Lawyers sometimes advise clients to sign a pre-nuptial agreement, or pre-nup, with their partners before marriage. Although it may make sense for newlyweds to share assets once they exchange vows, a couple signing a pre-nup agrees on who gets what in case of a divorce. In the business environment, this type of arrangement does not exist, and regulatory guidelines require that affiliated companies consolidate their assets and financial statements.
A financial statement is an accounting data summary providing valuable data about a firm’s solvency, liquidity and profitability. Examples include a balance sheet, statement of cash flows, statement of owners’ equity and a statement of profit and loss.
Consolidating financial statements is the accounting process that ultimately leads to consolidated financial statements. Both concepts are distinct -- one refers to a process, whereas the other is the final result. A company that owns more than 50 percent equity in another firm must consolidate, or combine, its results with the subsidiary’s data. Consolidation also applies if the firm owns less than 50 percent but exerts significant influence over the way the subsidiary operates. Consolidating accounting reports means adding up financial-statement items proportionately to the parent-company’s ownership stake.
By law, publicly traded companies must consolidate their financial statements when presenting performance data. These norms include generally accepted accounting principles, U.S. Securities and Exchange Commission guidelines and international financial reporting standards.
Company XYZ, a U.S.-based company, has the following equity stakes in three subsidiaries: - Company A: 60 percent equity stake; the firm posted year-end revenues and expenses of $1 million and $700,000, respectively; - Company B: 5 percent equity stake; the firm posted year-end revenues and expenses of $10 million and $5 million, respectively; and - Company C: wholly owned; the firm posted year-end revenues and expenses of $25 million and $15 million, respectively.
Company XYZ is the most important shareholder in company B and carries significant clout in the firm’s decision-making processes. At the end of the year, company XYZ’s accountants calculate the firm’s equity in its subsidiaries. Their calculations provided the following results, indicating company XYZ’s portion in the subsidiaries’ performance results: - Share in company A’s results: Revenues of $600,000 ($1 million times 60 percent) and expenses of $420,000 ($700,000 times 60 percent); - Share in company B’s results: Revenues of $500,000 ($10 million times 5 percent) and expenses of $250,000 ($5 million times 5 percent); and - Share in company C’s results: Revenues of $25 million ($25 million times 100 percent) and expenses of $15 million ($15 million times 100 percent).
Accordingly, company XYZ’s total revenues and expenses coming from subsidiaries are as follows: - Total revenues: $26.1 million, or $600,000 plus $500,000 plus $25 million; and - Total expenses: $15.67 million, or $420,000 plus $250,000 plus $15 million.