Consolidated financial reporting, the preparation of consolidated financial statements is aimed at providing a view of the financial well-being of a company and her subsidiaries. It is provided for under IFRS* 10.
While it is a requirement by accounting bodies (IASB**, FASB*** and GAAP****), preparation of consolidated financial statements also carries a tone of benefits to financial statements users.
It is important to note that preparing financial statements is an attempt to communicate the financial well-being of a company and as with all communications, the message must be as simple for the final recipient as possible. So, if the company has subsidiaries, consolidating the financial performance of the parent and her subsidiaries eases the communication of the financial well-being of the entire group so that users can easily make decisions without having to consolidate it themselves (Which they almost always may not do).
In fact, while the process of preparing consolidated financial statements looks repetitive and time consuming, it makes decision making quicker since having to go through financial statements for each entity separately is even more time consuming and may require more sophisticated financial analysis skills which most users don’t have. Besides, consolidation in this day and age is no-longer done manually as to be so time consuming. Companies now use ERP systems such as a Workflow Management System and financial consolidation software such as Quick-books to almost effortlessly consolidate financial performance.
Companies must prepare Consolidated financial statements to benefit from the following five major categories of advantages;
Almost surely, companies that set out to prepare consolidated financial statements enlist an ERP system such as SAP and/or a reporting tool such as SAP Business Objects. These come with advantages such as providing an overview of the group performance;
- In a timely manner, for financial information to be effectively acted upon,
- With less paper work and the subsequent reduction in the cost of accounting and the mistakes,
- Freeing up time for accountants to add value to the process of financial statement preparation, cost control, revenue maximisation and investment appraisal
- Business Intelligence
Over time, consolidated financial statements accumulate and as the financial data grows, it becomes easy to draw trends and project the future. All this as addition to the business intelligence of the company and comes with advantages such as;
- Improving the budgeting process of both the parent and the subsidiaries
- Improving the risk management and risk planning for the group
- Makes it easy to share best practice among subsidiaries so as to improve the entire group
- Easy monitoring of cross group investments since the reporting is already consolidated and time series are kept
- Sustainable growth
A group that maintains a consolidated view of their financial well-being significantly improves decision making for all their financial statement users including internal users. The group benefits from Automated reporting and business intelligence and all this translates into better management/operation decisions, better investment decisions and accurate investment appraisal. Basically, to a company that the above advantages accrue, growth efforts become sustainable and can be improved and stress tested easily.
- Compliance and transparency
A group whose financial statements are consolidated finds it easy to file returns on time and can be checked for compliance without much sweat. Even the internal compliance teams can quickly pick up and address anomalies. This transparency tends to brand the group as compliant and puts it in a good place to face little to no penalties.
- Attracting Investors, Lenders, Suppliers and Employees
In conclusion, People like to associate and take risks on groups that they understand. By preparing consolidated financial statements, a group gives external users a consolidated outlook of the parent and her subsidiaries thereby making it easy for
- Investors to bet on the group’s growth and buy shares,
- Lenders to assess debt serviceability and accept to lend to the group
- Talented/experienced people to make there bet on the group and join the workforce
* International Financial Reporting Standard
** International Accounting Standards Board
*** Financial Accounting Standards Board
**** Generally Accepted Accounting Principles