Understanding Consolidation Basics: A Step-by-Step Guide

Cover Image for Understanding Consolidation Basics: A Step-by-Step Guide

| Courtney Price

Consolidation is a crucial process in the world of accounting and finance, particularly for businesses with multiple subsidiaries. It involves combining the financial statements of a parent company and its subsidiaries into one comprehensive report. This blog will guide you through the basics of consolidation and the step-by-step process of collating the necessary information.

In a recent webinar Practical Consolidations and Groups Lindsay Webber provided a step-by-step guide to consolidation basics and collating information.

Step 1: Identifying Entities for Consolidation

The first step in the consolidation process is to identify which entities need to be included. This largely depends on the group structure and control mechanisms in place. Key factors to consider include voting rights and share classes, which can determine which subsidiaries are controlled by the parent company. For instance, even if there's one golden share issued to a subsidiary, it can give the holding company the right to control the board of directors, necessitating its inclusion in the consolidation.

Step 2: Collate Information

Once the entities for consolidation have been identified, the next step is to collate all the relevant financial information. This includes the profit and loss (P&L) statements from the start of the year to the current date. If detailed breakdowns are not available, a rough estimate can be made based on the full year's data. However, it's always preferable to have the most accurate and up-to-date information possible.

Step 3: Adjust Information

The third step involves adjusting financial information for differences in:

  1. Accounting policies
  2. Presentation currency
  3. Year ends

Step 4: Elimination Journals

Elimination journals are used to remove the effects of intercompany transactions, such as investments in subsidiaries and intercompany balances. For example, if a subsidiary has been held since incorporation, the investment in that subsidiary is simply eliminated against the ordinary share capital.

In cases where a subsidiary was acquired while it was already trading, the consolidation process becomes more complex. There may be elements of goodwill, pre-acquisition profit and loss, and non-controlling interests to consider. Goodwill only comes into play during consolidation and needs to be amortised over time. Non-controlling interest refers to the portion of a subsidiary not owned by the parent company, which also needs to be accounted for.

Step 5: Measure Non-Controlling Interest (NCI)

For existing NCI: calculate the amount of profits/losses relevant to the NCI

For new acquisitions: calculate the NCI on the acquisition date plus the share of post-acquisition.

For changes in NCI: calculate the change based on the fair value at the date of the transaction.

It's important to note that while this process can seem daunting, it's essential for providing a clear and accurate picture of a company's overall financial health. By following these steps, you can ensure that your consolidation process is thorough and accurate.

To watch the full session by Lindsay Webber, just click here. In the session, Lindsay covers the above as well as:

  • Consolidation basics & the requirement to consolidate
  • Practical implications on consolidation
  • Consolidation case study
  • Common errors in consolidation
  • Review of live consolidated accounts

The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.

Image of Courtney Price

About the Author

Courtney Price is a content creator for CPDStore UK. Courtney joined us during the COVID-19 pandemic and has been involved in the ever-evolving world of accounting ever since. Her passion for reading and writing, coupled with her degree in copywriting from Vega School has allowed her to channel her creativity and expertise into crafting engaging and informative content.

YOU MAY ALSO LIKE

Cover Image for The Abolition of the Operating Lease for Lessees

The Abolition of the Operating Lease for Lessees

 

The landscape of lease accounting has undergone a significant transformation with the abol...

Cover Image for The Complexities of Disclosing Related Party Transactions

The Complexities of Disclosing Related Party Transactions

 

In Accounting for Related Party Transactions, Lindsay Webber went through the complexities...

Cover Image for The Abolition of Operating Leases for Lessees

The Abolition of Operating Leases for Lessees

 

The landscape of financial reporting is undergoing a seismic shift that will impact many s...