Blog Home > Modern Finance > The Complete Guide to Consolidated Financial Statements

The Complete Guide to Consolidated Financial Statements

Table of Contents

Consolidated financial statements give company stakeholders a complete, 360-degree view of their multi-entity organizations financial health. They streamline reporting standards and accounting methodologies, centralize disparate data and create the strong foundation needed for informed stakeholder decision making and strategy development.

Once a heavily manual and time-consuming process, financial consolidation was no easy undertaking for finance teams. Manual consolidation requires significant time spent gathering data and not enough analyzing it not to mention processes are more disjointed, data inaccuracies are higher and statement version control is more difficult.

Fortunately, financial statement consolidation can now be automated and accelerated with the use of collaborative closing software tools and modern methodologies. The importance of these new and streamlined methods cannot be overstated they create greater financial transparency and power smarter strategic financial decisions at every level.

Let's dive deeper into how modern financial statement consolidation works and exactly how it can benefit your business.

Key Takeaways:

  • Consolidated financial statements centralize financial information of a parent company and its subsidiaries. They include three main components: balance sheets, income statements and cash flow statements.
  • Benefits of consolidated financial statements include: higher transparency, better informed decision making, more accurate valuations and tax advantages.
  • Financial consolidation is best performed using an automated software tool.

What Are Consolidated Financial Statements?

Consolidated financial statements centralize the financial information of a parent company and its subsidiaries into a single report. By doing so, they show the true financial position and performance of the entire organization rather than each  entity that is part of it.

This consolidated view is important to stakeholders such as CEOs, board members, investors and creditors who make strategic decisions for the organization or invest their own resources into its success.

Its important to note that consolidated financial statements dont replace the individual reports used by each business entity, which still need them to operate independently and make decisions.

Instead, they provide an additional holistic view of the parent company so leaders at its highest levels stay informed and drive the business toward its full strategic potential.

There are three primary components of consolidated financial statements:

By putting standardized processes in place to develop and share consolidated financial reports, companies eliminate the time-consuming task of starting from scratch each time it needs to be done in reaction to a specific situation or need. These three primary components are also referred to as the 3 statement model.

Instead, they maintain a real-time, 360-degree view of their organizations financial health that enables proactive strategies, greater agility and full transparency for stakeholders.

Its important to note that private companies dont have many requirements regarding how or if they develop consolidated financial statements, but public companies must follow GAAP guidelines. International companies must also adhere to IFRS guidelines.

How To Consolidate Financial Statements

1. Identify All Subsidiaries

The first step to developing complete consolidated financial statements is creating a full list of subsidiaries or companies in which your parent company has a greater than 50% ownership share. This list should be reviewed and updated periodically, especially for large companies that may acquire and/or adjust their stake in subsidiaries more often.

During this step, youll also need to collect balance sheets, income statements, cash flow statements and all other relevant financial information from each subsidiary. 

2. Adjust Subsidiary Financial Statements

Next, adjust your reports to streamline their format and structure. Be sure that accounting policies (i.e. revenue recognition processes, depreciation methods, etc.) align with those of your parent company.

All intercompany transactionsor revenues, expenses, assets or liabilities that result from transactions between your parent company and any of its subsidiariesmust also be eliminated for an accurate picture of overall financial performance.

At this time, you should also calculate non-controlling interest (the portion of a subsidiarys equity not owned by the parent company) and include it in each statement.

3. Consolidate Reports

The last step is to consolidate each entitys report into a single financial statement.

Given the amount of systems, sources and data your finance teams use throughout this process, its best done with a centralized, automated software tool that can accelerate the process and reduce the occurrence of human error.

A software platform also provides much-needed shared views for the individuals and teams working together on developing your consolidated financial statements.

Consolidated vs. Combined Financial Statements

Its important to understand the key difference between consolidated financial statements and combined financial statements, terms often used interchangeably, but that actually refer to two different types of reporting.

Combined Financial Statements

Combined financial statements report on the finances of both your parent company and subsidiaries, but they maintain them as separate reports within a single document.

Consolidated Financial Statements

Consolidated financial statements, however, fully integrate the financial information of your subsidiaries with that of your parent company in a singular report that demonstrates your parent company's financial position.

The Challenges of Using Manual Processes to Consolidate Financial Statements

Consolidating financial statements is possible through manual methods, but its difficult to manage and strategically detrimental in the fast-paced and technology-driven business environment companies operate in today.

Lets look at three of the biggest challenges that organizations encounter using manual methods and how to overcome them, as demonstrated by real Vena clients.

1. Time Is Monopolized by Tedious Tasks

Modern financial planning is strategic. Its less about checks and balances (although that remains important) and more about looking for insight in your financial data that can help inform decisions across the organizationand in the case of consolidated financial statements, across multiple entities.

But manual consolidation methods require spending so much time on data collection and other preparatory (often tedious) tasks that there isnt much time left for actual analysis.

In the case of Vena client First Service Residential, one of the largest property management firms in North America, this challenge seemed insurmountable.

For budgeting and forecasting in particular, that was thousands of Excel documents, thousands of workbooks, each workbook having multiple tabs, in excess of 30 tabs in some cases, says Robbie Phillips, their FP&A Director. The task of coordinating and consolidating was a very big one.

After adopting Vena, First Service was able to centralize data across markets, regions, and divisions. They increased financial reporting transparency and consolidated FP&A data 90% faster than they were previously able, saving hours of time that could be redirected to more meaningful, strategy-driving work.

Read FirstServices full story.

