If you run a business that has both a parent company and subsidiaries, you understand how complicated the financials can become. It is vital to track expenditures and profits separately as if each subsidiary were its own business. There may be times when it becomes necessary to report this information on a separate balance sheet, independent of other affiliated companies.
However, there may be some instances in which financial information for all components of the business must be showcased at once. This could become necessary when sharing the financials with a loan officer or board of directors. Investors also typically need to have access to this information to determine the value of their participation in your business.
Formal financial reports for companies who own a controlling stake in others (classified as 50-percent ownership or greater) are typically represented as a consolidated balance sheet. Internal accounting may still be done separately.
What Is a Consolidated Balance Sheet?
The simplest way to showcase the company’s financial information as one is to use a consolidated balance sheet. Typically, to create a consolidated balance sheet, you will need to start with a worksheet. This worksheet is usually presented as a chart, and it has columns for the parent company, each subsidiary, amounts to eliminate in both debits or credits and a total. The idea is that you should be able to get a very clear picture of the business’s overall health with a simple chart like this. The numbers can then be transferred to an even simpler consolidated balance sheet.
The rows of your chart should list all debit accounts and total debits, and the parent company and subsidiary can split this. Also, you should list all credit accounts and total credits. If you have any accounts that overlap between the parent company and its subsidiaries, you will need to eliminate duplicates on your consolidated balance sheet.
When you own a subsidiary in its entirety, it is fairly straightforward to submit a consolidated balance sheet. It should show the credits and debits for both your parent company and the subsidiary. No additional calculations need to be done to determine the portion of the subsidiary’s assets or liabilities that you must take ownership of.
In the case where a company does not own 100 percent of its subsidiary, this must be reflected on the consolidated balance sheet accordingly. If you own more than 50 percent but less than 100 percent of the subsidiary, you have what is known as minority interest in the company. To complete a consolidated balance sheet when you have a minority interest, your company should take ownership of all the subsidiary's debits and credits and then “return” the percentage you don’t own in the owner’s equity section. For instance, if your restaurant owns 75 percent of a small cafe, you would need to claim 75 percent of the cafe’s credits and 75 percent of its debits on your company’s consolidated balance sheet. You could do this by showing ownership of all the credits and debits, then by showing a return of 25 percent in the owner’s equity section.
If your company owns less than half of its subsidiary, you should not use a consolidated balance sheet. For businesses in this situation, you should merely claim one line item on your balance sheet that represents the portion of the subsidiary you own. If the subsidiary’s assets are equal to $100,000 and you have a 40-percent stake, you would record an asset of $40,000. This can become complicated, mainly when a business owns stakes in multiple subsidiary companies.
How to Prepare a Consolidated Balance Sheet
Consolidated balance sheets must be prepared according to the same rules and accounting methods used across the parent company and its subsidiaries. Generally accepted accounting principles, sometimes known as GAAP, must be adhered to at all times. Before proceeding with your consolidated balance sheet or a worksheet, you should carefully check all your reference information. The accuracy of your input is paramount in ensuring that the balance sheet itself is correct.
When preparing the consolidated balance sheet, it’s important to adjust the figures related to the subsidiaries assets so that they reflect their fair market value. Also, revenue of the parent company that is also an expense of the subsidiary should be left out because the net change is $0.
It may be helpful when preparing a consolidated balance sheet, to start with a worksheet. To create the worksheet, you will need the financials of the parent company and its subsidiary to be initially separate. Make a list of all the asset accounts and all the liability accounts including their values. Then, add together all the company’s assets and all its liabilities. Follow this same procedure for the subsidiary business. You should have one column for each unit of the company.
Next, you will need two columns for assets and liabilities that can be eliminated due to duplication. The debits and credits you eliminate will need to balance out to zero. These eliminated figures are listed in the assets or liabilities for both the company and the subsidiary. Including both would create duplication in the consolidated balance sheet. For instance, if your business and subsidiary both make use of a particular machine for production, you should not include it as an asset twice. This amount would need to be removed from one location so as not to duplicate numbers and throw off your total.
In the right-hand column of your worksheet, you should list the consolidated trial balance for each category you’ve listed. In this column, find the sum of all amounts in that row, being sure to add and subtract debits and credits from your duplication column appropriately.
