Financial Consolidation

Financial consolidation combines the financial statements of a parent company and every subsidiary it controls into one set of group statements. A reader of the consolidated balance sheet sees one company, not a holding structure with eleven legal entities underneath it. The requirement is control, not full ownership: a parent that owns 60% of a subsidiary still consolidates 100% of that subsidiary's assets, liabilities, revenue, and expenses, then shows the other 40% as a separate minority interest line rather than leaving it out.

The mechanical core of consolidation is elimination. Every transaction between entities in the group, an intercompany sale, a management fee, a loan from parent to subsidiary, appears twice in the unconsolidated books: once on each side. Left alone, the group's revenue and expenses would be inflated by trades the group made with itself. Consolidation removes both sides of each intercompany transaction and the matching balances they left behind, leaving only transactions with parties outside the group.

Three complications do most of the work in a real consolidation. Intercompany eliminations remove matched revenue and expense, and the related receivable and payable, for every transaction between group entities. Minority interest (also called non-controlling interest) splits a partially owned subsidiary's equity and net income between the group and the outside shareholders who own the rest. Currency translation converts a foreign subsidiary's statements, prepared in its own functional currency, into the parent's reporting currency, which creates a translation adjustment that sits in equity rather than the income statement.

Companies with one legal entity never touch consolidation. A company with even one subsidiary, a foreign office set up as its own entity, a holding structure built for tax reasons, or an acquisition that was never legally merged in, needs it every close. The work concentrates where entities use different charts of accounts, different ERPs inherited through acquisition, or different currencies, since the mapping and elimination logic has to reconcile all three before a single number is trustworthy.

Related terms: Intercompany Reconciliation, General Ledger, Currency Translation Adjustment

Go deeper: Financial Consolidation: The Complete Guide

Adopt's agents match each entity's leg of an intercompany transaction against its counterparty's, classify every mismatch by cause, and propose eliminations only for the portion that's proven to tie, so the manual trace-and-match work shrinks to the exceptions. Sign up free.