Consolidating your knowledge about consolidated accounts
At the consolidated level, an elimination adjustment must be added so that the consolidated statement is not overstated by the amount of equity held by the parent.
The elimination adjustment is made with the intent of offsetting the intercompany transaction, such that the values are not double counted at the consolidated level.
One of the reasons for this is that in the past some companies have used consolidated reports to hide losses and liabilities in special subsidiaries that were created specifically for hiding these financial problems.
The Financial Accounting Standards Board and the International Accounting Standards Board regularly revisit the definitions and requirements for consolidated statements in order to make them more reliable and easier to use.
SUMMARY: Consolidated financial statements can be complex to prepare, especially for parent companies that include many subsidiaries.
However, consolidation software has made preparation easier and standards boards like FASB and IASB regularly work to improve the process.
Assuming no other transactions occur in the year, the consolidated statement would look like the following: As can be seen above, the elimination adjustment is necessary so as not to overstate the consolidated balance sheet.
At a glance, they can view the overall health of the business and how each subsidiary impacts the parent company.
Reducing Paperwork – With consolidated financial statements, there is also less paperwork involved.
This method can only be used when the investor possesses effective control of the investee or subsidiary which often, but not always, assumes the investor owns at least 50.1% of the subsidiary’s shares or voting rights.
The consolidation method works by reporting the subsidiaries balances in a combined statement along with the parent company’s balances, hence ‘consolidated’.