Financial reporting is much more complex for individuals and companies that hold a majority stake in more than one business. Not only must individual financial statements be prepared but the Financial Accounting Standards Board also requires the reporting of consolidated financial statements at regular intervals as well.
What is the main difference between individual and consolidated financial statements and why are both needed?
This article will give an overview of both types of statements, the main difference between them and how consolidation software can help in producing financial reports.
Individual Financial Statements
Individual financial statements are also known as standalone financial statements. These statements are prepared for an individual business and provide a snapshot of the performance of the business for a specific period – monthly, quarterly, yearly, etc. These reports typically include a balance sheet, income statement, statement of cash flow and a shareholder equity report. Taken together, these statements show how well the business is doing and offer a general overview of the money that is coming in and going out of the business.
Individual financial statements are prepared if a business owner owns a single business. They are also prepared if the business in question is split up; for example, joint ownership where Person A owns 60% of the business and Person B owns 40% of the business. If a business owner owns multiple companies and has full ownership in a single business, the wholly-owned business is not required to prepare individual financial statements because the information will be captured in the consolidated financial statements. However, individual financial statements are often prepared even if a business is 100% owned by a parent company, simply for internal management purposes.
Consolidated Financial Statements
Consolidated financial statements are prepared for a group of businesses that are owned by the same parent company. These statements provide information about the overall health of the parent company when all majority or wholly-owned businesses are taken together. A consolidated financial statement includes all the subsidiary businesses where the owner has a controlling interest and also the subsidiaries that are wholly-owned.
Consolidated financial statements include the same elements as the individual financial statement, except in consolidated form. For example, the consolidated balance sheet reports the assets, liabilities and capital of all the businesses taken together and the consolidated income statement reports the combined revenue of all businesses taken together.
However, there is one major difference with consolidated financial reports: Preparing a consolidated financial report is not the same as simply adding together the individual reports because certain transactions called intracompany transactions must be omitted from consolidated financial statements.
Intra-company Transactions
Intra-company transactions are transactions that occur between the parent company and its subsidiaries or when subsidiaries do business with each other. An example of an intra-company transaction would be a retailer that owns a packaging company paying for boxes it receives from that company. Another example would be a struggling subsidiary getting a loan from another subsidiary or the parent company.
How Consolidation Software Can Help
These intra-company transactions must be eliminated from the consolidated financial statements, making these reports more complex to prepare. For this reason, many business owners use consolidation software that can automate the financial reporting process, making reporting faster, easier and more efficient.
A parent company that wholly owns or has a controlling interest in multiple businesses must perform both individual and consolidated financial statements. Knowing the main difference between the two will facilitate the process of completing these reports. For those who need to prepare consolidated financial statements regularly, consolidation software can make generating these reports much faster and less stressful.