Question

What is the justification for preparing consolidated financial statements when, in fact, it is apparent that the consolidated group is not a legal entity?

Answer 1

Although the consolidated group is not a legal entity, still consolidated financial statements are prepared because an analysis of the same allows us to determine the overall position of an entire group of companies, as compared to a company's stand alone position.

It can happen that the parent company is performing financially well, but a few of its subsidiaries are not doing so well. Consolidation would help to provide a better understanding of the same. Also, there might be a few entries/transactions which take place amongst such companies. The impact of such transfers/ any internal profit realised is also eliminated in the consolidated statements.

Although the consolidated group is not a legal entity, the purpose of preparing such consolidated statements is to provide the stakeholders with a single aggregated view of how the group as a whole is performing, as if the whole group was a single entity. This enhances the decision making power of all the investors and stakeholders.