Consolidated financial statements are pretty popular considering all the mergers and acquisitions in the business world. A lot of companies also simply operate with the parent/subsidiary structure which requires consolidated financial statements. A concept that is a little less seen or known are the combined financial statements. A big recurring question is whether combined and consolidated financial statements are the same thing. This is what we will find out in this article.
Combined VS Consolidated: The Differences
To get a good understanding between the differences of combined and consolidated financial statements, it’s important to first know what these are.
When a company prepares consolidated financial statements, this means that the structure of the company has more than one entity. Most likely, it’s a parent and subsidiaries relationship. If that’s the case, the financial statements will reflect the results of the parents and the subsidiaries together making these entities appear like one single entity. In reality, subsidiaries and parent companies operate separately and are different entities, however, for the purpose of consolidation, there is no separate reporting prepared for the parent company or any of the subsidiaries. The consolidated financial statements will be the only financial report issued which reflects the activities of the parent and subsidiaries as a whole.
If looking at a parent and subsidiaries relationship from a combined financial statements point of view, an accountant will need to prepare financial reports for each of the entities first. This means that the parent company and every subsidiary will have their own financial report reflecting their own activities. In other words, the parent and each of the subsidiaries are operating as single entities on their own and also treated as single entities for reporting purposes. Once the reporting for each entity is completed, the reports for the parent and the subsidiaries are then added together, which makes them combined financial statements.
Now that we know clearly what consolidated and combined financial statements are, we can clearly identify the differences between the two:
- Consolidated financial statements treat different entities, such as parent-subsidiaries, as one entity as a whole even if they operate separately as single entities whereas combined financial statements treat every entity as their own with their individual reporting.
- Consolidation merges all financial activities of multiple entities as if one entity is operating and provides a global picture of a company’s health by including the operations of all entities. Combination, on the other hand, requires the preparation of financial statements for each of the entities as standalone companies first and then they are added together in a single set of financial statements.
- An investor or user can see the financial statements and related performance of the parent entity or any of the subsidiaries if the financial statements are presented on a combined basis. If the parent and subsidiaries are consolidated, there is no way for the investors or users to look at the performance of only the parent or any of the subsidiaries on an individual basis.
- In consolidated financial statements, the shareholders’ equity section for the subsidiaries are eliminated during the consolidation since the parent owns the subsidiaries. By merging subsidiaries and the parent company together, if the shareholders’ equity section is not eliminated in the subsidiaries, that would equal to double accounting. In combined financial statements, we simply add the shareholders’ equity section of all entities together.
The differences between consolidated and combined financial statements might be subtle since in the end, both types of financial statements end up presenting the financial situation of one entity. Simply remember that the approach taken to get to the financial statements is different between the two. One important thing to also remember is that regardless if it’s combined or consolidated financial statements, intercompany transactions always need to be eliminated to avoid double accounting.
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When To Use Combined Financial Statements?
Combined financial statements are most appropriate for entities under common control or common management where there is no parent entity. Even if there is a parent entity, having combined financial statements might be more appropriate or meaningful to investors and users of financial statements since they are able to see the performance of all entities as a whole and also of each entity within the group on an individual basis.
It’s also easier to prepare combined financial statements than consolidated financial statements since in combined, you first prepare financial statements for single entities and then aggregate them together.
When To Use Consolidated Financial Statements?
Accounting standards dictate that if there is controlling interest where a company owns more than 50% of another company, consolidated financial statements need to be prepared. It’s also the case with significant influence, meaning if the ownership is less than 50% but a company has significant influence over another company’s business decisions, consolidation is needed. In those instances, there is not even the choice of preparing under combined basis.
Sometimes, preparing consolidated financial statements simply makes more sense. This happens if there is a parent company that doesn’t have much activity since all operations are happening at the subsidiaries level. In cases like this, there’s no point in preparing financial statements for the parent and each of the subsidiaries separately since presenting them on a consolidated basis reflects the financial reality better. Investors looking at consolidated financial statements of the group will understand the worth of the group as a whole.
In situations where the parent company is globally known but the general public isn’t familiar with any of the subsidiaries, it’s simply better to consolidate the parent and subsidiaries since the readers of the financial statements don’t need to look at individual performances of the subsidiaries. All they would want to know is how the parent is performing.
Final Thoughts: Combined VS Consolidated Financial Statements
Differences between combined and consolidated financial statements can seem subtle and people might confuse the two types but they are actually very different from each other. The key thing to remember is that combined financial statements allow readers to analyze the performance of each of the individual entities that were combined into one set of financial statements whereas consolidated financial statements cannot. In consolidated financial statements, we bring all entities into one as if they were operating as one entity in reality. While companies can have the choice to present combined or consolidated, whichever suits them better, sometimes, consolidation is the only way to go if it involves controlling interest or significant influence.
