What is consolidation accounting? by gcneophil9



Consolidation accounting entails preparing financial statements of a group of companies for
publication, and also internal purposes. It involves aggregation of the accounts of each of the
companies that make up the group.

The consolidated balance sheet and income statement, are drawn as if it were a single entity.
The main role player of the consolidation exercise is the consolidator, who can be internal to the
group, operating largely in the finance department. Including the controller (external) - the
consolidated accounts are then established by a Member of the Order of Chartered

The main technique of consolidation is to substitute the value of securities held by the parent
company of all assets and liabilities under direct or indirect control of the consolidated company.
When the parent company does not hold the entire share capital of the subsidiary, the portion
not owned appear as liabilities under the name of minority interest.

Restatements are made to fulfill the following purposes:

     - Eliminate the consequences of trade which has been reached between group companies
(claims and debts, profits, internal)
     - To standardize the accounting practices of different societies,
     - To display only the economic aspect of transactions, out of purely fiscal requirements of
     - Eliminate corporate holdings, among them: the equity of a subsidiary, and its equity
securities held in its parent entity are canceled.

Concept of group consolidation

A group is a set of entities each with a different legal personality. From an economic standpoint,
a group is composed of a set of legally independent units that are part of the holding entity
(parent company). Generally, the relationship of dependence that results from this organization
is within the context of an overall development strategy. And entails direct or indirect voting

The international standard IAS 27 "Consolidated and Separate Financial Statements", deals
explicitly with this concept: A parent is presumed to have control when it directly or indirectly
stakes a claim on a majority of the voting rights of a company. Or when it can direct the financial
and operating policies of the company under statutes or contracts.

Consolidated accounts must be regular, sincere and give a true and fair view of the financial
position of all companies belonging to the integration. The objective of the balance sheet,
income statement, schedule, table of changes in shareholders' equity, cash flow and cash
management report is to provide partners with economic and financial information on the group.
The interpretation of the various consolidated accounting records must take account of
particular groups.

Issues of equity

In the individual accounts of a company consolidated accounts may prepared, and the value of
securities on the balance sheet is the only piece of information available on a shareholding. This
value generally reflects the cost of acquisition.

The method of consolidation of companies depends on the nature of control of the investee and
the percentage of control, the parent company holds directly or indirectly on these entities.
Three methods exist: global integration, equity method and proportional consolidation.

To top