if these have already been prepared. This will allow you to simply combine larger line items and go back through the books only to eliminate duplicate items.

Coordinate fiscal periods. In order to consolidate financial statements, you'll need to be sure that all companies' financial reports refer to the same fiscal period. Generally, if there is a mismatch in fiscal periods, you should modify subsidiary's timeline match that of the parent. This should either be done at acquisition or can be done through an adjustment to the subsidiary's financial statements. For example, if a subsidiary considers August 31 as its year end and the parent company's year end is December 31, then prepare financial statements for the first subsidiary running from January 1 through December 31. This may involve significant adjustment.

Setting Up a Worksheet

Set up a spreadsheet. This should in a program that you can easily manipulate, like Microsoft Excel. Be sure to create separate pages for each combined financial statement you plan to create. At this point, just start by creating one for the consolidated balance sheet and one for the consolidated income statement.

Add financial information for each company side-by-side. Set up your spreadsheet so that you can see where you'll be adding the information from different companies together. This will help you organize your information later. You'll also want to label the rows with what type of financial information you plan to input there. For example, for the consolidated balance sheet, label your rows with common titles such as “Cash” or “Accounts Payable” and “Inventory.”

Leave every third and fourth column blank for credit or debit consolidation adjustments. You'll need an area to record adjustments from duplicate transactions as you move forward with the process. Simply be sure to label these columns individually as credit and debit as you would in bookkeeping and label them collectively as "duplicate adjustments" or something similar. For one subsidiary and one parent, simply fill the first two columns with their financial information and leave the next two blank for these adjustments. Leave the fifth column blank too for the eventual calculations of the final, adjusted values. For multiple subsidiaries, follow this same pattern but separate the subsidiaries. In this case your spreadsheet columns should be laid out as follows: 1.Parent financial information 2.Subsidiary 1 financial information 3.Adjustments (subsidiary 1)-debit 4.Adjustments (subsidiary 1)-credit 5.Consolidated financial information after subsidiary 1 adjustments 5.Subsidiary 2 financial information 6.(and on) repeat of process for other subsidiaries

Combining Financial Statements

Check your financial statements again. Before combining them it's best to check the financial statements you will be using to ensure that they are for the same fiscal period. If not, you'll want to adjust them now. Going back and adjusting for this later will be much more work. In addition, check your financial statements for any missing information and seek to correct this before beginning to consolidate them.

Create a consolidated balance sheet. Consolidate financial statements by creating a balance sheet that reflects a sum of net worth, assets and liabilities. This is done by simply adding together the separate values from the balance sheets of the parent company and the subsidiaries. The balance sheet will include assets like cash, receivables, and land, as well as liabilities like payable accounts and loans. For example, if the parent has $30,000 in cash and the subsidiary has $15,000 in cash, the consolidated balance sheet would show $45,000 in cash.

Create a consolidated income statement. This document will include all revenues earned and expenses incurred by the parent company and its subsidiaries. Like the consolidated balance sheet, this is done by simply adding the values from the companies' independent income statements together. Included values are measures of money earned, including sales and net income, and also measures of expenses like cost of goods sold and wage expense. For example, if the parent company incurred $45,000 in income expense and the subsidiary incurred $20,000 in income expense, the consolidated income statement would show $65,000 in interest expense.

Eliminating Duplicate Values

Review the consolidated statements for duplicate values. After the statements have been consolidated, you'll need to check for instances that don't make financial sense. These situations arise when, for example, when money or assets have flowed between the parent and the subsidiary, or when the part of the value of the subsidiary is now reported twice by the parent. In general, the consolidated report should read like the financial statements of one company. Check for the following problems: The consolidated company owning parts of itself (intercorporate stockholdings) The company owing itself money (intercorporate receivables and payables) The company selling items to itself for profit (intercorporate sales)

Eliminate intercorporate stockholdings. Intercorporate stockholdings refer to the situation where stock in the subsidiary is owned by the parent and is therefore not reportable as stock outstanding in the consolidated statement. Note that this is not true for subsidiary stock held by parties outside of the parent corporation or subsidiary. Adjustments are made on the consolidated balance sheet by debiting the subsidiary's common stock, additional paid in capital, and retained earnings and crediting the consolidate stock of subsidiary account for the book value of the intercorporate shares.

Account for intercorporate receivables and payables. These refer to situations where, after consolidation, a company can appear to owe itself money. This arises from situations where a parent company owes money to or receives money from a subsidiary for products or services. This results in unnecessarily high values for some of the combined accounts. Adjustments for this situation are made on the balance sheet by debiting consolidated accounts payable or crediting consolidated accounts receivable by the book value of the duplicated entry.

Delete any intercorporate sales. By transferring inventory between parents and subsidiaries, either party may technically realize a profit, even though no sale has been made. This results in overstated inventory, net income, and retained earnings for the consolidated company. Correct this imbalance on the balance sheet by debiting retained earnings of the consolidated entry and crediting consolidated ending inventory by the amount of the sales.