Role of Subsidiaries in Consolidated Financial Statements

 Introduction 

In the current organizational structure of firms, organizations tend to extend their reach through acquisitions or formations of other organizations. Such organizations are termed as subsidiaries. In such circumstances, the need for consolidated financial statement arises to reflect the overall financial status of both the parent organization and its subsidiaries. As stated by IFRS 10, consolidation is necessary to ensure that a true and fair view of the group is provided.

Meaning of Subsidiary

A subsidiary is an enterprise controlled by another enterprise called the parent enterprise. There is control if:

The parent exercises power over the investee

The parent is exposed to variability of returns

The parent is able to influence these returns through exercising such power.

This definition of control is vital in the preparation of consolidated financial statements under IFRS 10

 Meaning of Consolidated Financial Statements

The consolidated financial statements consist of the financial statements of a business entity prepared as if for one economic unit. They comprise the following:

Consolidated Balance Sheet

Consolidated Income Statement

Consolidated Cash Flow Statement

This involves combining the accounting information of both the parent company and its subsidiaries.

Role of Subsidiaries in Consolidation

• Combination of Financial Data

The financial data of the subsidiary is aggregated with that of the parent. Thus, a complete picture of the consolidated financial position of the organization can be obtained.

• Elimination of Transactions within the Organization

Financial transactions between the parent organization and its subsidiaries (for example, sales, borrowing of money, or payments of dividends) are eliminated so that only external transactions are accounted for.

• Non-Controlling Interest Calculation

In cases where the parent company does not have complete ownership in the subsidiary, that percentage becomes the NCI. It is considered the income attributable to the minority investors.

• Presentation of True Financial Position

Subsidiaries will assist in reflecting the actual financial position of the entity. Consolidation is important since it helps ensure that the financial position shown reflects actual performance.

• Adherence to Accounting Standards

Including subsidiaries in the consolidation process helps comply with various accounting standards such as IFRS 10.

Practical Example

Let us take an example where Company A holds 80% equity stake in Company B. Thus, Company B is considered a subsidiary of Company A. In the consolidation process:

100% of the asset and liabilities of Company B are considered

20% equity stake in Company B is reflected as non-controlling interest

All intercompany transactions are eliminated

Role Played by Subsidiaries in the Process of Consolidated Financial Statements Preparation

Aids investors in determining the performance of the entire entity

Increases transparency and comparability

Facilitates sound decision making

Highlights economic reality over legal form

Conclusion

The subsidiaries are vital when preparing the consolidated financial statements. Through subsidiaries, it becomes possible for the parent to give an overall financial picture. The guidelines set in the IFRS 10 help to maintain transparency in financial reporting.