A Consolidated Financial Statement (CFS) is a financial report that combines the financial data of a parent company and its subsidiaries into a single report.
Now comes the quesiton when is a CFS prepared?
If a company owns other companies and can make decisions about how they are run , it must prepare a consolidated financial statement to show the financial performance of the entire group together.
This helps investors, regulators, and other stakeholders understand the financial health of the whole group, rather than just the individual companies.
Holding Company (Parent Company)
If a company controls or owns the majority of another company (more than 50%), allowing it to influence how that company runs, it is considered a holding company.
Also if a company has the ability to control another entity by way of control over Management of the company.
Example 1: If Company H has a invested in 6,000 Equity shares of Company S having a total of 10,000 Equity shares . In this case Company H is holding 60% of total equity of Company H. Therefore, under The Companies Act, 2013, Company H would be considered as Holding company and Company S would be considered as Subsidiary.
Example 2: If Company H has 5 directors and Company S has 3 directors. But 2 directors of Company S are also Directors in Company H. Therefore, these Directors will have Majority control over the decisions made by Company S. Therefore, under companies act, 2013, Company H would be considered as Holding company and Company S would be considered as Subsidiary.
Subsidiary Company
A subsidiary company is a company that is controlled by another company, called the parent company or holding company.
The parent company has a say in what the subsidiary does, but the subsidiary still operates as its own legal entity.
What is Included in CFS?
Consolidated Balance Sheet: Shows the assets, liabilities, and equity of the entire group.
Consolidated Income Statement: Combines the revenues, expenses, and profits of the parent and subsidiaries.
Consolidated Cash Flow Statement: Summarizes the cash inflows and outflows of the entire group.
Elimination of intra-group transactions: Any financial transactions between the parent and subsidiaries, such as loans or sales, are removed in the CFS to avoid double counting.
Benefits of Preparing CFS:
Clear Financial Overview of the Group: A consolidated financial statement shows the total financial strength of the group, which may appear stronger than individual subsidiaries’ reports.
Internal Management Benefits: CFS enables the management to evaluate the performance of the group as a whole and each subsidiary within it. This helps in making strategic decisions about expanding, divesting, or restructuring operations.
Better Control Over Subsidiaries: Through CFS, the parent company can keep a close watch on the financial performance of its subsidiaries.
Any doubts related to CFS can be asked in the comments section.
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