What is Consolidation of Financial Statements?
Consolidation combines a parent company and its subsidiaries into one set of financial statements. It requires eliminating intercompany transactions and the investment account, and recognizing any non-controlling interest separately.
Consolidation combines a parent and its subsidiaries into one set of financial statements by adding line items and eliminating intercompany balances, transactions, and the investment account against subsidiary equity, recognizing any non-controlling interest (NCI) separately.
- 1↓Identify parent & subsidiaryDetermine control — typically more than 50% of voting rights, or de facto control (IFRS 10).
- 2↓Eliminate the investment accountOffset the parent's 'Investment in Subsidiary' against the subsidiary's equity at acquisition.
- 3↓Eliminate intercompany transactionsRemove intercompany sales, receivables/payables, and unrealized profit in inventory.
- 4↓Allocate to NCIRecognize the non-controlling interest's share of subsidiary net assets and income.
- 5Combine line itemsAdd parent and subsidiary assets, liabilities, revenues, and expenses line by line.
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Step-by-step worked examples
A parent owns 80% of a subsidiary; the subsidiary's fair value of net assets is $2,000,000. Compute NCI.
1 − 0.80 = 0.20 0.20 × $2,000,000 = $400,000
A parent sells inventory costing $80,000 to its subsidiary for $110,000; the subsidiary still holds all of it in ending inventory. Find the unrealized profit to eliminate.
Unrealized profit = $110,000 − $80,000 = $30,000 Consolidation eliminates $30,000 from inventory and COGS/retained earnings
NCI ownership is 30% and the subsidiary's net income is $500,000. Find NCI's share of income.
NCI share = 0.30 × $500,000 = $150,000
Flashcards
Quick quiz
Q1.What triggers the requirement to prepare consolidated financial statements?
Q2.In consolidation, what happens to the parent's 'Investment in Subsidiary' account?
Q3.An intercompany sale with unrealized profit in ending inventory must be:
Q4.If a parent owns 75% of a subsidiary, the NCI's share of subsidiary equity is:
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Common mistakes
Simply adding the parent's investment account and the subsidiary's equity together. — Correct: The investment account must be eliminated against the subsidiary's equity, not added.
Ignoring intercompany transactions because they 'net out' between the entities. — Correct: Intercompany revenue/expense and unrealized profit must be explicitly eliminated, not just netted informally.
Assuming only 100%-owned subsidiaries are consolidated. — Correct: Any subsidiary under the parent's control is consolidated, with NCI recognized for the portion not owned by the parent.
Recording NCI as a liability. — Correct: NCI is presented within equity in the consolidated balance sheet, not as a liability.
FAQ
What is consolidation of financial statements?
It's the process of combining a parent and its subsidiaries into one set of financial statements, eliminating intercompany balances and the investment account.
What is the formula for non-controlling interest (NCI)?
NCI = (1 − Parent's ownership %) × Fair value of the subsidiary's net identifiable assets.
What are examples of consolidation adjustments?
Eliminating the investment account against subsidiary equity, removing intercompany sales/receivables, and eliminating unrealized intercompany profit.
How do you calculate NCI in consolidated financial statements?
Multiply the subsidiary's fair value of net assets (or income) by the percentage the parent does not own.