Consolidation in summary

Consolidation in summaryConsolidation 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:

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.

Something else -   Reporting entity

Consolidation Step-by-Step

Issues

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

  • intra-group losses/profits
  • tax effects
  • intra-group arrangements that affect classification

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)

  • determining the effective ownership percentage
  • NCI valuation method

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Consolidation in summary

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Something else -   Purpose and design of the investee

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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.

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.

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