In: Accounting
Discuss the meaning of consolidated accounts and the adjustments necessary for the preparation of consolidated financial statement. (Namely: statement of financial position and statement of comprehensive income).
Consolidated Financial Statements:
Consolidated financial statements are financial statements of an entity with multiple divisions or subsidiaries. It constitutes of combining 2 or more balance sheets and preparing a single one. However, the Financial Accounting Standards Board defines consolidated financial statement reporting as reporting of an entity structured with a parent company and subsidiaries.
Private companies have very few requirements for financial statement reporting but public companies must report financials in line with the Financial Accounting Standards Board’s GAAP. If a company reports internationally it must also work within the guidelines laid out by the International Accounting Standards Board’s (IFRS). Both GAAP and IFRS have some specific guidelines for companies who choose to report consolidated financial statements with subsidiaries. There are 2 types of adjustments in consolidation:
Permanent Consolidation Adjustments:
Permanent consolidation adjustments are those adjustments that are made only on the first occasion or subsequent occasions in which there is a change in the shareholding of a particular entity which is consolidated.
Permanent consolidation adjustments are:
Current Period Consolidation Adjustments:
Current period consolidation adjustments are those adjustments that are made in the accounting period for which the consolidation of financial statements is done. Current period consolidation adjustments primarily relate to elimination of intragroup transactions and account balances including:
(a) Intra-group interest paid and received, or management fees, etc.;
(b) Unrealised intra-group profits on assets acquired/ transferred from/ to other subsidiaries;
(c) Intra-group indebtedness;
(d) Adjustments related to harmonising the different accounting policies being followed by the parent and its components;
(e) Adjustments to the financial statements (of the parent and the components being consolidated) for recognized subsequent events or transactions that occur between the balance sheet date and the date of the auditor’s report on the consolidated financial statements of the group.
Statement of Financial position:
While preparing a consolidated financial statement, there are two basic procedures that need to be followed: first, you cancel out all the items that are accounted as an asset in one company and a liability in another, and then add together all uncancelled items.
There are two main types of items that cancel each other out from the consolidated statement of financial position.
Statement of Comprehensive Income
The Statement of Comprehensive Income provides a summary of a company’s net assets over a given period of time. In other words, the statement highlights the adjustments on equity during a given timeframe.
A statement of comprehensive income contains two main things: the net income and other comprehensive income (OCI). The net income is the result obtained by preparing an income statement. On the other hand, OCI consists of all the other items that are excluded from the income statement