Once you’ve found the total of your consolidated trial balance by category, you are ready to move on to your consolidated balance sheet. The only numbers that you should transfer over are those that you listed in the right-hand column of your worksheet. These should represent the total numbers of assets, liabilities and owner’s equity for both your parent company and its subsidiary.
To create a consolidated balance sheet, first document the name of the company, its subsidiary and the date at the top of your chart. In the left-hand column, you’ll want a section for assets, liabilities and equity. The numbers that you include should match those from your worksheet’s consolidated trial balances.
Once you have finished inputting the numbers from your worksheet, check your consolidated balance sheet. Your total assets, liabilities and equity should match those of your parent company plus those of your subsidiary, minus any duplicate items you eliminated.
Advantages of a Consolidated Balance Sheet
A consolidated balance sheet has many advantages, not the least of which is ease of use. This method of financial documentation makes it simple for lending institutions, boards of directors and stockholders to see a clearly laid-out statement of the company’s financial health.
This is preferable to a separate balance sheet for the parent company and its subsidiary for a variety of reasons. First of all, the parent company likely includes the purchase of the subsidiary among its liabilities and this could be confusing if it's included on a parent-company-only balance sheet. Secondly, the parent company and subsidiary may share various assets or liabilities, including office space, advertising and payroll. For instance, if some employees work part-time for the parent company and part-time for its related subsidiary, showing the payroll liability on a consolidated balance sheet is essential. Overall, presenting the company’s financials in this manner helps provide the clearest possible picture of its health and longevity.
Consolidated Balance Sheet Example
A consolidated balance sheet should always begin with a statement of the parent company name, the name of its subsidiary, the words “consolidated balance sheet” and the date.
You will then list your total assets, liabilities and equity. Say you have $450,000 in total assets between your parent company and your subsidiary. Your liabilities are $330,000, and you hold $80,000 in equity. These should all be listed in one column. You may then add up your total liabilities and equity, for a total of $450,000. As always, assets should be equal to your liabilities plus owner’s equity.
You may use footnotes or other asides to explain anything that would be confusing to someone who might later look at the consolidated balance sheet. For instance, if you recently sold off a great deal of equipment or experienced a reduction in staffing, you might wish to note it so that parties who have viewed comparable financial statements from your company are not confused.
What is the Difference Between A Consolidated Balance Sheet and Traditional Balance Sheet?
You may be wondering what the key differences are between traditional balance sheets and consolidated balance sheets. Basically, both are a financial statement showing the relationship between a company’s assets, liabilities and equity. You might choose to view a consolidated balance sheet as an extension of a traditional one. In this instance, the assets and liabilities of the subsidiary are included. A standalone balance sheet explicitly indicates which assets and liabilities belong to the parent company, whereas a consolidated balance sheet represents both the parent and subsidiary company.
A balance sheet is relatively straightforward as financial statements go. On the other hand, a consolidated balance sheet is among the most complex of financial statements due to the amount of information required for input and all of the parties and accounts involved. This is because a balance sheet requires information from only a trial balance, income statement and cash flow statement which is then summarized in two columns, one each for assets and liabilities.
Consolidated balance sheets, on the other hand, typically require a great deal of time and effort to put together because the parent company’s balance sheet is needed in addition to that of the subsidiary. Also, depending on the ownership arrangement of the subsidiary, the nature of the consolidated balance sheet may differ. Careful, accurate accounting is essential throughout the year in both the parent company and subsidiary to ensure that, when it comes time to create a consolidated balance sheet, it is done correctly.
Balance sheets are generally a requirement for doing business. They are typically prepared quarterly and are important for strategic planning and protection from audits. Consolidated balance sheets, while challenging, are essential when you’re operating a business and a subsidiary. This is especially true since the information contained within might overlap between the two entities and thus need to be eliminated to avoid duplication.
Both a traditional balance sheet and a consolidated balance sheet are essential to have on hand and be able to furnish to investors. These balance sheets can showcase the overall health of the company and impress investors in the ongoing benefits of their involvement. Showcasing the information in a clear-cut manner is critical, however, to avoid confusion.