Consolidated reporting: compilation, analysis

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Specialists of all organizations face standard accounting forms. They contain information about the operations, financial position of the enterprise. If two or more organizations are in legal and financial relationships, then consolidated financial statements are prepared.

A bit of history

The first consolidated financial statements were published in the US in 1902. It was a report of six companies as a single entity. In European countries and Japan, holdings began to develop in the second half of the last century, the practice of consolidated reporting appeared in the 1980s. In Russia, the need for consolidated reporting fell on the period of creating holdings, restructuring the economy and privatizing enterprises. Only in 1996, the Ministry of Finance approved the "Guidelines for the preparation of consolidated financial statements."

The development of consolidated financial statements was influenced by the emergence of large corporations, the presence of the financial market, and the requirements of investors for joint reporting. Otherwise, determine the directions for further investment of capital andrisk analysis is not possible. Automating the processes of compiling balance sheets with the help of special software allows you to increase efficiency.

What is it?

Consolidation is determined by economic feasibility. Often, instead of one corporation, entrepreneurs create several small economically interconnected organizations. This form of doing business makes it possible to save on tax payments, reduce the risk of operations and ensure stability in the supply of materials.

The idea of consolidation is simple. In a group of legally related companies, one plays a dominant role (parent), while the others are subordinate organizations. Consolidated financial statements give an idea of the state of the group as a whole. At the same time, each enterprise is obliged to maintain accounting records of its operations and generate financial statements on them. Consolidation is not just the summation of identical reporting items. Transactions between corporate members are not reported.

For whom?

It is believed that the main users of data are investors who have the skills to use information. In fact, the reports contain information for all groups of interested users: from creditors to owners. In particular, shareholders can use the information for group-wide short- and long-term planning.

Today, the preparation of consolidated financial statements (IFRS) is mandatory for all enterprises with subsidiariesunits.

Legislative regulation

In the Russian Federation, the requirements for documents are spelled out in the "Regulations on the maintenance of accounting records in the Russian Federation." This regulatory document states that if an organization has dependent divisions located on the territory of the Russian Federation and abroad, it is obliged, in addition to individual reporting, to also provide a consolidated one.

Banks in Russia have been compiling IFRS since 2004. OJSCs whose shares are listed on stock exchanges must form consolidated balance sheets from 2012. According to the results of the report “Concepts for the development of accounting in the Russian Federation for the medium term”, it was revealed that the largest companies use IFRS and other international forms, but they still make serious mistakes when compiling the report.

An important step in the development of this area was the adoption of the Federal Law “On Consolidated Reporting”. The law prescribes the categories of organizations that are required to draw up IFRS: credit institutions, insurance companies, non-state PF, organizations in the form of OJSC, audit companies (since 2017). The law does not apply to state and municipal institutions. All these participants are required to compile consolidated reports from 2012 or from the date of formation. If they have previously compiled consolidated balance sheets according to the standards of other countries, then they must additionally provide a report for the transition period. The structure and their regulations are prescribed in the “Interpretations of IFRS for use in the territory of the Russian Federation”

Basic terms

Intra-group transactions are transactions between a parent and subsidiaries or between subsidiaries of a group.

Intragroup balance - the balance of "debtors" and "creditors" for internal operations.

Unrealized gains/losses are financial results from internal operations that are included in the book value of assets.

Preparation of consolidated financial statements

Reporting is done by the main company. In this case, the balance sheets of all organizations must be drawn up on the same date using a single accounting policy. The document is formed by adding the same indicators of all companies. Excluded are articles for which the group has no readings for the current and previous period, as well as:

• value of the parent company's investment in each facility;
• amount of intragroup transactions;
• Amount of unrealized gains and losses.

If one of the entities issues preferred shares that are held outside the group, profit/loss is adjusted for the amount of dividends.

Key Feature

Consolidated financial statements necessarily include such an indicator as a minority interest in the capital of subsidiaries. How to calculate it? First, the sum of equity and net profit of subsidiaries is determined, reduced by the amount of unrealized profit from intra-group operations. Then the share of each organization for this indicator is calculated. If the value turned out to be negative, then it is displayed in brackets.

The difference between the book value and the fair value of goodwill is reflectedas part of expenses (income) over the useful life.

The notes provide the following information:

• List of enterprises with an indication of the share in the capital.
• Reasons why the company's performance is not included in the overall report.
• The nature of business-to-business relationships in which the parent company does not own more than 50% of the assets.
• Reporting items to which different accounting policies have been applied.

Nuances of filling

Organizations that have switched to consolidated financial statements since 2016, provided that their activities are regulated by tariffs, are required to apply IFRS 14.

