5.1 Subsidiaries (Basic Consolidated Financial Statements with one subsidiary – excluding disposals and statement of cash flows)

Consolidated financial statements are prepared by a parent company to present the financial position, financial performance, and cash flows of a group of companies as if they were a single economic entity. When a company owns a controlling interest in one or more subsidiary companies, it is required to consolidate the financial information of those subsidiaries into its own financial statements. Here’s an overview of how to prepare basic consolidated financial statements with one subsidiary:

Scenario: Parent Company (P) owns 100% of Subsidiary Company (S)

**1. Gather Financial Information: Collect the separate financial statements of the parent company (P) and the subsidiary company (S). These statements include the statement of financial position (balance sheet), statement of profit or loss (income statement), and statement of cash flows for each company.

**2. Eliminate Intercompany Transactions: Identify and eliminate any intercompany transactions between the parent company and the subsidiary. These transactions can include sales, purchases, loans, dividends, and other transactions between P and S. Eliminate both the intercompany amounts and any related profits or losses.

**3. Adjust for Unrealized Gains/Losses: If the subsidiary (S) holds any assets or liabilities that were revalued after acquisition by the parent (P), adjust these values to reflect the parent’s ownership percentage. Any unrealized gains or losses due to revaluation should be removed from the consolidated financial statements.

**4. Prepare Consolidated Financial Statements: Consolidate the financial information of the parent company (P) and the subsidiary company (S) to create the consolidated financial statements. Here’s how:

a. Combine the assets, liabilities, equity, revenue, expenses, and cash flows of the parent and the subsidiary into a single set of financial statements.

b. Add the parent’s equity (commonly known as “non-controlling interest” or “minority interest”) to the equity section of the consolidated statement of financial position. This represents the portion of the subsidiary’s equity that is not owned by the parent.

c. Combine the parent’s and subsidiary’s revenues and expenses to calculate the consolidated profit or loss (income) for the period.

d. Consolidate the cash flows of both companies to prepare the consolidated statement of cash flows.

**5. Presentation and Disclosure: Present the consolidated financial statements in the required format, including the consolidated statement of financial position, consolidated statement of profit or loss, and consolidated statement of cash flows. Provide disclosures about the nature and extent of the parent’s ownership, any non-controlling interests, and the accounting policies used for consolidation.