There are two types of reports that investors definitely need to know and understand how to read, which are consolidated financial statements and separate financial statements. So what are consolidated and separate financial statements? How to distinguish between these two reports? All will be in the article below!
What is consolidated financial statements?
Large corporations with one or more subsidiaries prepare consolidated financial statements. These reports combine the financial data of the parent company and its subsidiaries, presenting their assets, liabilities, income, and cash flows as if they belong to a single economic entity. This approach provides stakeholders with a comprehensive view of the entire group’s financial health and operational performance.
Subjects in consolidated financial statements:
- Group: a parent company and many subsidiaries.
- Relationship: Subsidiaries are businesses that are controlled by another business (in this case, the parent company).
(Control here means the right to govern the operations and finances of a business, with the aim of gaining economic benefits)
What are individual financial statements?
A separate financial statement is a financial statement of a single enterprise, reflecting the financial situation (including assets, equity, liabilities) and business performance of that enterprise for each period.
Investors will often rely on individual financial statements to determine the profitability and current status of that business to consider whether to invest or not.
Consolidated vs. Separate Financial Statements
Similarities
- Purpose: These two types of reports are summarized to summarize the development situation as well as the business performance in the last production period.
- Subject: Consolidated financial statements must be presented in the same manner as individual financial statements, meaning that the entire group will be treated as one enterprise.
Difference
Consolidated financial statements and separate financial statements differ mainly in the following two points:
Balance sheet: Consolidated and separate financial statements both include a balance sheet. This sheet covers assets and capital sources. However, the balance sheet of each report has differences in some accounts as follows:
| Consolidated financial statements | Separate financial statements |
| No investment account in subsidiaries. Has goodwill account. Has minority interest account (if the capital held by the parent company is less than 100%) | There is an investment account in a subsidiary. There is no goodwill account. There is no minority interest account. |
Time of recording equity
- Consolidated financial statements: Recorded at the date of consolidation that the parent company’s shareholders own in the subsidiary.
- Separate financial statements: Recorded under the equity method means when the owner does not add capital or withdraw capital.
In which situations are both separate and consolidated financial statements required from a company?
To have both types of financial statements, the enterprise must own at least one subsidiary. If the enterprise does not own any subsidiaries, it will only have separate financial statements.
However, if the capital-owning enterprise is a joint venture or associated company, the financial statements do not need to be consolidated with those of the owning company. The joint venture only needs to record the correct and complete amount of money to purchase shares. And, if the capital-owning enterprise owns less than 20% of the shares, that amount will be recorded in the financial investment account (at the time of receiving dividends).
It can be said that both types of reports help investors understand the financial situation of the company or whether investing in that company is safe and profitable? And above is all the information related to the two types of financial reports. Hopefully the above article will be helpful in your investment plan.
Conclusion
In conclusion, understanding both consolidated and separate financial statements is crucial for investors, business analysts, and financial professionals. While separate financial statements reveal the financial position of an individual company, consolidated financial statements offer a holistic view of a corporate group. Both reports complement each other in assessing a company’s true financial health and investment potential—especially when subsidiaries are involved.
FAQs
What is the main purpose of consolidated financial statements?
Consolidated financial statements present the financial position of a parent company and its subsidiaries as a single entity. They give investors a complete picture of the group’s performance.
When is a company required to prepare consolidated financial statements?
A company must prepare consolidated statements when it controls one or more subsidiaries, typically through majority ownership or voting rights.
Why do companies also issue separate financial statements?
Separate financial statements help stakeholders evaluate the financial performance of the parent company alone, without including subsidiary data.
What is the key difference between separate and consolidated financial statements?
The key difference lies in scope—consolidated statements include data from both parent and subsidiaries, while separate statements only report the parent company’s financials.
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