Consolidated Financial Statements (AS - 21)

What is the concept of Consolidated Financial Statements?

Every company is required to prepare its financial statements comprising of Statements of Profits and Losses, Balance Sheets and Cash Flow Statements annually / quarterly / half yearly as the case may be. These statements contain financial details only of that particular company, the reason why it is called "Standalone Financials". 

Now let us understand this concept with an example.

We are well aware about the Walmart - Flipkart story where the latter was acquired to the extent of 77% by the former for a whooping $16 Billion in 2018. As Walmart gained ownership to more than 50% of the Flipkart's stakes, it became a parent to Flipkart reciprocally, Flipkart became a subsidiary to Walmart. What matters most in the story is the matter of "control" of the subsidiary company which is now in the hands of the parent company. In simple words, Walmart has a control on Flipkart up to 77%. This control is not only applicable to voting and decision making, but also to equity and movement in the equity with respect to reserves and surplus. After 2018, Flipkart would make its standalone financials only, but Walmart will have to prepare a standalone for itself along with joint statements showing details about itself and its controlled subsidiary, Flipkart which is called Consolidated Financial Statements. 

Concepts to understand before preparing Consolidated Financial Statements

Like how you must eat some sweet before heading with an important task, here it is a must to understand the following concepts before preparing Consolidated Financials. So hold your breath, it's a matter of 4 minutes reading.

1. Consolidated Financial Statements: These are financial statements that combine the financial information of a parent company and its subsidiary companies to present the group's financial position, performance, and cash flows as if they were a single entity. 

2. Parent Company: The parent company is the entity that holds a controlling interest in one or more subsidiary companies. It has the power to govern the financial and operating policies of its subsidiaries. It is the entity which owns more than 50% equity in the subsidiary company. 

3. Subsidiary: A subsidiary is a company that is controlled by another entity, precisely a parent company. A subsidiary company is also termed as minority or non-controller. 

4. Control: Control refers to the power of the parent company to govern the financial and operating policies of its subsidiaries with the objective of obtaining benefits from its activities. Control is the central concept in consolidation accounting. Control typically means ownership of more than 50% of the voting rights. 

5. Minority Interest: Also known as Non - Controlling interest, it represents the portion of equity ownership in a subsidiary not held by the parent company which also includes profits and reserves entitled to the subsidiary as per their holding.

6. Cost of Control: It is that amount invested by the parent company towards acquiring ownership not only in the form of equity but also reserves and surplus of the subsidiary company.