Illustrative examples Illustrative financial statements for Small and Medium-sized Entities SMEs

The decision to file consolidated financial statements with subsidiaries is usually made on a year-to-year basis and often chosen because of tax or other advantages that arise. The criteria for filing a consolidated financial statement with subsidiaries is primarily based on the amount of ownership the parent company has in the subsidiary. The purpose of comprehensive income is to show all operating and financial events that affect non-owner interests. As well as net income, comprehensive income includes unrealized gains and losses on available-for-sale investments. It also includes cash flow hedges, which can change in value depending on the securities’ market value, and debt securities transferred from ‘available for sale’ to ‘held to maturity’—which may also incur unrealized gains or losses.

Since it includes net income and unrealized income and losses, it provides the big picture of a company’s value. Similarly, it highlights both the present and accrued expenses – expenses that the company is yet to pay. But if there’s a large unrealized gain or loss embedded in the assets or liabilities of a company, it could what is a good return on investment affect the future viability of the company drastically. The SCI, as well as the income statement, are financial reports that investors are interested in evaluating before they decide to invest in a company. The statements show the earnings per share or the net profit and how it’s distributed across the outstanding shares.

• There are however some situations where a corporate structure change may call for a changing of consolidated financials such as a spinoff or acquisition.
• Understanding the drivers of a company’s daily operations is going to be the most important consideration for a financial analyst, but looking at OCI can uncover other potentially major items that impact a company’s bottom line.
• Although this can apply to combined reporting as well, if a group of subsidiaries included in special purpose financials have a cash concentration and sweep arrangement, there’s likely to be some complications in the Statement of Cash Flows.
• Comprehensive income provides a complete view of a company’s income, some of which may not be fully captured on the income statement.
• Income excluded from the income statement is reported under “accumulated other comprehensive income” of the shareholders’ equity section.

In our example above, MetLife’s foreign currency adjustment wasn’t overly large, but seeing it could help an analyst determine the impact of currency fluctuations on a company’s operations. For a U.S.-based firm, a stronger domestic dollar will lower the reported value of overseas sales and profits. Looking at results from a currency-neutral standpoint can help in understanding the actual dynamics of growth and profitability. To better illustrate the specific components of OCI, let’s look at a statement from MetLife. Items included in comprehensive income, but not net income, are reported under the accumulated other comprehensive income section of shareholder’s equity. A company’s income statement details revenues and expenses, including taxes and interest.

Financial analysis

A consolidated financial statement reports on the entirety of a company with detailed information about each subsidiary. So to keep you on the straight and narrow, Embark thought it best to take a closer look at consolidated and combined statements – along with their cousin, special purpose financial statements – how they all differ, and when each is appropriate. Granted, you usually don’t have a choice in the matter since the circumstances will dictate which to use, but knowledge is power and we want you to be as powerful as possible. How a firm generates revenues and turns them into earnings is an important factor, but there are other important considerations.

• Years of low-interest rates have put pension assets of a number of large corporations’ plans below the obligations they must cover for current and future retirees.
• Business owners and leaders use consolidated statements when there’s a group of companies made up of a parent company and its subsidiaries.
• Existing disclosures to either detail comprehensive income and all of its components at the bottom of the income statement, or on the following page in a separate schedule, have made analysis easier.
• Granted, you usually don’t have a choice in the matter since the circumstances will dictate which to use, but knowledge is power and we want you to be as powerful as possible.
• It summarizes all the sources of revenue and expenses, including taxes and interest charges.

Companies most often use consolidated financials for SEC reporting and debt covenant purposes. After all, you can consolidate/combine leftover pizza, Pokémon card collections, bank accounts, and a whole slew of other things. But when it comes to your company’s financial statements, there’s an important difference between the two, no matter how similar the terminology might seem. The effect of intra-group trading must be eliminated from theconsolidated income statement. Such trading will be included in thesales revenue of one group company and the purchases of another. Existing disclosures to either detail comprehensive income and all of its components at the bottom of the income statement, or on the following page in a separate schedule, have made analysis easier.

What Is Consolidated vs. Separate Financial Statement?

