Group Financial Statements
Group Financial Statements, also known as consolidated financial statements, represent the financial position and performance of a group of entities under common control, usually a parent company and its subsidiaries, as if they were a single entity.
Consolidation involves adding together the parent and the subsidiary entities’ financial statements (like balance sheets, income statements, and cash flow statements), and then making certain adjustments and eliminations. Intercompany transactions, such as sales, loans, and dividends between the parent and subsidiaries, are eliminated to avoid double counting.
The four basic financial statements that are usually consolidated are:
- Consolidated Balance Sheet: This represents the group’s financial position at a specific point in time. It shows the group’s total assets, liabilities, and equity.
- Consolidated Income Statement: This shows the group’s total revenues, costs, and profit or loss for a specific period.
- Consolidated Statement of Comprehensive Income: This statement includes all other income and expenses that are not included in the profit or loss, such as revaluations and foreign currency translation differences.
- Consolidated Cash Flow Statement: This provides information about the group’s cash inflows and outflows during a specific period.
The main purpose of consolidated financial statements is to provide a comprehensive view of the financial position and performance of the entire group, rather than its individual entities. It allows shareholders, lenders, and other stakeholders to assess the overall health and performance of the entire business group. They are also typically a requirement under most financial reporting standards, such as U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).
Example of Group Financial Statements
Let’s take a simplified example involving a parent company and one subsidiary.
Parent Company A owns 100% of Subsidiary B. At the end of the year, the individual balance sheets of the two companies are as follows:
Company A’s Balance Sheet
- Assets: $1,000,000
- Liabilities: $500,000
- Equity: $500,000
Company B’s Balance Sheet
- Assets: $600,000
- Liabilities: $200,000
- Equity: $400,000
To create a consolidated balance sheet, we would add together the corresponding assets, liabilities, and equity of Company A and Company B. However, we also have to consider the investment made by Company A to acquire Company B. This investment is an asset on Company A’s balance sheet but is not a part of the consolidated entity’s net assets. Therefore, it must be eliminated during consolidation.
Assuming that Company A’s investment in Company B was $400,000 (which equals Company B’s equity), the consolidation process would look like this:
Consolidated Balance Sheet
- Assets: ($1,000,000 from Company A + $600,000 from Company B) – $400,000 investment in Company B = $1,200,000
- Liabilities: $500,000 from Company A + $200,000 from Company B = $700,000
- Equity: $500,000 from Company A = $500,000
This consolidated balance sheet now shows the financial position of Company A and Company B as if they were a single entity. It eliminates any transactions between the two companies (in this case, Company A’s investment in Company B) and provides a complete picture of the group’s financial position.
