Definition of consolidating financial statements

05 Jan

The companies remain separate legal entities and each maintains its own set of books.Consolidated financial statements are often used for reporting to investors, government agencies or applying for loans and grants.Statement 141 from the Financial Accounting Standards Board lays out the rules for preparing consolidated financial statements.All businesses must prepare a set of financial statements showing the activity for the previous accounting period.A consolidated financial statement combines the information from the subsidiary companies' individual financials.For investors, a company's financial statements offers insight into the health of the company.

These statements are often prepared with the use of financial consolidation software which takes financial figures from each individual subsidiary and combines them into one overall report.

For example, it is common for one company to purchase smaller companies that can complement the primary business and make it even stronger.

The smaller companies can help the profitability of the parent company while also continuing to operate as separate entities.

Depending on the size of a company and the complexity of its business, the financial statements may be a bit confusing, particularly if the company has several subsidiaries with overseas operations.

A parent company with a controlling interest in a subsidiary consolidates the financial statements of its subsidiary into its own financial statement.