As we said, special purpose reporting is common amongst joint ventures and other types of special agreements between businesses, where the joint venture members combine the involved transactions into a single set of financial statements. For instance, if a company has five subsidiaries but only two of them are involved in a specific joint venture, special purpose financials would consolidate the information for those two subsidiaries but exclude the others. Put another way, consolidated statements – income statement, balance sheet, cash flow statement, and the like – feature a specific legal entity, the parent, as the point of reference. They’re prepared in accordance with US GAAP (generally accepted accounting principles), specifically, ASC 810 and its discussion on how to consolidate the financials and when to use them.

Comprehensive income is the variation in the value of a company’s net assets from non-owner sources during a specific period. Unrealized income can be unrealized gains or losses on, for example, hedge/derivative financial instruments and foreign currency transaction gains or losses. One of the biggest issues we see in combined financial statements results from a group’s reporting processes and systems. Let’s say you’re a new controller for a group and inherit the existing accounting systems and processes. Shortly after you start your new job, new regulatory requirements come out, mandating combined financials for the different entities in your group.

Don’t Jam a Combined Peg into a Consolidated Hole

We understand that our high-level look at consolidated and combined financial statements might have felt like an information tsunami, so a handful of best practices should help flesh everything out and put it into context. Alternatively, let’s say you’re a major player in the thriving widget market and sell your popular line of widgets through retail stores. If you already record all of your activity at the store level, then generating combined financial statements won’t be much of an issue. It’s going the other direction, using consolidated data for combined purposes, that can wreak havoc on your time, patience, and resources. Further, consolidated reporting applies to a variety of different ownership structures, from 100% ownership to controlling interest to variable interest entities (VIEs).

Consolidated Statement of Comprehensive Income

There are however some situations where a corporate structure change may call for a changing of consolidated financials such as a spinoff or acquisition. To throw a slight wrench into things, some people refer to “combined financials” when they actually mean special purpose statements. Special purpose financial statements are used to satisfy reporting requirements that consolidate entities outside of the reporting standards from the FASB (Financial Accounting Standards Board) via ASC 810. These are usually reporting requirements for a joint venture, tax reporting, or other industry specific reporting. In these instances, special purpose financials take the different portions of the company and combine them in a subjective, often ad hoc way that’s outside of 810’s purview.

Comprehensive Income

Consolidated financial statements include the aggregated financial data for a parent company and its subsidiaries. Private companies have more flexibility with financial statements than public companies, which must adhere to GAAP standards. If a parent company has 50% or more ownership in another company, that other company is considered a subsidiary and should be included in the consolidated financial statement. This also applies if the parent company has less than 50% ownership but still has a controlling interest in that company. Generally, 50% or more ownership in another company defines it as a subsidiary and gives the parent company the opportunity to include the subsidiary in a consolidated financial statement.

Net income is the actual profit or gain that a company makes in a particular period. Comprehensive income is the sum of that net income plus the value of yet unrealized profits (or losses) in the same period. Financial statements, including those showing comprehensive income, only portray activity from a certain period or specific time. Net income is arrived at by subtracting cost of goods sold, general expenses, taxes, and interest from total revenue. Therefore, when the need arises, be sure to include any large payables to or receivables from the parent on your financials. Also, provide adequate disclosure regarding collectability, intent to pay, or valuation, especially since to/from accounts can occupy a healthy portion of the balance sheet.

The Financial Accounting Standards Board (FASB) has continued to emphasize a financial measure called other comprehensive income (OCI) as a valuable financial analysis tool. A company’s statement of profit and loss, also known as its income statement, has its drawbacks. For the most part, the statement accurately reflects a company’s past profitability and earnings growth—one of the primary determinants of a firm’s stock performance—but it remains a subjective measure, open to manipulation. In particular, companies have a fair amount of latitude on the timing and impact of the quarterly and annual charges and other expenses reported on the statement. One of the most important components of the statement of comprehensive income is the income statement. It summarizes all the sources of revenue and expenses, including taxes and interest charges.

In an ideal world, there would only be comprehensive income as it includes standard net income and OCI, but the reality is that astute analysts can combine both statements in their own financial models. Consolidated financial statements are like most financial statements in that they report on the financial health of the company. They differ in that they include information about subsidiaries that are part of the larger company. Items of property, plant and equipment are measured at cost less accumulated depreciation and any accumulated impairment losses. Comprehensive income is the sum of a company’s net income, as recorded on the income statement, and unrealized income (or “other comprehensive income”) that is not included on an income statement but is recorded in the statement of comprehensive income. The net income section provides information derived from the income statement about a company’s total revenues and expenses.