Consolidation in summary – Consolidated financial statements present the financial position and results of a group (a parent and its subsidiaries) as those of a single economic entity. The key steps to achieve this are:
- currency conversion: assets, liabilities, equity, income, expenses and cash flow need to be translated into the reporting currency. Positions at closing rates and streams at average rates or transaction date rates,
- combine like items of assets, liabilities, equity, income, expenses and cash flows from the financial statements of each group entity,
- eliminate intra-group transactions and balances,
- eliminate the parent’s investment in each subsidiary and recognise goodwill and other business combination-related adjustments,
- eliminate intra-group dividends,
- consolidate allocation differences of goodwill/badwill,
- allocate comprehensive income and equity between the parent and any non-controlling interests,
- account for changes in the scope of consolidation.
The concept of a single economic entity is illustrated in the example below:
Example – Single economic entity concept
A subsidiary buys an asset from a third party for CU100. It subsequently sells the asset on to its parent for CU 130. The subsidiary records a profit of CU30 and the parent records an asset of CU130 in its separate financial statements.
If the parent and subsidiary are viewed as being a single entity, all that has happened is that this single entity has bought an asset for CU100 from a third party. This is what would be shown in the parent’s consolidated financial statements.
So upon consolidation the CU30 would be eliminated.
The detailed ‘mechanics’ of the consolidation process vary from one group to another, depending on the group’s structure, history and financial reporting systems. IFRS 10 and much of the literature on consolidation are based on a traditional approach to consolidation under which the financial statements (or, more commonly in practice, group ‘reporting packs’) of group entities are aggregated and then adjusted on each reporting date. Larger groups using enterprise reporting systems may prepare consolidated financial information in a more real time and automated manner. However, the traditional approach still serves to illustrate the underlying concepts.
Step 1 – combine financial statements of each group entity
Consolidation in summary
Consolidation in summary
Step 2 – eliminate intra-group transactions and balances
Consolidation in summary Consolidation in summary
Step 3 – eliminate the parent’s investment in each subsidiary and recognise goodwill and other business combination-related adjustments
Step 4 – allocate comprehensive income and equity to non-controlling interests (NCI)
See also: The IFRS Foundation