For investors, a company’s financial statements offers insight into the health of the company. Depending on the size of a company and the complexity of its business, the financial statements may be a bit confusing, particularly if the company has several subsidiaries with overseas operations. A parent company with a controlling interest in a subsidiary consolidates the financial statements of its subsidiary into its own financial statement.
Combined Financial Statements
A combined financial statement shows financial results of different subsidiary companies from that of the parent company. The complete financial statement of one subsidiary is shown separately from another as a stand-alone company. The benefit of combined financial statements is that it allows an investor to analyze the results and gauge the performance of the individual subsidiary companies separately.
Consolidated Financial Statements
Consolidated financial statements aggregate the financial position of a parent company and its subsidiaries. This allows an investor to check the overall health of the company in a holistic manner rather than viewing the individual company’s financial statements separately. In other words, the consolidated financial statements agglomerates the results of the subsidiary businesses into the parent company’s income statement, balance sheet and cash flow statement.
Intercompany Transactions
Accounting treatment of both combined and consolidated financial statement eliminates intercompany transactions. These are transactions that occur between the parent and subsidiary company. These transactions must be eliminated to avoid double-counting, once on the books of the subsidiary and again on the parent’s books. This avoids misrepresenting transactions that distort actual results of the parent company and subsidiary.
Income Statement
Both combined and consolidated financial statements add the subsidiary companies’ income and expenses to the parent company. This creates a total income and expenses for the entire group of companies, including the parent.
Stockholder’s Equity
Consolidated financial statements simply eliminate the stockholder’s equity section of the subsidiary. Therefore, there are no changes to shareholder equity accounts, such as stock and retained earnings. In contrast, combined financial statements adds the stockholder’s equity to that of the parent. This is because the parent has controlling interest in the subsidiary group of companies.
Noncontrolling Interest
In both cases, combined and consolidated financial statements, accountants must keep track of the noncontrolling interest relationship between the parent and subsidiary. This creates an account called noncontrolling interest or minority interest, which tracks the part of the subsidiary not owned by the parent. In the United States, a company with greater than 50 percent ownership of another company must consolidate its financial statements.