When a company has ownership in one or more companies, an accountant may have to either consolidate their financial statements or combine them. Consolidation occurs when a parent company owns more than 50 percent of a subsidiary. Combination occurs when a group of companies are owned with no clear parent in the group.
Combined vs. Consolidated
A consolidated financial statement brings together a parent's and a subsidiary's financial statements to provide one cohesive financial statement. A combined financial statement simply brings together a group of companies' financial statements into one document. The different companies' financial statements remain separate from one another.
Under both combined and consolidated financial statements, the accountant must eliminate intercompany transactions. Intercompany transactions are those occurring between the parent and the subsidiary or the companies in the group. Accountants must eliminate these accounts because, if they remain on the books, they may be accounted for twice, one time on the parent's book and again on the subsidiary's books.
In both a consolidated financial statement and a combined financial statement, the accountant must create a non-controlling interest account. This account is also known as a minority interest account. This account keeps track of an interest in the subsidiary that the parent does not control.
When consolidating financial statements, the stockholders' equity section of the subsidiary is eliminated from the books. Therefore, there are no increases in accounts, such as stock and retained earnings. When combining financial statements, the accountant should simply add the stockholders' equity section across the accounts. This does not eliminate any company's stockholders' equity in the account but increases the overall stockholders' equity for the entire group of companies.
When consolidating financial statements, the income and expenses from the subsidiary are added to the parent company's income statement. Similarly, when combining financial statements, the income and expenses are added across the companies for a total of income and expenses from the group. This increases the group's income, as a whole, compared to if the companies reported individually.