Consolidated vs consolidating financials
Again, the rules on how to estimate this value and how often it gets updated varies across countries. Consolidated statements exclude intra company transactions. Thus, if company A sells $ 100 million in products to company B, the parent company financials will show revenues of 0 million for company A and costs of $ 100 million for company B, but the consolidated statements will net them out and show nothing.Why would a company choose to use one versus the other? In the United States, companies are required to consolidate financial statements, if they own a controlling stake of a subsidiary (defined as 50% of the outstanding equity).Some examples of intercompany transactions and how to account for them will be discussed below.Parent investment in a subsidiary previously accounted for as an asset in the parent’s balance sheet and as equity in the subsidiaries’ balance sheet is eliminated.Intercompany transactions must be adjusted correctly in consolidated financial statements in order to show their impact on the consolidated entity instead of its impact on the parent or subsidiaries solely.Understanding how intercompany transactions are recorded in each concerning entity’s journal entries and the impact of the transaction on each entity is necessary to determine how to adjust intercompany transactions in the consolidated financial statement.They do not have to consolidate minority holdings in companies.In general, US companies are required to report only consolidated statements and do not have to provide parent company financials, but these consolidated statements represent a mix of consolidation (for majority stakes) and parent company rules (for minority stakes).
In much of Europe and in many emerging markets, companies will report both parent company and consolidated statements in the same annual report, with wildly different results.
Accounting Background The question of whether to use parent-company or consolidated statements becomes an issue only when a company has cross holdings in other companies.
To illustrate the difference, consider a simple example, where company A owns 60% of company B.
The total amount of unrealised profits/loss to be eliminated in intercompany transactions does not vary regardless of whether the subsidiary is wholly-owned (non-controlling interest, NCI, does not exist) or partially owned.
However, if the subsidiary is partially owned (i.e., NCI exists), the elimination of such profit/loss may be allocated between the majority and minority interests.