Purpose, content, and technicalities

Transcription

1 Purpose, content, and technicalities 1

2 1. Understand the reasons why consolidated financial statements (CFSs) are prepared. 2. Understand the content of the consolidated financial statements. 3. Understand how the consolidation process is technically implemented. 2

3 Present the financial position and results of operations (i.e. net equity and net income) for a parent (controlling or acquiring entity, or holding company) and one or more subsidiaries (controlled or acquired entities) as if the individual entities actually were a single company (and a single accounting entity) No regard for the legal boundaries between the companies in the group 3

4 Performed to provide a clear and better picture of the total resources that are under the parent s control, and of the overall structure and performance of the combined entity (group) If a company invests in the shares of another company, all that appears in the FS of the investor company is the original cost of the investment in BS (as asset Investment in subsidiaries included in the Financial fixed assets section) and dividends received (if any) in IS (Income from financial assets). Very limited information about the investment! Parent shareholders do not automatically receive copies of subsidiaries FSs, being not shareholders of those companies! 4

5 Formed at least by Consolidated Balance Sheet (or Consolidated Statement of Financial Position) Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Cash Flow Statement Statement of Changes in Shareholders Equity Notes 5

6 Consolidated Balance Sheet shows: Total assets employed in the group (net of accumulated depreciation and impairment losses) Total obligations (debts) to parties outside the group Interests of parent company shareholders in group net assets Interests of minorities (if existent) in the same net assets 6

7 Consolidated Income Statement shows: Total revenues recognized for a certain period thanks to selling activities to parties outside the group Total expenses charged against said revenues (salary, purchase of productive factors, purchase of services, depreciation and amortization, etc.) Revenues and costs related to investment and financing activities, and taxes Interests of both majority and minorities in net earnings 7

8 A worksheet is used to facilitate the process of combining and adjusting the account balances involved in a consolidation While the parent company and the subsidiary each maintain their own books of accounts (working according to the double-entry rules), there are no books for the consolidated entity The accounts balances are taken at the end of each period from the books of both parent and subsidiary and entered in the consolidation worksheet 8

9 Where the simple adding of the amounts from the two companies leads to a consolidated figure different from the amount that would appear if the two companies were actually one, the combined amount must be adjusted to the desired figure trough the so called eliminating entries (adjustments) At the end of the year, the separate financial statement of the parent and its subsidiaries are posted to a worksheet This means that all starting values are book values Then, all values are added together line-by-line 9

10 Any consolidation difference is recognized in a consolidating journal entry posted to the worksheet Any intercompany transaction is eliminated If the parent owns less than 100% of a subsidiary and applies a full consolidation method, the parent o o adds all of the subsidiary s assets and liabilities, and all of the subsidiary s revenues and expenses in the consolidation recognizes that part of the subsidiary belongs to a Noncontrolling Interest, both in terms of equity and net income 10