Difference Between Combined and Consolidated Financial Statements

As companies pursue expansion strategies, they may acquire controlling or non-controlling stakes in other companies. This is done in order to gain access to new opportunities, obtain synergies and enter into otherwise restricted markets. (Some countries do not allow overseas companies to start businesses without a partnership with a domestic company in the home country). Such acquired stakes should be recorded in the financial statements. If a company holds a stake in another company it is referred to as the ‘parent company’. The second company can either be a ‘subsidiary’ or an ‘associate’, depending on the percentage owned by the parent company and is referred to as the ‘holding company’. If the results are recorded separately for the parent and the holding company, this is referred to as Combined Financial Statements. If the results of the holding companies are amalgamated and recorded depending on their share of ownership by the parent company, then such statements are called Consolidated Financial Statements. This is the key difference between combined and consolidated financial statements.

CONTENTS
1. Overview and Key Difference
2. What are Combined Financial Statements
3. What are Consolidated Financial Statements
4. Side by Side Comparison – Combined vs Consolidated Financial Statements
5. Summary

What are Combined Financial Statements?

The parent company can acquire a stake in the holding company as below.

Subsidiaries

The parent company owns a stake of more than 50% of the subsidiary; thus it exerts control.

Associates

The parent company’s stake is between 20%-50% of the associate where the parent company exerts significant influence.

Income statement, balance sheet and cash flow statement are the main year-end financial statements prepared by a company. If the company is practising a combined reporting approach, this means that the financial results of the parent and the holding companies will be shown separately in the financial statements. In other words, the holding companies will be recorded as stand-alone companies.

E.g. ABC Ltd. is a company that has invested in two other companies, DEF Ltd and GHI Ltd. ABC Ltd holds 55% of DEF (subsidiary) and 30% of GHI Ltd (associate).  An extract of the combined income statement will be as follows.

The advantage of this approach is that it allows shareholders to compare and contrast the results of the parent and the holding company separately in order to evaluate their individual performance. However, this does not indicate the percentage of ownership of the holding company by the parent.

What are Consolidated Financial Statements?

In this approach, the financial results of the parent and the holding companies are presented as a single entity. Here, only the proportion of results of the holding company that belong to the parent will be recorded. If the subsidiary is ‘wholly owned’ (stake is 100%). Then the results will be fully incorporated into the financial statements.

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), requires companies to prepare consolidated financial statements when they hold a controlling interest; more than 50 percent ownership in other businesses.

Continuing from the above example,

With this approach, the results of the holding company are amalgamated into the financial statements of the parent company. This provides the opportunity for investors to view results in a complete and accurate manner. Thus, this approach is more holistic than combined financial statements. Recording financial results through consolidated financial statements method should consider the following.

Share Capital

The share capital of the subsidiary or associate will not be reflected in the consolidated balance sheet in the records of the parent company. Share capital automatically adjusts with the amount of the investment of parent company into holding company.

Non-Controlling Interest

Also referred to as the ‘minority interest’, this is the share of ownership in a subsidiary’s equity that is not owned or controlled by the parent company. This will be calculated using the net income of the subsidiary that belongs to the minority shareholders.

E.g.: If the parent company holds 65% of the subsidiary, the minority interest is 35%. Supposing the subsidiary made a net income of $ 56,000 for the year, the minority interest will be $ 19,600 (56,000* 35%)

What is the difference between Combined and Consolidated Financial Statements?

Summary – Combined vs  Consolidated Financial Statements

The main difference between combined and consolidated financial statements depends on the way that financial results are presented. Many large scale organizations use consolidated financial statements at the year-end due to its increased accuracy and as it is required by law if the stake of ownership exceeds 50%. However, the preparation of consolidated statements is complicated and time-consuming in comparison with combined financial statements.

Reference:
1. “What Is the Difference Between Combining vs. Consolidating Financial Statements?”.Chron.com. N.p., n.d. Web. 23 Feb. 2017.
2. “Consolidated Financial Statements.” Investopedia. N.p., 24 July 2015. Web. 23 Feb. 2017.
3. “Difference Between Consolidated Financial Statements and Stand Alone Financial Statements.” The Finance Base. Leaf Group, 15 Aug. 2011. Web. 23 Feb. 2017.
4. “When are specific financial statements needed?” MLR. N.p., 23 Oct. 2016. Web. 23 Feb. 2017.