Financial Statement Consolidation
It is an accounting process through whichthe financial statements of the parent company and its subsidiaries are combinedinto a single group, as if it were one economic entity.
🧾 First: Basic Concepts
🔹 1.Parent Company
is the company that holds a controlling interest (usually more than 50%) in one or more companies.
🔹 2.Subsidiary
is the company that is controlled by the parent company, either through direct or indirect ownership.
🔹 3.Control- according to the standardIFRS 10
a company controls another company if:
it hasthe powerover the company.
It is exposed tovariable benefitsfrom its relationship with the company.
It has the ability toinfluencethose benefits.
📊 Second: Objectives of Consolidation
To present the financial statements of the group as if it were a single economic entity.
To eliminate the effects of internal transactions between companies within the group.
To clarify the true financial position and actual financial results of the group.
📌 Third: Steps for Consolidating Financial Statements
✅ 1.Gathering Financial Statements
Collect all financial statements (balance sheet, income statement, cash flows) for both the parent company and the subsidiaries.
The statements must be:
for the same time period.
according to the same accounting policies.
In the same currency.
✅ 2.Elimination of investment in the subsidiary
Example:
If the parent company invested 100,000 K.D. to purchase 80% of the shares of the subsidiary.
In consolidation, this investment iseliminatedagainstequityof the subsidiary.
Processing:
Dr. Equity of the subsidiary (such as capital + retained earnings) Cr. Investment in the subsidiary Cr. Non-controlling interest (for non-shareholders of the parent company)
✅ 3.Calculation of goodwill or negative gains
If:
Purchase price > Net assets→ Goodwill arisesGoodwill.
Purchase price < Net assets→ Gain on bargain purchase arises(Gain on Bargain Purchase).
Goodwill equation:
Goodwill = Acquisition cost + Non-controlling interest – Fair net assets of the subsidiary
✅ 4.Elimination of intercompany transactions
Transactions between the parent company and subsidiaries must be removed, such as:
Sales and purchases between companies.
Unrealized profits from goods not sold to external parties.
Accounts receivable and payable balances.
Dividends from subsidiaries.
✅ 5.Recognition of non-controlling interest
This is the portion of the net assets and profits of the subsidiary that is not owned by the parent company.
In the balance sheet:
Non-controlling interest appears as a separate item in equity.
In the income statement:
The minority's share of net income is deducted at the end of the list.
🔍 Fourth: A simplified example of budget consolidation
🏢 Parent company (A) purchased 80% of the subsidiary (B)
Balance sheet data:
| Item | Company (A) | Company (B) |
|---|---|---|
| Assets | 1,000,000 | 500,000 |
| Liabilities | 400,000 | 200,000 |
| Equity | 600,000 | 300,000 |
| Investment in (B) | 240,000 | – |
Steps for consolidation:
Eliminate the investment against equity in (B).
Calculate goodwill (if any).
Recognize minority interest (20%) = 20% × Net assets of (B).
Fully consolidate assets and liabilities.
Present minority interests separately.
📘 Fifth: Relevant accounting standards
IFRS 10: Consolidated financial statements.
- International Financial Reporting StandardIFRS 10: Consolidated financial statementsEstablishes principles regarding howto prepare and present consolidated financial statementswhen one company (the investor) hascontrolover one or more companies (the subsidiaries).
- 🔑 Key points in IFRS 10:
Purpose: To ensure that the consolidated financial statements present the financial position, financial performance, and cash flows of the group as if it were a single economic entity.
The concept of control:
The investor is considered to have control if all three conditions are met:
It has power over the investee (Power).
He is exposed to or has rights to variable returns from his connection to it (Variable returns).
He has the ability to use his power to influence those returns (Link between power and returns).
Requirements:
The parent company mustconsolidate all subsidiariesthat it controls.
Exclusions are only allowed in very specific cases (such as liquidation).
Consolidation method:
Consolidate line by line for assets, liabilities, revenues, and expenses.
Eliminate transactions and internal balances between companies within the group.
Recognize non-controlling interests in the statement of financial position and income statement.
Disclosure:
Provide sufficient information to understand the parent company's interests in subsidiaries.
Explain the nature of control and any significant restrictions on the transfer of funds within the group.
IFRS 3: Business Combinations.
- International Financial Reporting StandardIFRS 3: Business CombinationsEstablishes accounting rules when two or more companies merge to become a single entity.