It is forbidden to provide irrelevant information in the reporting. For example, accounting for financial instruments involves the disclosure of a large amount of data. But if the organization does not use this type of asset, then it does not make sense to bring this item to the balance sheet. Another thing is if the volume of foreign exchange earnings has changed dramatically. Then the reasons for what happened should be indicated in the additions.

If the service contract is a continuation of an involvement in a financial asset, it is disclosed in accordance with IFRS 7. Continuation of involvement is a situation where the entity sells the services of the transferred asset and intends to earn a profit from it in the long term. We are talking only about situations where the monetary reward is floating.

It is recommended to pay salaries to employees who have completed their labor activity at the discount rate of government bonds (IFRS 19).

The value of fruit crops is measured at actual acquisition costs (IFRS 41), but they are accounted for in accordance with IFRS 16. Previously, valuation at fair value in some organizations led to large financial costs, and in others - to difficulties in finding alternatives on the market.

When an audit of consolidated financial statements is carried out, the parent company's shareholding in the share of each of the group's enterprises is checked first. If the subsidiary is not an investment entity, but provides services to the parent entity, then it must be consolidated. If the company is an investment company, its share is carried in the balance sheet at fair value. The algorithm for such accounting is prescribed in IFRS 28.

If additional information is disclosed in internal documentation, such as an employee statement, then it should be attached to the balance sheet (IFRS 34).

All these nuances should be taken into account when preparing consolidated financial statements.

Data analysis

Summary reporting allows you to use group income as a basis for dividend calculations, taxation in countries where it is permitted by law. Therefore, the analysis of consolidated financial statements is aimed at studying the state of the group itself as a whole and individual enterprises. Based on these data, it is possible to determine how the financial condition of each enterprise will change as a result of a change in the financial position of the group.

Balance

Because a group may include organizations from different industriesbelonging, it is necessary to select coefficients that are significant for each enterprise. Consider them in more detail:

• Share of OA in property=OA / Balance currency.
• Share of cash (FC) in OA=(CA + Short-term financial investments) / OA.
• Indicator of financial independence=Equity capital (SK) / Balance currency.
• Debt structure=Long-term liabilities / Debt.
• Coefficient investment=UK / Non-current assets.
• Current liquidity=OA / Current liabilities.
• Quick liquidity=(FV + Short-term financial investments + Short-term DZ) / Short-term liabilities.
• Absolute liquidity=(DS) / Short-term liabilities.
• OA turnover=Revenue / Avg. OA amount.
• Asset turnover=Revenue / Avg. balance currency.
• Rate of return=Net profit (NP) / Revenue.
• Sales profitability=Sales profit / Revenue.
• ROA=PR / Avg. balance currency.
• SC Profitability=PR / Avg. SK amount.

Standard values for each coefficient are determined on the basis of industry averages. If the group includes enterprises of various fields of activity, then several regulatory bases are drawn up. To determine the planned values for each coefficient of the group as a whole, the contribution of each of the industry components is assessed. Based on the collected data, a sustainability rating is formed: excellent, good, satisfactory and unsatisfactory.

Profit andlosses

In the process of analyzing the consolidated financial statements, an organization needs to determine the share of subsidiaries in terms of the minority share in profits, since the financial results of the group depend on the way the companies are combined. In the event of a merger, the value of the group exceeds the value of the two companies. There are economies of scale. IFRS 1 describes the disclosure requirements. The parent company is obliged to present financial indicators of subsidiaries and separately its values in the reporting. It is also necessary to justify the factors and causes of their occurrence. Since the merger of organizations leads to an increase in their value, the report provides information on the amount of dividends to be distributed and per share.

It's important to consider

The consolidated balance sheet contains additional information about the state of the parent company. Therefore, it does not include intragroup transactions. The following balance sheet items are subject to detailed breakdown:

• the sum of equity and long-term investments;
• current settlements: advances, receivables and payables, financial result of future periods;
• company loans;
• other non-traditional operations.

The explanatory note reads:

• indicate the type of consolidation used;
• list the grounds for merging enterprises into a group;
• show relationship.

If the consolidated balance sheet for the group is compiled for the first time, then special attention should be paid toattention to the analysis of differences in accounting policies, namely in the accepted methods of asset valuation, the share of investment of the parent company. It is very important to use a single accounting policy in all companies of the group. Then it will be easier to analyze the reporting.

Conclusion

Consolidated reporting is a consolidated balance sheet for a group of enterprises that are legally and/or economically related. The process of its formation is carried out by summing up the same indicators of reports, calculating the minority share in net profit. Features of compilation are spelled out in the Federal Law of the same name. Reporting does not reflect transactions between group members. Consolidation is provided to show the financial condition of the group as a whole.