2. Workflows are Disjointed

Manual, spreadsheet-based consolidation methods lead to inevitable inaccuracies and frustration for finance teams attempting to collaborate successfullyespecially in large organizations.

When Mitsubishi Chemical Groups Director of Finance, Cindy Tynan, joined the company in 2010 (she was then an internal auditor), their forecasting and budgeting processes across entities was cumbersome and time consuming. Thats because their workflows were manual and as a result, massively disjointed.

Spreadsheets were unreliably linked through Excel formulas, collaboration was difficult and they experienced constant errors and accuracy issues. According to Cindy:

I always dreaded those conversations where data owners would want to change their data inputs, because that meant I had wasted four to six hours of my time, Cindy said. Our president would ask if the forecast was ready, and Id tell him, It was ready but someone wants to change something, so give me eight hours and I can give you an updated number.

The company desperately needed a streamlined consolidation workflowone that allowed for real-time collaboration and higher accuracy across statements and other reports.

They worked with ProLytics Consulting Group to implement Vena as their solution to this challenge, and as a result have been able to standardize reporting processes for more meaningful comparisons across business areas, including better upward reporting to their parent company.

Read Mitsubishi Chemical Groups full story.

3. Inaccuracies Abound and Version Control Suffers

The silos that exist across manual financial reporting methods create inaccuracies and version control issues that are nearly insurmountable for multi-entity organizations to overcome.

After being acquired by a private equity firm in 2016, Aurora Plastics made five acquisitions in just one year. The offline Excel spreadsheets being shared via email were hindering their ability to scale efficientlyconverting acquired entity financials was taking hours at a time.

Recognizing the challenge, they hired Joe Morris as a base-division Financial Controller to get a handle on and improve their financial capabilities. Joe shared the extent of the issue:

Anytime that we would add on an acquisition, we would have to do a tremendous amount of work, he shared. You'd get into a meeting and the Operations team would be working off a different version than the Finance team.

Joe led the way to implement the Vena platform, which allowed them to quickly consolidate and automate their budgeting process. They now have 40+ users analyzing the same real-time data across merged entities and are able to  recognize risk and take corrective action immediately.

Read Aurora Plastics full story.

Benefits of Streamlining Financial Statement Consolidation

If you werent already convinced that its time to ditch manual processes, using software to consolidate financial statements delivers additional benefits that make for more transparent, accountable, efficient and accurate financial reporting.

Lets look at five of these important benefits.

1. Transparency and Accountability

Streamlining accounting methodology and eliminating intercompany transactionsboth done during the development of consolidated financial statementscreates a standardized and transparent view of financial health for both your parent company and subsidiaries.

The ripple effect is greater accountability at every level for each organization to make smart financial decisions and maintain strong reporting standards.

2. Seamless and Efficient Workflows

Collaboration and visibility are key for modern finance teams and especially for parent companies measuring the financial performance of their multiple subsidiaries.

By modernizing your financial statement consolidation processes with cloud-based solutions, you can get a better handle on the performance of each individual entity and what it means for the financial health of your entire organization.

Further, youll know your data is updated in real time so you dont have to execute cumbersome data collection and update processes every time you need new insight.

3. Informed Decision Making

With a consolidated view of the organizations financial health, your finance team and company leaders can make fully informed decisions not undermined by missing or inaccurate information. These decisions may include investments, M&A or other strategically impactful actions that determine the organizations future financial performance.

4. Accurate Company Valuations

Consolidated financial statements provide the most accurate view for valuing the company as a whole. This is important for investors interested in buying or selling the organization or investing in its growth.

5. Tax Advantages

Consolidated financial statements deliver two key tax advantages. First, it makes the filing process less time consuming and more simplified with standardized, centralized reporting.

Second, it helps companies reduce their tax liability by offsetting profits and losses across subsidiaries, providing access to  tax incentives, deducting intercompany transactions and improving cash flow management for better planning.

Final Thoughts

The impact of todays rapidly paced business environment is felt on an exponential scale for multi-entity organizations. Not only are you executing acquisitions and other M&A initiatives more quickly, but change within each of your entities is happening at a faster rate than it was in the past.

Vena for Financial Consolidation helps you keep up with those rapid changes with:

  • Centralized Database Integrate disparate ERP/accounting systems and multiple currencies or subsidiaries to make financial consolidation simple.
  • Excel Templates Automate intercompany eliminations with journal entry templates to accelerate your consolidation and maximize auditability.
  • Improved Workflows Track activities, improve collaboration and govern your close process with workflows. Monitor it all in real time with status dashboards.

Did you find this article helpful? If so, you might also enjoy this related content:

 

 

graphic of a spreadsheet and a bar chart
Optimize Your Consolidation Process With Vena Solutions

The process of building your consolidated financial statements doesnt have to be tedious or stressful. See what Vena for Financial Consolidation looks like in action.

Request a Demo
Illustration of an opened envelope with a lightbulb

Like this content?

Get resources curated just for you and your department.

Learn More

About the Author

Olivia MacDonald, Senior Manager of FP&A, Vena

Olivia MacDonald is a Senior Manager of FP&A at Vena. A creative problem solver who enjoys analyzing and detangling complex situations to make things better, she’s experienced in leading multiple projects at once and has found the key to success to be documentation, communication and teamwork. Olivia is passionate about removing manual, clunky and repetitive tasks from finance professionals’ working days so they can focus on what they believe truly adds value to the business instead. At work, she’s also heavily involved with Vena’s Women+ employee resource group, which collaborates with thought leaders and companies across the globe to remove intersectional barriers in the workplace. Outside of work, Olivia also takes part in youth engagement and education programs as a volunteer.

Read More