- 🔑 Key points in IFRS 3:
- 1. Purpose
- To provide principles and guidelines for the recognition, measurement, and disclosure ofbusiness combinationsso that users obtain a fair and transparent view of the impact of the merger.
2. Method of treatment
The only permitted method:
✅ is the acquisition method.
The old "pooling method" is no longer allowed.
Identify the acquirer:
the company that gained control over the other (IFRS 10 standards are applied to determine control).
Determining the Acquisition Date:
The date on which the buyer obtains control.
Recognition of assets and liabilities:
All must be recognizedidentified assetsandidentified liabilitiesof the acquired entity at fair value.
This includes intangible assets (such as patents and trademarks) even if they were not previously recognized.
Measuring goodwill or bargain purchase gains:
Goodwill = consideration transferred + non-controlling interests + fair value of previously held interest – net identified assets at fair value.
If the result is negative → a bargain purchase gain is recognized in profit or loss.
Can be measured in two ways at the acquisition date:
At fair value.
By its proportionate share of the net identified assets of the acquired entity.
Are not addedto the purchase price.
They are recognized as expenses immediately (such as legal and consulting fees).
Information must be provided to allow users to understand:
The nature of the acquisition.
The financial effect on the statements.
The method of calculating goodwill or bargain purchase gains.
IAS 27: Separate Financial Statements.
- International Accounting StandardIAS 27: Separate Financial StatementsFocuses on situations where a company preparesseparate financial statements(not consolidated).
- 🔑 Key points in IAS 27:
1. Purpose
- To determine howto prepare and present separate financial statementswhen a company chooses or is required by law to prepare them, alongside or instead of consolidated financial statements.
2. When are separate financial statements used?
When a company hasinvestments in subsidiaries, associates, or joint venturesand presents its data independently without consolidation.
They are not always required to be prepared, but they may be required forlegal, regulatory, or administrative purposes..
Subsidiaries.
Associates.
Joint Ventures.
Cost method.
Fair value through profit or loss (FVTPL)according to IFRS 9.
Fair value through other comprehensive income (FVTOCI)according to IFRS 9.
Inconsolidated financial statements: the results and positions of the group are presented as a single entity.
Inseparate financial statements: investments are presented as a single asset at the chosen value (cost or fair value).
The nature of the relationship with subsidiaries, associates, or joint ventures.
The basis used for accounting for these investments.
The reason for preparing separate financial statements if they are not mandatory.
IFRS 12: Disclosure of interests in other entities.
- International Financial Reporting StandardIFRS 12: Disclosure of interests in other entitiesFocuses on disclosure requirements related to the company's relationships with other entities (subsidiaries, associates, joint ventures, or structured entities).
- 🔑 Key points in IFRS 12:
1. Purpose
To provide information to users of financial statements to understand:
The nature of the entity's interests in other entities.
The risks associated with those interests.
The impact on the financial position, financial performance, and cash flows.
Subsidiaries.
Associates(Equity method applies as per IAS 28).
Joint Arrangements(Joint ventures or joint operations as per IFRS 11).
Unconsolidated Structured Entities.
The structure and ownership in subsidiaries.
Significant restrictions on the transfer of funds (such as dividends).
The nature of non-controlling interests (NCI) and their proportions.
Their purpose and nature of activities.
The extent of risks the company is exposed to due to these entities.
Any current or potential financial support for these entities.
Brief information about the financial position and performance (financial summary).
The nature of the relationship and ownership percentage.
Any potential liabilities or unrecognized obligations associated with it.
Where the company holds shares.
How those shares affect risks and returns.
How they may impact future cash flows.
3. Steps to apply the acquisition method
4. Non-controlling interests (NCI)
5. Acquisition-related costs
6. Disclosure
3. Accounting for investments in separate financial statements
A company may choose to measure its investments in:
using one of the following methods:
The chosen policy must be applied consistently to each category of investments.
4. Difference from consolidated financial statements (IFRS 10)
5. Disclosure
2. Scope of application
Includes disclosure of:
3. Key disclosure requirements
A) Consolidated entities
B) Unconsolidated structured entities
C) Associates and joint ventures
4. The core philosophy of the standard
The goal is not just numbers, butfull transparencyabout:
🎯 Summary
Consolidating financial statements is an important accounting process that provides an accurate and comprehensive picture of the financial position of the group as a whole. It requires a thorough understanding of accounting standards and valuation and financial analysis applications, especially when there are complex transactions such as partial acquisitions or transactions between sister companies.